================================================================================
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


                                    FORM 10-K

|X|     Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
        Act of 1934 for the fiscal year ended December 31, 1998 OR

|_|     Transition  Report  Pursuant  to Section  13 or 15(d) of the  Securities
        Exchange Act of 1934 for the transition period from to  ----------------
        -------------

                        Commission File Number 001-14183
                             ----------------------

                        RECKSON SERVICE INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)


          Maryland                                11-3233650
 (State or other jurisdiction of               (I.R.S. Employer
  incorporation or organization)              Identification No.)

      225 Broadhollow Road,                         11747
         Melville, NY                             (Zip Code)
    (Address of principal
      executive offices)

       Registrant's telephone number, including area code: (516) 719-7400
                             ----------------------

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


   Title of each class                       Name of Each Exchange on
                                                Which Registered
   -------------------                       ------------------------
Common Stock, $.01 par value                   OTC Bulletin Board

        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  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

         Indicate 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 the  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. [ ]

     The  aggregate  market  value  of  the  shares  of  common  stock  held  by
non-affiliates was approximately $77,752,142 based on the average of the closing
bid and ask prices on the OTC Bulletin Board for such shares on March 24 ,1999.

         The number of the Registrant's  shares of common stock  outstanding was
24,686,834 as of March 24,1999.



                       DOCUMENTS INCORPORATED BY REFERENCE

Portions  of the  Registrant's  Proxy  Statement  for the  Annual  Shareholder's
Meeting to be held June 24,1999 are incorporated by reference into Part III.

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<PAGE>

TABLE OF CONTENTS


                                                                    Form 10-K
   Item No.                                                         Report Page
--------------                                                  ----------------

                                                     PART I
1.   Business.......................................................... I-1
2.   Properties........................................................ I-6
3.   Legal Proceedings................................................. I-6
4.   Submission of Matters to a Vote of Security
     Holders........................................................... I-6

                                           PART II
5.   Market for Registrant's Common Equity and Related
     Stockholder Matters............................................... II-1
6.   Selected Financial Data........................................... II-2
7.   Management's Discussion and Analysis of Financial Condition and
        Results of Ooperations......................................... II-3
7a.  Quantitative and Qualitative Disclosures about Market
        Risk........................................................... II-9
8.   Financial Statements and Supplementary Data....................... II-9
9.   Changes in and Disagreements with Accountants on
        Accounting and Financial Disclosure............................ II-9

                                          PART III
10.  Directors and Executive Officers of the Registrant................III-1
11.  Executive Compensation............................................III-1
12.  Security Ownership of Certain Beneficial Owners
        and Management................................................ III-1
13.  Certain Relationships and Related Transactions................... III-1

                                           PART IV
14.  Financial Statements and Schedules, Exhibits and
        Reports on Form 8-K............................................ IV-1






<PAGE>

ITEM 1.     BUSINESS

General

Reckson  Service  Industries  ("RSI"  or  the  "Company"),  a  business  service
provider,  was  formed  on July 15,  1997 by  Reckson  Associates  Realty  Corp.
("Reckson"),  to create,  operate and manage a system of inter-related  business
services offered for sale to its customer pool which currently includes business
customers of Reckson  Operating  Partnership,  L.P.  ("ROP") a  commercial  real
estate  owner,  Advantis,  the  Company's  executive  suite  business,   On-Site
Ventures, LLC, ("On-Site") the Company's  telecommunications  business,  Reckson
Strategic Venture Partners, LLC ("RSVP") (collectively, the "RSI Customer Pool")
and  third   parties  in  the   general   marketplace   through  a   centralized
infrastructure.  The Company's  growth  strategy is to acquire or form strategic
alliances with established businesses with strong entrepreneurial management and
a reputation  for high  quality  services  within each of its targeted  business
service sectors ("Business Service Platforms").  Specifically, the Company seeks
opportunities  to provide  business  services for which there is broad demand in
the RSI Customer Pool.  Such Business  Service  Platform  investment or alliance
serves as a basis for sale and delivery of business services to the RSI Customer
Pool.  The Company  believes  the RSI  Customer  Pool will  attract  exceptional
investment  opportunities  and  strategic  alliances  which  can  capitalize  on
enhanced revenue  opportunities through a cross selling effort. The Company will
establish Business Service Platforms that present  significant  opportunities to
provide business services to the RSI Customer Pool and third parties. Currently,
the RSI Customer Pool retains third parties to provide many business to business
services for their  day-to-day  operations.  Of these services,  the Company may
seek to  provide  the RSI  Customer  Pool  with  telecommunications,  outsourced
business  services,  E-commerce  and  content,  executive  suites and  concierge
services,  as well as other business services that the Company determines may be
utilized by the RSI Customer  Pool.  The RSI Customer  Pool consists of small to
medium size  businesses as well as the mobile  workforce of large  corporations.
RSI  seeks to  provide  the RSI  Customer  Pool with  high  quality  value-added
business services meeting all of their outsourcing needs and providing them with
resources  to  successfully  compete in the  marketplace.  The Company will seek
growth in each Business  Service Platform by (i) accessing the RSI Customer Pool
as an anchor for growth  opportunities,  (ii)  integrating each Business Service
Platform  into RSI's  centralized  infrastructure  and (iii)  acquiring  similar
businesses,  forming strategic alliances or making additional investments within
such Business Service Platform.

In connection with the initial capitalization of RSI, ROP contributed $4,256,324
for a 95% non-voting  equity interest and certain members of Reckson  management
contributed  notes of  $224,017  to the  Company  in  exchange  for a 5%  voting
ownership interest. On October 29, 1997 the notes were repaid.

On June 11, 1998, ROP distributed its 95% of the common stock of RSI to its unit
holders of record on May 26, 1998 (the "Distribution"). Immediately prior to the
Distribution,  the shares of non-voting  common stock held by ROP were exchanged
by RSI for RSI common shares. Each share of the Company's common stock issued in
the  Distribution  was  accompanied  by  one  preferred  share  purchase  right.
Simultaneously,  Reckson distributed 100% of the RSI common shares received from
the  Distribution  to its  common  shareholders  of the  same  record  date.  In
addition, simultaneously with the Distribution, the Company issued rights to its
stockholders to subscribe for the purchase of additional  shares of common stock
of the Company.

Immediately  after the  distribution  of RSI common  stock,  RSI  granted to its
stockholders  (each a  "Holder")  one  subscription  right for each share of RSI
common stock. Each subscription right entitled the Holders to purchase one share
of RSI  common  stock at a  purchase  price of $1.03  per share  (the  "Exercise
Price")  and, at the election of such Holder,  four  additional  shares (but not
less than four  additional  shares)  at a purchase  price of $1.03 per share.  A
Holder of subscription  rights had the opportunity to acquire up to an aggregate
of approximately 20,557,130 shares of RSI common stock. RSI and Reckson Standby,
LLC  (the  "Standby   Purchaser")   (an  entity  owned  by  several  members  of
management),  entered  into a standby  agreement  pursuant  to which the Standby
Purchaser agreed to purchase,  and RSI agreed to sell, any and all shares of RSI
common stock that were the subject of subscription rights in the rights offering
but were not subscribed  for by a Holder on the expiration  date at the Exercise
Price. The proceeds from the StandBy  Purchaser were  approximately  $7,325,000.
RSI received net proceeds from the rights offering of approximately $19,852,000.
In connection with the Company's  initial  capitalization  the Company obtained,
from  ROP  a  five  year  $100  million  unsecured  credit  facility  (the  "RSI
Facility").  The RSI Facility  bears  interest at a rate equal to the greater of
the prime rate plus 2% and (i) 12% per annum with the rate in this  clause  (ii)
increasing  annually on  outstanding  borrowings at the rate of 4% per year over
the prior year's rate.

ROP and RSI have entered into an intercompany  agreement (the "ROP  Intercompany
Agreement") to formalize their  relationship and to limit conflicts of interest.
Under  the  ROP  Intercompany  Agreement,  RSI  granted  ROP a  right  of  first
opportunity  to  make  any  Real  Estate  Investment  Trust   ("REIT")-qualified
investment  that  becomes  available to RSI. In  addition,  if a  REIT-qualified
investment opportunity becomes available to an affiliate of RSI, including RSVP,
the  ROP  Intercompany  Agreement  requires  such  affiliate  to  allow  ROP  to
participate in such opportunity to the extent of RSI's interest.

Under  the  ROP  Intercompany  Agreement,  ROP  granted  RSI a  right  of  first
opportunity to provide business services to ROP and its tenants. RSI is required
to provide  services  to ROP at rates and on terms as  attractive  as either the
best available for comparable  services in the market or those offered by RSI to
third  parties.  In addition,  ROP is required to give RSI access to its tenants
with  respect to business  services  that may be provided to such  tenants  and,
under the ROP Intercompany Agreement, subject to certain conditions, ROP granted
RSI a right of first refusal to become the lessee of any real property  acquired
by ROP if ROP determines that, consistent with Reckson's status as a REIT, it is
required to enter into a "master" lease agreement.


                                       I-1

<PAGE>


RSI Fund Management,  LLC a wholly owned subsidiary of RSI, is a managing member
of RSVP Holdings,  LLC ("Holdings"),  the managing member of RSVP, a real estate
venture  capital  fund formed to invest in real  estate and real  estate-related
operating  companies  outside of Reckson's core  interests.  RSVP will invest in
established  entrepreneurial  enterprises with  experienced  management teams in
market  sectors  which are in the early  stages of their  growth  cycle or offer
unique circumstances for attractive  investments as well as platforms for future
growth ("RSVP  Investments").  ROP has committed  $100 million to be invested in
RSVP Investments  (the "RSVP  Facility").  Paine Webber Real Estate  Securities,
Inc. ("PWRES") is a non-managing  member and holds a preferred interest in RSVP.
PWRES has committed  $200 million in capital (the "PWRES Equity  Facility")  and
shares 66 2/3% in profits and losses of RSVP, subject to a maximum internal rate
of return ("IRR") of 16% of invested capital.  On April 24, 1998, PWRES assigned
25% of its preferred  equity interest in RSVP,  representing an unfunded capital
committment  of $50  million  to  Stratum  Realty  Fund,  LLC  ("Stratum").  The
assignment  provides Stratum with similar rights and privileges.  Excess returns
over 16% on the PWRES Equity Facility is to be distributed to Holdings. On March
17,  1999,  PWRES  transferred  all of its  rights,  title and  interest on its
invested capital to date in RSVP to Stratum.

Holdings has retained two managing directors (the "RSVP Managing  Directors") to
manage the day-to-day  operations of RSVP, subject to the strategic direction of
RSI. New World Realty,  LLC ("New World"),  an entity owned by the RSVP Managing
Directors  acts  as a  managing  member  of  Holdings.  The  Holdings  operating
agreement (the "Managing Member Operating  Agreement")  provides for the payment
to New World of distributions  out of the cash flow of Holdings, after RSI
and affiliated persons have received a return of their capital  contributions to
RSVP investments plus a 12% IRR thereon, of $15 million and, thereafter, a share
of cash flows  ranging from 15% to 27.75% based upon the IRR received by RSI and
affiliated persons above 12% in respect of RSVP investments. The Managing Member
Operating   Agreement   obligates  RSI  to   contribute   100%  of  the  capital
contributions to be made by Holdings to RSVP in an amount up to $100 million. In
the event that RSI defaults in making its capital  contributions,  distributions
of cash to RSI will be  subordinated to certain  distributions  to New World and
RSI's  management  rights will be reduced and RSI will be obligated to purchase,
at the election of New World, a portion of New World's  interest in Holdings for
a minimum of $15 million.  At the  termination of RSVP, New World has a right of
first refusal to purchase any RSVP investment  proposed for sale. New World will
also be entitled to one-half of any asset management fee earned by Holdings from
ROP.  Additionally,  it is anticipated  that New World will receive  transaction
fees of up to $1 million a year for  identifying  investment  opportunities  for
RSVP.

The Company's  executive offices are located at 225 Broadhollow Road,  Melville,
New York 11747 and its telephone  number at that location is (516) 719-7400.  At
December 31, 1998, the Company had approximately 13 employees.

Recent Developments
-------------------

Investment Activities
---------------------

Set  forth  below  is a brief  description  of the  Company's  major  investment
activities during 1998:

Executive Office Suites
------------------------

On April 1, 1998,  the Company  acquired a 9.9%  membership  interest in Reckson
Executive  Centers,  LLC ("REC,  LLC") for $200,000 from ROP and assumed debt of
approximately $322,000. On October 5, 1998, the Company contributed its interest
in REC, LLC to Reckson  Executive  Centers,  Inc. ("REC") in exchange for 75% of
the common stock of REC.

On November 9, 1998,  the Company  acquired a majority  interest in  Interoffice
SuperHoldings  Corporation  ("Interoffice"),  a  nationally  operated  executive
office suite  business.  The  aggregate  purchase  price paid by the Company was
approximately  $20.5 million,  and was financed through borrowings under the RSI
Facility. The Company also acquired receivables related to certain advances made
to certain other  stockholders of Interoffice for  approximately  $10.3 million.
Such receivables are secured by the shares held by these stockholders.

On January 8, 1999,  Interoffice (36 executive  office suite centers) and REC (8
executive office suite centers) merged with Alliance National  Incorporated, a
holding  company which owns and operates  approximately  90  nationally  located
executive office suite centers.The merged company changed its name to Advantis. 
The stockholders of Interoffice and REC received shares of the Series C 
Preferred Stock of Advantis which represent approximately
40%  of  the  equity  interest  in  Advantis.   The  Company   thereafter  owned
approximately 23% of Advantis.  The holders of the Series C Preferred Stock have
the  right to  appoint  four of the ten  members  of the Board of  Directors  of
Advantis,  including  Chairman of the Board and  received  specified  preemptive
rights and other specified rights. RSI and the other stockholders of Interoffice
hold  the  Series C  Preferred  Stock  received  in  respect  of the  merger  of
Interoffice  through Interoffice  Superholdings,  LLC ("IS LLC"), a newly formed
Delaware limited liability company of which RSI is the sole managing member. RSI
also holds the Series C Preferred Stock received in respect of the merger of REC
through Reckson Office Centers,  LLC, a newly formed Delaware limited  liability
company of which a subsidiary of RSI is the managing member.

Advantis and RSI have also entered into an  intercompany  agreement  pursuant to
which RSI has the opportunity to be the exclusive  provider of certain  business
services to Advantis,  provided  certain third party and  "most-favored  nation"
conditions are satisfied.

RSI acquired certain ownership rights related to the Series C Preferred Stock of
Advantis  from a  stockholder  of  Interoffice  which  provided the Company with
enhanced governance rights for $6.5 million. In addition,  the Company paid $3.5
million to another  stockholder  of  Interoffice  for an option to purchase that
stockholders  effective  interest in the Series C Preferred Stock for a purchase
price of $6.75 million. If the option is not exercised,  the stockholder has the
right to sell such  interests  to the Company at fair value,  as  determined  in
accordance  with  the  applicable  agreement.  A  significant  number  of  items
presented to the Advantis Board will require the separate approval of a majority
of the representatives of the Series

                                       I-2

<PAGE>





C Preferred  Stock on the Board,  including  significant  acquisitions,  sale or
leasing of assets,  approval of  Advantis's  annual  operating  budget,  certain
borrowings and capital  expenditures  by Advantis,  the hiring or termination of
senior  executives  and other matters.  The holders of Series C Preferred  Stock
also have the right to appoint  half of the members of the  executive  and audit
committees of the Board. The preferred  stockholders of Advantis  (including the
holders of Advantis' Class A Preferred Stock,  Class B Preferred Stock and Class
C Preferred  Stock) were granted  super-majority  voting  rights with respect to
certain corporate actions, including the issuance of equity securities,  changes
to the charter documents of Advantis and other matters.

Telecommunications
------------------

The  Company  currently  has  a  1%  interest  and  holds  a  subordinated  note
convertible  into a 58.69% equity  interest in On-Site,  a company that provides
advanced   telecommunications   systems  and  services  within   commercial  and
residential  buildings  and/or  building  complexes.  The Company  has  advanced
On-Site $6.5 million through  December 31, 1998 to fund certain  operating costs
under the terms of the  subordinated  note. The loan bears interest at a rate of
12% per annum. In May 1998, the Company made an initial capital  contribution of
$300,000 for a 58.69% interest in On-Site  Commerce and Content,  LC ("OCC"),  a
Company established to acquire and develop software products. As of December 31,
1998 OCC had no operations.

Real Estate Venture Capital Fund
--------------------------------

On August 11,  1998,  RSVP,  through a wholly owned  subsidiary,  formed a joint
venture,  Gateway  Development  Group, LLC ("Gateway"),  with Gateway Management
Group.  Gateway is a start up entity that pursues  opportunities  in  privatized
military housing. During 1998, RSVP contributed $549,238 to Gateway. The Company
is uncertain  whether it will recover its invested dollars from Gateway's future
cash flows.  At December 31, 1998,  RSVP has recognized a loss of $650,531 which
includes a reserve for their total  contributed  dollars and investment costs of
$101,293.

On August 12,  1998,  RSVP  acquired,  through a wholly  owned  subsidiary a 45%
interest in Assisted Living  Investments,  LLC ("ALI") for  approximately  $3.25
million.  ALI is a joint venture that  develops,  leases,  operates and finances
assisted living  facilities.  In addition,  RSVP has agreed to contribute 80% of
the equity of ALI, up to a maximum $16.0 million for a total maximum  commitment
of $19.25  million.  RSVP funded $7.5 million of its $19.25  million  commitment
upon  the  closing  of the  transaction.  RSVP  has  funded  50% of its  capital
contributions through draws under the PWRES Equity Facility.

On  August  27,  1998,   RSVP  formed  a  joint   venture  with   Dominion,   an
Oklahoma-based,   privately-owned   group  of  companies  that  focuses  on  the
development,  acquisition and ownership of government  occupied office buildings
and correctional facilities. The joint venture, Dominion Venture Group LLC, (the
"Dominion Venture"),  is owned by RSVP-Dominion,  LLC, a subsidiary of RSVP, and
by Burgess  Services,  LLC, an entity owned and  controlled  by Calvin  Burgess,
President and Chief  Executive  Officer of Dominion.  The Dominion  Venture will
engage  primarily in acquiring,  developing  and/or  owning  government-occupied
office  buildings and privately  operated  correctional  facilities  and related
activities. RSVP is to invest up to $100 million in the Dominion Venture subject
to its affirmative voting rights relating to investment activities.  RSVP funded
its total  capital  contribution  of  $8,597,455  through  draws under the PWRES
Equity Facility and the RSVP facility.  ROP has  contributed  $10,065,338 to the
Dominion Venture.

Financing Activities
--------------------

During 1998,  RSI  established  the RSI Facility  with ROP in the amount of $100
million for RSI's business service sector operations and other general corporate
purposes.  Borrowings  under the RSI Facility bear interest at the rate equal to
the greater of (i) the prime rate plus 2% and (ii) 12% per annum,  with the rate
referred to in clause (ii)  increasing  annually on outstanding  borrowings at a
rate of 4% per year of the prior year's rate. The RSI Facility is expected to be
payable on an interest  only basis from net cash flow and have a five year term.
Advances under the RSI Facility will be a recourse  obligation of RSI. Under the
terms of the RSI facility,  as long as there are outstanding advances under such
facility the Company is  prohibited  from paying  dividends on any shares of its
capital stock. At December 31, 1998, RSI had availability under the RSI Facility
to borrow an additional $66.3 million.

During 1998, ROP approved the funding of $100 million of investments  with or in
RSVP.  It is  anticipated  that a portion  of these  investments  will be funded
through  advances to RSI under the RSVP  Facility.  The RSVP Facility has a term
and interest rate similar to that of the RSI Facility. At December 31, 1998, RSI
had availability under the RSVP facility to borrow an additional $82,652,881.


Corporate Strategies, Growth Opportunities and Business Segments

The Company's primary business  objective is to maximize the long term return to
shareholders  through the  appreciation  in the value of its common  stock.  The
Company plans to achieve these objectives by executing the corporate  strategies
and growth opportunities described below.

Corporate  Strategies.  Management  believes  that  there  exists a  significant
opportunity  to  create,  operate  and manage a system to  deliver  business  to
business services to the RSI Customer Pool.  Management also believes that it is
in a unique  position to invest in  companies  that will expand the RSI Customer
Pool and thereby increase its business services business.  Management intends to
execute an

                                       I-3

<PAGE>

operating  strategy  that will provide the RSI  Customer  Pool with high quality
value-added  services to meet the customer's  outsourcing  needs while providing
them with a competitive advantage in the marketplace. These operating strategies
include  the  implementation  of (i) a  marketing  program  that will survey our
customers to comprehend  their  outsourcing  service  needs and design  creative
approaches to sell RSI's  business  services,  (ii)  programs to form  strategic
alliances  with  business  service  companies  to  enable  RSI  to  quickly  and
efficiently bundle and deliver a variety of service products to the RSI Customer
Pool, (iii) an acquisition  strategy to expand the RSI Customer Pool through our
executive  suites  business or by making  strategic  investments in key business
service  providers,  and (iv) cost  control  management  and  systems  that take
advantage  of economies of scale that arise from the  Company's  large  customer
base and market position.

Internal  Growth.  Currently  the RSI Customer Pool consists of customers of the
following  investees and business partners:  (i) Advantis Executive Suites which
total  approximately  15,000  customers (ii) ROP which has  approximately  1,500
business tenants,  employing additional thousands of personnel and (iii) On-Site
that has 170 business  customers.  The Company will initially  target this large
customer base to provide  business  services.  The Company  believes that it can
build a substantial service business by penetrating this Customer Pool.

External  Growth.  The Company  intends to seek  external  growth  opportunities
through  investment in business  service  companies or strategic  alliances with
such companies.  These  investments and alliances will serve to increase the RSI
Customer  Pool and  expand the  distribution  and  variety  of service  products
available for sale to the RSI Customer Pool. For example,  the Company will seek
to  increase  its  investment  in  the  executive  suite  business  through  the
acquisition and development of executive suite centers by Advantis.  The Company
will utilize the RSI  Facility to fund its  additional  investment.  The Company
will also seek other forms of equity capital through strategic venture partners.

Business Segments

Executive Office Suites
-----------------------

The executive office suites business  ("EOS") began  approximately 35 years ago.
There has been a significant  expansion in the business  during the last decade.
This growth  resulted  largely from corporate  downsizing and the development of
technology  which  decreased  the  need for  employees  to be  present  in large
corporate  offices.  Instead,  more work has been outsourced to consultants,  or
smaller  groups,  who often work closer to their homes. A wide range of services
are now offered by EOS businesses  and are only paid for on an "as-used"  basis.
The EOS business meets the needs of a broad range of businesses  from individual
entrepreneurs  to branch offices of Fortune 500 firms  offering basic  telephone
and   clerical   services   as   well  as  more   advanced   services   such  as
teleconferencing, internet access and virtual office concepts.

The industry combines many aspects of the real estate business - supply,  demand
and location - with those of a service intensive business, including technology.
The industry is currently fragmented with only two large participants  operating
on a national  basis with many  operating  under an  affiliation  or  networking
basis.

The merger of the Company's  executive  suite businesses, REC and Interoffice
with Advantis,  on January 8, 1999 created the nation's largest executive suite 
company.

Telecommunications
------------------

Building  centric  communications  is a newer  sector of the  telecommunications
industry,  having evolved largely as a result of the  Telecommunications  Act of
1996.  This sector  includes  those  companies  involved in providing  local and
long-distance  telecommunications  and high-speed  Internet access. The industry
and this sector are regulated on both the federal and state level.  Competing in
this sector requires  significant capital expenditures for wiring and equipment.
Companies with access to lower-cost capital have a competitive  advantage due to
the significant  capital  expenditures  incurred by participants in this sector.
This sector is undergoing rapid change,  development and innovation.  On-Site is
one of several  companies  seeking to establish a  significant  presence in this
market.

Student Housing
---------------

The student  housing  industry  is a  specialized  market  sector that is highly
fragmented and has relatively few large  participants.  Management believes that
student  housing  represents a market sector that will maintain growth trends as
the student population increases.  According to the 1994 Statistical Abstract of
the United  States,  8.6 million  students  were  enrolled  in higher  education
institutions  nationwide in 1970. This population increased to over 12.1 million
in 1980.  By 1995, it was estimated  that the student  population  was over 16.5
million  with over 18 million  students  projected  by 2005.  While the  student
population has continued to increase,  the rate of growth slowed somewhat during
the last several  years.  The U.S.  Department of Education  estimates  that the
student  housing  industry is currently a $10 billion dollar  industry and could
grow to a $20 billion industry in less than ten years.

While the student  population and the demand for student  housing has increased,
housing stock and in particular  on-campus  housing stock,  has not kept up with
demand. Student housing is comprised of two different sub-sectors, on-campus and
off-campus housing.  However,  some university-run  student housing projects are
experiencing declining occupancy rates, as a direct result of age, general

                                       I-4

<PAGE>

mismanagement,  and physical and  functional  obsolescence  rather than due to a
lack of  demand.  The  failure  of the  housing  supply  to keep  pace  with the
increased  demand  provides  the  opportunity  to develop new private on and off
campus student  housing and to improve the management and physical  condition of
existing university owned housing through privatization.

Privatization
-------------

In the United States the  Privatization  Industry is in the initial stages of an
anticipated   significant   period   of   growth.   Traditionally,    government
organizations  have  financed new  facilities  through a  combination  of budget
appropriations  and bonds. As governments of all types face increasing  pressure
to control  costs and  improve the quality of  services,  they are  increasingly
turning to the private sector.

Privatization  holds a great deal of promise due to expected growth,  which will
arise mainly from increasing demand from  municipalities  that will outstrip the
available supply of real estate dedicated to governmental  use, and governments'
embracing  the  economic  benefits  and other  efficiencies  of  private  sector
financing, ownership and management, which will cause governments to depart from
their  historic  primary  reliance  upon budget  appropriations  for  financing,
self-development and self-management.

Opportunities  in  privatization  of correctional  facilities will arise from an
extremely favorable  demand/supply  environment.  Many prison  jurisdictions are
currently operating their prisons at levels exceeding their legal capacities and
are  therefore  under  federal  court order to  alleviate  prison  overcrowding.
According  to the  Bureau of  Justice  Statistics,  as of year end  1996,  state
prisons  were  operating at between 16% to 24%  overcapacity,  while the federal
correction  systems  was  25%  overcrowded.   Sentencing   jurisdictions  cannot
appropriate  funds or obtain  financing to construct new  facilities  because of
other  pressing  fiscal  demands  and  requirements  for public  approval.  Many
governments have been, and more will be, forced to consider private ownership of
correctional facilities.

As high  occupancy  rate and prison  overcrowding  have resulted in an increased
demand for new correctional facilities,  the new construction can be absorbed in
the market.  These factors create a strong opportunity for growth in investments
with companies  that have  demonstrated  capabilities  in developing and leasing
correctional facilities.

Privatization  of  government  office,  industrial,  residential  and other real
estate will create new  opportunities  for  investment by the private  sector as
governments  acknowledge  the  benefits  of a shift from  public  ownership  and
development of such assets towards the increasing involvement of, and ultimately
dependence on, the private sector. As with correctional facilities,  development
and construction capabilities enhance investment opportunities in these types of
privatized real estate.

Assisted Living
---------------

Assisted living is currently the fastest growing segment of the  seniors-housing
industry with over 6.5 million senior adults (adults over the age of 65) in need
of some form of assistance  with the  activities of daily living.  Activities of
daily living are defined to mean those activities necessary to health, grooming,
personal  sanitation,  and  well-being  which  reasonably  competent and healthy
individuals can ordinarily perform for themselves.  Such activities include, but
are not limited to, walking, bathing,  shaving, dental care, grooming,  dressing
oneself,   shopping  food   preparation,   self-administration   of  medication,
recreation, and leisure activities.

The number of senior  adults will  approximately  double over the next 20 years,
and over the next five years,  it is  estimated  that  seniors  will account for
one-third  of all  population  growth in the  United  States.  Because  of these
demographic  trends,  new capital is flowing rapidly into assisted  living.  The
capital  sources are  attracted to the fact that,  although  there are currently
facilities  which cater to those  suffering  from  Alzheimer's  disease or other
illnesses,  assisted living facilities fill the gap for housing requirements for
the remainder of the frail elderly that require some form of assistance with the
activities of daily  living,  but do not need the nursing  services  provided by
more specialized facilities.

The goal of assisted  living  residences  is to provide a home-like  environment
with hospitality services and to provide assistance with daily living activities
to those  who need it where  such  need has not  risen to the  level of  skilled
nursing in a long term facility  environment.  Assisted  living  facilities  are
defined to be a building  or group of  buildings  in which room,  board,  meals,
laundry,  and  assistance  with personal care and other services are provided by
trained professionals to elderly adults.

Financial information about the Company's industry segments may be found in Note
6 to the Company's consolidated financial statements presented in Item 8 of this
Annual  Report  on From  10-K and  incorporated  herein  by  reference.


                                      I-5


<PAGE>

ITEM 2. PROPERTIES

The Company leases its principal office at 225 Broadhollow Road,  Melville,  New
York,  11747, in a building owned in part by certain  members of management.  In
addition,  the Company also leases an office at 10 East 50th  Street,  New York,
New York, 10017.

Reckson  Executive  Centers,  Inc. leases its offices at 225  Broadhollow  Road,
Melville,  New York,  11747.  Interoffice  Holdings  Corporation  maintains  its
principal office at 11350 Random Hills Road, Fairfax, Virginia, 22030.

On-Site Ventures, LLC leases its principal office at 680 Third Avenue, New York
New York.

Reckson  Strategic  Venture  Partners,  LLC  leases its  principal  office at 50
Charles Lindbergh Boulevard,  Suite 400, Uniondale,  New York, 11553 as a lessee
in a building owned by Reckson Operating Partnership, L.P.

Management  believes that such  properties  are sufficient to meet their present
needs and does not anticipate any difficulty in securing  additional  space,  as
needed, on terms acceptable to the Company.

ITEM 3. LEGAL PROCEEDINGS

The Company is not  presently  subject to any  material  litigation  nor, to the
Company's  knowledge,  is any litigation  threatened against the Company,  other
than  routine  actions  for  negligence  or  other  claims  and   administrative
proceedings  arising  in the  ordinary  course  of  business,  some of which are
expected to be covered by liability  insurance and all of which collectively are
not  expected to have a material  adverse  effect on the  liquidity,  results of
operations or business or financial condition of the Company.

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

No matters were submitted to a vote of stockholders during the fourth quarter of
the year ended December 31, 1998.




                                       I-6

<PAGE>
                                     PART II


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

The Company's  common stock began trading  over-the-counter  ("OTC") on June 29,
1998 under the symbol "RSII".  The following table sets forth the quarterly high
and low  closing  bid  prices per share of the common  stock  reported  for each
respective  quarter.  These OTC market quotations reflect  inter-dealer  prices,
without  retail  mark-up,  mark-down  or  commission  and  may  not  necessarily
represent actual  transactions.  Since  inception,  the Company has not paid any
dividends to its stockholders. Under the terms of the credit facilities that the
Company has obtained from Reckson Operating  Partnership,  L. P. ("ROP") as long
as there  are  outstanding  advances  under  such  facilities,  the  Company  is
prohibited from paying dividends on any shares of its capital stock.



                                                   High            Low
                                                   ----            ---
     June 29, 1998.....................          $4.063           $3.625
     June 30, 1998.....................          $3.750           $3.125
     September 30, 1998................          $4.500           $2.000
     December 31, 1998.................          $4.625           $1.688


The  Company's  Registration  Statement  on Form S-1 (File No.  333-44419)  with
respect to the  spin-off  distribution  of its shares  and the  registration  of
20,557,130  shares of the Company's  common stock in connection  with the rights
offering,  was declared  effective by the Securities and Exchange  Commission on
May 13, 1998. In connection with the rights offering,  which expired on June 29,
1998, the Company sold 20,557,130 shares of common stock for aggregate  proceeds
of approximately  $21.1 million before deducting  approximately  $1.2 million of
offering  costs.  As of December  31, 1998,  the Company had used  approximately
$17.7 million of the net proceeds of the rights  offering to repay  indebtedness
(and related  interest)  to ROP,  approximately  $1 million to fund  advances to
On-Site and approximately $1.2 million to pay operating and other expenses.


                                      II-1

<PAGE>





ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                           For the                  For the period
                                                          year ended               July 15, 1997 to
                                                      December 31, 1998            December 31, 1997
                                                   ------------------------    ------------------------
<S>                                                     <C>                         <C>
OPERATIONS SUMMARY:
    Total revenues.....................................    $    1,342,504          $      30,383
    Equity in earnings (loss) of investments...........       (3,966,399)                223,437
    Total expenses.....................................         5,455,963                511,707
    Cumulative effect of change in accounting principle          (67,945)                  -----
    Net loss...........................................    $  (8,147,803)          $   (257,887)

PER SHARE DATA: (1)
    Basic and diluted net loss.........................    $        (.56)          $        ----

BALANCE SHEET DATA (PERIOD END):
    Equity Investments ................................    $   45,837,711          $   5,845,258
    Affiliate receivables..............................         9,396,070                832,854
    Equipment..........................................            99,928                  -----
    Other assets.......................................         1,483,427                 30,185
    Total assets.......................................        58,842,663              7,519,695
    Credit facilities..................................        40,981,500                  -----
    Loans payable to affiliates........................             -----              3,177,857
    Total liabilities..................................        42,875,157              3,297,241
    Total shareholders' equity.........................    $   15,967,506          $   4,222,454

</TABLE>
-----------
(1) Based on 14,522,513  weighted average shares of common stock outstanding for
    the year ended December 31, 1998.


                                      II-2
<PAGE>





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

The following  discussion  should be read in conjunction  with the  accompanying
Financial  Statements of Reckson  Service  Industries,  Inc.  (the  "Company" or
"RSI") and related notes thereto.

The  Company  considers  certain  statements  set  forth  to be  forward-looking
statements  within the meaning of Section 27A of the  Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, with respect to
the  Company's   expectations  for  future  periods.   Certain   forward-looking
statements, including, without limitation, statements relating to the ability to
identify and acquire interests in commercial services  companies,  the financing
of the Company's operations, the timing and success of such acquisitions and the
ability to integrate and manage  effectively its various  acquisitions,  involve
certain  risks  and  uncertainties.  Although  the  Company  believes  that  the
expectation reflected in such forward-looking statements are based on reasonable
assumptions,  the actual results may differ  materially  from those set forth in
the  forward-looking  statements  and the Company can give no assurance that its
expectations  will be achieved.  Certain factors that might cause the results of
the Company to differ  materially from those  indicated by such  forward-looking
statements include, among other factors,  general economic conditions, a lack of
attractive  business  opportunities  or  suitable  acquisitions,  the  Company's
dependence  upon financing from Reckson  Operating  Partnership,  L.P.,  ("ROP")
conflicts of interest of management,  competition for targeted  acquisitions and
the ability to otherwise  finance  business  opportunities.  Consequently,  such
forward-looking  statements  should be  regarded  solely as  reflections  of the
Company's current operating and development plans and estimates. These plans and
estimates are subject to revision  from time to time as  additional  information
becomes  available,  and actual  results may differ from those  indicated in the
referenced statements.

OVERVIEW AND BACKGROUND

The Company's primary business is to create and operate a system of interrelated
business services offered for sale to its customer pool which includes customers
of ROP, a commercial real estate owner,  Advantis, the Company's executive suite
business,  On-Site Ventures, LLC ("On-Site"),  the Company's  telecommunications
business, and Reckson Strategic Venture Partners,  LLC ("RSVP"),  (collectively,
the "RSI Customer Pool") and third parties in the general  marketplace through a
centralized infrastructure.  The Company's growth strategy is to acquire or form
strategic  alliances with  established  businesses  with strong  entrepreneurial
management  and a  reputation  for  high  quality  services  within  each of its
targeted business service sectors ("Business Service Platforms").  Specifically,
the  Company  seeks  opportunities  for which  there is broad  demand in the RSI
Customer Pool. Such Business Service Platform investment or alliance serves as a
basis for sale and delivery of business  services to the RSI Customer  Pool. The
Company will  establish  Business  Service  Platforms  that present  significant
opportunities  to provide  business  services to the RSI Customer Pool and other
third parties. Currently, the RSI Customer Pool retains third parties to provide
many business to business  services for their  day-to-day  operations.  Of these
services,   the  Company  may  seek  to  provide  the  RSI  Customer  Pool  with
telecommunications,  outsourced  business  services,  E-commerce  and   content,
executive suites and concierge services, as well as with other business services
that the  Company  determines  may be  utilized by the RSI  Customer  Pool.  The
Company will seek growth in each Business  Service Platform by (i) accessing the
RSI Customer Pool as an anchor for growth  opportunities  (ii)  integrating each
Business  Service  Platform  into  RSI's  centralized  infrastructure  and (iii)
acquiring similar businesses,  forming strategic alliances, or making additional
investments within such Business Service Platform.

In connection with the initial capitalization of RSI, ROP contributed $4,256,324
for a 95% non-voting  equity interest and certain members of Reckson  management
contributed  notes of  $224,017  to the  Company  in  exchange  for a 5%  voting
ownership interest. On October 29, 1997 the notes were repaid.

On June 11, 1998, ROP distributed its 95% of the common stock of RSI to its unit
holders of record on May 26, 1998 (the "Distribution"). Immediately prior to the
Distribution,  the shares of non-voting  common stock held by ROP were exchanged
by RSI for RSI common shares. Each share of the Company's common stock issued in
the  Distribution  was  accompanied  by  one  preferred  share  purchase  right.
Simultaneously,  Reckson Associates Realty Corp. ("Reckson") distributed 100% of
the RSI common shares received from the Distribution to its common  shareholders
of the same record date. In addition,  simultaneously with the Distribution, the
Company  issued  rights to its  stockholders  to  subscribe  for the purchase of
additional shares of common stock of the Company.

Immediately  after the  Distribution  of RSI common  stock,  RSI  granted to its
stockholders  (each a  "Holder")  one  subscription  right for each share of RSI
common stock. Each subscription  right entitled the Holder to purchase one share
of RSI  common  stock at a  purchase  price of $1.03  per share  (the  "Exercise
Price")  and, at the election of such Holder,  four  additional  shares (but not
less than four  additional  shares)  at a purchase  price of $1.03 per share.  A
Holder of subscription  rights had the opportunity to acquire up to an aggregate
of approximately 20,557,130 shares of RSI common stock. RSI and Reckson Standby,
LLC  (the  "Standby   Purchaser")   (an  entity  owned  by  several  members  of
management),  entered  into a standby  agreement  pursuant  to which the Standby
Purchaser agreed to purchase,  and RSI agreed to sell, any and all shares of RSI
common stock that were the subject of subscription rights in the rights offering
but were not subscribed  for by a Holder on the expiration  date at the Exercise
Price. The proceeds from the Standby Purchaser were

                                      II-3

<PAGE>

approximately $7,325,000.  RSI received net proceeds from the rights offering of
approximately   $19,852,000.   In   connection   with  the   Company's   initial
capitalization the Company obtained, from ROP a five year $100 million unsecured
credit facility (the "RSI Facility").  The RSI Facility bears interest at a rate
equal to the  greater  of the prime  rate plus 2% and (i) 12% per annum with the
rate in clause (ii) increasing annually on outstanding borrowings at the rate of
4% per year over the prior year's rate.

ROP and RSI have entered into an intercompany  agreement (the "ROP  Intercompany
Agreement") to formalize their  relationship and to limit conflicts of interest.
Under  the  ROP  Intercompany  Agreement,  RSI  granted  ROP a  right  of  first
opportunity  to make  any  Real  Estate  Investment  Trust  ("REIT")  -qualified
investment  that  becomes  available to RSI. In  addition,  if a  REIT-qualified
investment opportunity becomes available to an affiliate of RSI, including RSVP,
the  ROP  Intercompany  Agreement  requires  such  affiliate  to  allow  ROP  to
participate in such opportunity to the extent of RSI's interest.

Under  the  ROP  Intercompany  Agreement,  ROP  granted  RSI a  right  of  first
opportunity  to provide  commercial  services to ROP and its  tenants.  RSI will
provide  services to ROP at rates and on terms as  attractive as either the best
available for comparable services in the market or those offered by RSI to third
parties.  In  addition,  ROP is required to give RSI access to its tenants  with
respect to business services that may be provided to such tenants and, under the
ROP Intercompany  Agreement,  subject to certain  conditions,  ROP granted RSI a
right of first refusal to become the lessee of any real property acquired by ROP
if ROP  determines  that,  consistent  with the REIT  status of  Reckson,  it is
required to enter into a "master" lease agreement.

RSI Fund Management,  LLC a wholly owned subsidiary of RSI, is a managing member
of RSVP Holdings,  LLC  ("Holdings"), the managing member of RSVP, a real estate
venture  capital  fund formed to invest in real  estate and real  estate-related
operating  companies  outside of Reckson's core  interests.  RSVP will invest in
established  entrepreneurial  enterprises with  experienced  management teams in
market  sectors  which are in the early  stages of their  growth  cycle or offer
unique circumstances for attractive  investments as well as platforms for future
growth ("RSVP  Investments").  ROP has committed  $100 million to be invested in
RSVP Investments  (the "RSVP  Facility").  Paine Webber Real Estate  Securities,
Inc. ("PWRES") is a non-managing  member and holds a preferred interest in RSVP.
PWRES has committed  $200 million in capital (the "PWRES Equity  Facility")  and
shares 66 2/3% in profits and losses of RSVP, subject to a maximum internal rate
of return ("IRR") of 16% of invested capital.  On April 24, 1998, PWRES assigned
25% of its preferred  equity interest in RSVP,  representing an unfunded capital
committment  of $50 million to Stratum  Realty  Fund,  LLC  ("Stratum").  Excess
returns over 16% on the PWRES Equity  Facility is to be distributed to Holdings.
On March 17, 1999,  PWRES  transferred all of its rights,  title and interest on
its invested capital to date in RSVP to Stratum.

Holdings has retained two managing directors (the "RSVP Managing  Directors") to
manage the day-to-day  operations of RSVP, subject to the strategic direction of
RSI. New World Realty,  LLC ("New World"),  an entity owned by the RSVP Managing
Directors  acts  as a  managing  member  of  Holdings.  The  Holdings  operating
agreement (the "managing member operating  agreement")  provides for the payment
to New World of  distributions  out of the cash flow of Holdings,  after RSI and
affiliated persons have received a return of their capital contributions to RSVP
investments plus a 12% IRR thereon, of $15 million and,  thereafter,  a share of
cash flows  ranging  from 15% to 27.75%  based upon the IRR  received by RSI and
affiliated persons above 12% in respect of RSVP investments. The managing member
operating   agreement   obligates  RSI  to   contribute   100%  of  the  capital
contributions to be made by Holdings to RSVP in an amount up to $100 million. In
the event RSI  defaults in making its capital  contributions,  distributions  of
cash to RSI will be subordinated to certain distributions to New World and RSI's
management rights will be reduced and RSI will be obligated to purchase, at the 
election of New World, a portion of New World's interest in Holdings for a 
minimum of $15 million. At the termination of RSVP, New World has a right of
first refusal to purchase any RSVP investment proposed for sale.
New World will also be entitled to one-half of
any asset  management  fee  earned by  Holdings  from ROP.  Additionally,  it is
anticipated  that New World will receive  transaction fees of up to $1 million a
year for identifying investment opportunities for RSVP.

On April 1, 1998,  the Company  acquired a 9.9%  membership  interest in Reckson
Executive  Centers,  LLC ("REC,  LLC") for $200,000 from ROP and assumed debt of
approximately $322,000. On October 5, 1998, the Company contributed its interest
in REC, LLC to Reckson  Executive  Centers,  Inc. ("REC") in exchange for 75% of
the common stock of REC.

On November 9, 1998,  the Company  acquired a majority  interest in  Interoffice
SuperHoldings  Corporation  ("Interoffice"),  a  nationally  operated  executive
office suite  business.  The  aggregate  purchase  price paid by the Company was
approximately  $20.5 million and was financed  through  borrowings under the RSI
Facility. The Company also acquired receivables related to certain advances made
to certain other  stockholders of Interoffice for  approximately  $10.3 million.
Such receivables are secured by the share held by these stockholders.

On January 8, 1999,  Interoffice (36 executive  office suite centers) and REC (8
executive  office suite centers) merged with Alliance  National  Incorporated, a
holding  company which owns and operates  approximately  90  nationally  located
executive office suite centers. The merged company changed its name to Advantis.
The  stockholders  of  Interoffice  and REC  received  shares  of the  Series  C
Preferred  Stock of Advantis  which  represent  approximately  40% of the equity
interest  in  Advantis.  The  Company  thereafter  owned  approximately  23%  of
Advantis.  The holders of the Series C Preferred Stock have the right to appoint
four of the ten  members  of the  board  of  directors  of  Advantis,  including
Chairman  of the  Board  and  received  specified  preemptive  rights  and other
specified rights.  RSI and the other stockholders of Interoffice hold the Series
C  Preferred  Stock  received  in respect of the merger of  Interoffice  through
Interoffice  Superholdings,  LLC ("IS LLC"),  a newly  formed  Delaware  limited
liability  company of which RSI is the sole managing member.  RSI also holds the
Series C  Preferred  Stock  received  in respect  of the  merger of REC  through
Reckson Office Centers,  LLC, a newly formed Delaware limited  liability company
of which a subsidiary of RSI is the managing member.


                                      II-4

<PAGE>

Advantis and RSI have also entered into an  intercompany  agreement  pursuant to
which RSI has the opportunity to be the exclusive  provider of certain  business
services to Advantis,  provided  certain third party and  "most-favored  nation"
conditions are satisfied.

RSI acquired certain ownership rights related to the Series C Preferred Stock of
Advantis  from a  stockholder  of  Interoffice  which  provided the Company with
enhanced governance rights for $6.5 million. In addition,  the Company paid $3.5
million to another  stockholder  of  Interoffice  for an option to purchase that
stockholders  effective  interest in the Series C Preferred Stock for a purchase
price of $6.75 million. If the option is not exercised,  the stockholder has the
right to sell such  interests  to the Company at fair value,  as  determined  in
accordance  with  the  applicable  agreement.  A  significant  number  of  items
presented to the Advantis Board will require the separate approval of a majority
of the  representatives of the Series C Preferred Stock on the Board,  including
significant  acquisitions,  sale or leasing of assets,  approval  of  Advantis's
annual  operating  budget,   certain  borrowings  and  capital  expenditures  by
Advantis,  the hiring or termination of senior executives and other matters. The
holders of Series C Preferred  Stock also have the right to appoint  half of the
members  of the  executive  and audit  committees  of the Board.  The  preferred
stockholders  of Advantis  (including the holders of Advantis' Class A Preferred
Stock,  Class B  Preferred  Stock  and Class C  Preferred  Stock)  were  granted
super-majority   voting  rights  with  respect  to  certain  corporate  actions,
including the issuance of equity securities, changes to the charter documents of
Advantis and other matters.

The  Company  currently  has  a  1%  interest  and  holds  a  subordinated  note
convertible  into a 58.69% equity  interest in On-Site,  a company that provides
advanced   telecommunications   systems  and  services  within   commercial  and
residential  buildings  and/or  building  complexes.  The Company  has  advanced
On-Site $6.5 million through  December 31, 1998 to fund certain  operating costs
under the terms of the  subordinated  note. The loan bears interest at a rate of
12% per annum. In May 1998, the Company made an initial capital  contribution of
$300,000 for a 58.69% interest in On-Site Commerce and Content,  LLC ("OCC"),  a
Company established to acquire and develop software products. As of December 31,
1998 OCC had no operations.

RESULTS OF OPERATIONS

For the period from July 15, 1997  (commencement  of operations) to December 31,
1997 the Company reported total revenues of $253,820. Total revenues include (i)
equity in earnings  of $245,593  which  represents  RSI's 33 1/3%  interest in a
joint  venture  that  owns a 70%  interest  in  Dobie  Center  Properties,  Ltd.
 .("Dobie"),  (ii) equity in loss of American Campus Communities,  LLC ("ACC") of
$22,156 and (iii) interest  income of $30,383  relating to loans made to certain
affiliates.   The  Company  also  reported  total  expenses  of  $511,707  which
substantially represents payroll and office costs.



                                      II-5

<PAGE>





Summary of Operations by Business Segment

Executive Suites
----------------

For the period November 9, 1998 to December 31, 1998,  Interoffice reported loss
of $73,509. RSI's share after adjustments, was income of $54,161. For the period
April 1, 1998 to December 31, 1998, REC reported losses of $275,818. RSI's share
of these losses was $149,079.  REC's losses were generally attributable to costs
of opening new centers.

Telecommunications
------------------

For the period May 18, 1998 to December 31,  1998,  On-Site  reported  losses of
$3,055,505.  On-Site's losses were generally attributable to start-up costs. The
Company's share of losses attributable to its 1% equity interest was $30,555. In
connection  with the Company's  convertible  notes with On-Site,  RSI recognized
$345,428 in interest income.

RSVP Holdings, LLC
------------------

For the year ended  December  31, 1998,  Holdings,  reported  total  revenues of
$646,678,  equity  in  losses on  investments  of  $3,993,755  and  expenses  of
$7,261,529.  RSI's share of Holdings'  loss for the year ended December 31, 1998
was $3,959,989.  Included in Holdings'  operating results are the following RSVP
activities:

Student Housing
---------------

For the year ended December 31, 1998,  Dobie reported income of $869,412.  RSI's
share of income for its period of  ownership,  January 1, 1998 to March 31, 1998
was $170,567.  For the period April 1, 1998 to December 31, 1998 RSVP's share of
income was $32,296.  Student rental  revenues are generally  recognized over the
school year. In addition,  in August of 1998, the mortgage indebtedness in Dobie
Center  was  refinanced  with a larger  mortgage  loan  resulting  in  increased
interest expense.

For the period  April 1, 1998 to December  31,  1998,  ACC,  reported  losses of
$2,226,330.  RSI's share of those losses for its period of ownership, January 1,
1998 to March 31, 1998 was $51,504. For the period April 1, 1998 to December 31,
1998  RSVP's  share of losses  was  $518,895.  ACC losses  generally  related to
operating expenses on new projects prior to student occupancy,
in addition to interest  expense and amortization of leaseholds.

Privatization
-------------

On August 11,  1998,  RSVP,  through a wholly owned  subsidiary,  formed a joint
venture, Gateway Development Group,LLC ("Gateway") with Gateway Management 
Group. During 1998, RSVP contributed $549,238 to Gateway. RSVP is currently 
uncertain whether it will recover its invested dollars from Gateway's future 
cash flows.
At December 31, 1998,  RSVP has  recognized a loss of $650,531  which includes a
reserve for their total contributed dollars and investment costs of $101,293.

For the period August 27, 1998 to December 31, 1998 Dominion  Venture Group, LLC
reported income of $970,608. RSVP's share of income was $296,970.

Assisted Living
---------------

For the period August 21, 1998 to December 31,1998 Assisted Living  Investments,
LLC ("ALI")  reported  losses of $5,102,096.  RSVP's share of losses amounted to
$2,907,607.  ALI's  losses  were  generally  attributable  to the opening of new
assisted  living  facilities  and the costs of operating and  maintaining  those
facilities prior to their lease up.

LIQUIDITY AND CAPITAL  RESOURCES

Summary of Cash Flows
---------------------

Net cash used by operating activities totaled  approximately $15 million in 1998
and $1.9 million for the period July 15, 1997 to December 31, 1997. Cash used in
operations for 1998 and 1997 were primarily  attributable to the start-up losses
incurred by the Company,  advances to affiliates and general and  administrative
operating costs.

Net cash used in investing activities totaled  approximately $44 million in 1998
and $2 million for the period July 15, 1997 to December 31,  1997.  Cash used in
investing  activities  related  primarily  to  investments  in and  advances  to
Holdings, Interoffice and On-Site.


                                      II-6

<PAGE>

Net cash provided by financing  activities totaled  approximately $61 million in
1998,  and $4 million for the period July 15, 1997 to December  31,  1997.  Cash
provided by financing  activities  during 1998 is  attributable to proceeds from
the rights offering and draws on the RSI facility and the RSVP facility.

Financing Activities

On June 15, 1998,  RSI  established  the RSI Facility  with ROP in the amount of
$100 million for RSI's service  sector  operations  and other general  corporate
purposes.  On the same date,  RSI  established  the RSVP  Facility  with ROP for
funding  of  investments  of up to $100  million  with or in  RSVP  through  (i)
RSVP-controlled joint venture REIT-qualified  investments, or (ii) advances made
to RSI  subsequent  to the  Distribution.  Advances  under the RSVP  Facility in
excess of $25 million in respect of any single  platform are subject to approval
by Reckson's board of directors, while advances under the RSI Facility in excess
of $10  million  in  respect of any  single  investment  in a  Business  Service
Platform, as well as advances for investments in opportunities in non-commercial
services,  are  subject  to  approval  by  Reckson's  board of  directors,  or a
committee  thereof.  The RSI and RSVP Facilities (the "Credit  Facilities") each
have a term of five years and advances  thereunder  are recourse  obligations of
RSI.  Interest  accrues on advances  made under the Credit  Facilities at a rate
equal to the greater of (i) the prime rate plus 2% and (ii) 12% per annum,  with
the rate on balances outstanding for more than one year increasing annually at a
rate of 4% of the prior  year's  rate.  Prior to  maturity,  interest is payable
quarterly but only to the extent of net cash flow and on an interest-only  basis
and is  prepayable  without  penalty at the option of RSI.  As long as there are
outstanding advances under the Credit Facilities,  RSI is prohibited from paying
dividends on any shares of its capital stock. The Credit  Facilities are subject
to certain other covenants and will prohibit  advances  thereunder to the extent
such advances could, in the determination of Reckson,  endanger Reckson's status
as a REIT. Additional indebtedness may be incurred by subsidiaries of RSI. As of
December  31,  1998,  approximately  $33.7  million  was  outstanding  under RSI
Facility and approximately $17.3 million was advanced under the RSVP Facility of
which  approximately $10.1 million represents an investment by ROP in RSVP joint
ventures and approximately $7.2 million represents outstanding borrowings.

Additionally, RSVP has obtained the PWRES Equity Facility which provides for the
investment  by PWRES  of up to $200  million  in RSVP in the  form of  preferred
equity, subject to certain conditions.  Amounts available under the PWRES Equity
Facility have been used by RSVP to make investments consistent with its business
objectives  and to fund  working  capital.  Under the terms of the PWRES  Equity
Facility, RSVP is subject to various covenants and events of default and related
remedies.  Such  remedies  include  increased  control  rights of PWRES over the
operation of RSVP under certain  circumstances.  Advances under the PWRES Equity
Facility are partially funded by an investment fund that is jointly sponsored by
financier  George Soros and PWRES.  In addition,  PWRES and such investment fund
will  receive a  priority  or  preferred  distribution  from  RSVP  prior to the
distribution  of cash to RSI. As of December  31,  1998,  PWRES and Stratum have
contributed $37,465,384. On March 17, 1999, PWRES transferred all of its rights,
title and  interest on its  invested  capital to date in RSVP to  Stratum.  This
transfer  will  include  the  rights to  distributions  based upon the amount of
funded capital contributions.

The Company  utilizes  the  advances  under the RSI  Facility  primarily to make
investments in operating  companies that provide business services.  The Company
may make  additional  investments  in these  operating  companies to accommodate
their respective growth plans. The Company's  investments in operating companies
are  anticipated  to  produce  net  cash  flow as a result  of  their  operating
activities  over the long term,  although  the level and timing of net cash flow
for each investment in the short-and  long-term may vary based upon the stage of
the respective  operating  company's growth cycle and the level of the Company's
ownership interest.  The Company targets investments in operating companies that
will produce net cash flow in the long-term.  It is expected that certain of the
Company's  investments  will be  made  in  Companies  which  it does  not own a
majority interest or fully control. Thereby cash flow of these companies will be
used for growth  opportunities at such companies and not for distribution to its
owners.  It is also  expected  that the Company will seek to invest in companies
where it controls  operations  and  consolidates  such companies cash flows with
those of the Company.  Under such  circumstances  net cash flow  produced by the
Company's  investments  will be used for debt service under the RSI Facility and
for the Company's  operating  costs.  The Company expects to meet its short term
liquidity  requirements  generally  through  its net cash flow  produced  by its
operations along with advances under the RSI Facility.  The Company expects that
it will refinance indebtedness under the RSI Facility at maturity or retire such
debt  through the issuance of debt  securities  or equity  securities,  although
there can be no  assurance  that the Company will be able to refinance or retire
such  indebtedness.  The Company  anticipates  that cash on hand, net cash flows
from operating  activities,  together with cash available from borrowings  under
the  RSI  Facility,   will  be  adequate  to  meet  the  capital  and  liquidity
requirements of the Company in both the short-and long-term.

IMPACT OF YEAR 2000

With respect to the year 2000  disclosure,  the  following  Company  information
pertains to RSI, its direct investments (On-Site,  Interoffice and Holdings), as
well as the RSVP platform investments.

Some of the  Company's  older  computer  programs  were written using two digits
rather than four to define the  applicable  year.  As a result,  those  computer
programs have  time-sensitive  software that recognizes a date using "00" as the
year 1900  rather  than the year  2000.  This  could  cause a system  failure or
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to

                                      II-7

<PAGE>


process transactions, or engage in similar normal business activities.

The Company has  completed an  assessment  to modify or replace  portions of its
software so that its computer  systems will  function  properly  with respect to
dates in the year 2000 and thereafter. Currently, the entire property management
system  is year  2000  compliant  and has  been  thoroughly  tested.  Since  the
Company's  accounting software is maintained and supported by a third party, the
total year 2000 project cost is estimated to be minimal.

The year 2000 project is estimated to be completed not later than July 31, 1999,
which is prior to any anticipated impact on its operating systems. Additionally,
the  Company  has  received  assurances  from  its  contractors  that all of the
Company's  building  management and  mechanical  systems are currently year 2000
compliant  or will be made  compliant  prior to any  impact  on  those  systems.
However,  the Company  cannot  guarantee that all  contractors  will comply with
their  assurances and  therefore,  the Company may not be able to determine year
2000 compliance of those  contractors.  At that time, the Company will determine
the  extent  to  which  the  Company  will  be  able  to  replace  non-compliant
contractors.  The Company believes that with  modifications to existing software
and conversions to new software,  the year 2000 issue will not pose  significant
operational  problems for its computer systems.  However,  if such modifications
and conversions  are not made, or are not complete timely costs  associated with
the year 2000  issue  could be  significant  and have a  material  impact on the
operations on the Company.

To date, the Company has expended approximately $21,000 and expects to expend an
additional $60,000 in connection with upgrading building management,  mechanical
and computer systems. The costs of the project and the date on which the Company
believes it will complete the year 2000  modifications are based on management's
best  estimates,  which were derived  utilizing  numerous  assumptions of future
events,  including the  continued  availability  of certain  resources and other
factors.  However,  there  can be no  guarantee  that  these  estimates  will be
achieved and actual  results  could differ  materially  from those  anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the  availability  and costs of personnel  trained in this area, the
ability  to  locate  and  correct  all  relevant  computer  codes,  and  similar
uncertainties.

In a "worst case scenario" of the failure of the third party to deliver to, on a
timely basis,  the necessary  upgrades to the accounting  software,  the Company
would  be  required   to  process   transactions,   such  as  the   issuance  of
disbursements, manually until an alternative system was implemented.

If the Company is not successful in implementing  its year 2000 compliance plan,
the Company may suffer a material  adverse impact on their results of operations
and financial  condition.  Because of the importance of addressing the year 2000
issue, the Company expects to develop  contingency  plans if they determine that
the compliance plans will not be implemented by July 31, 1999.

INFLATION

The Credit  Facilities bear interest at the greater of the prime rate plus 2% or
12% (on  balances  outstanding  more than one year  increasing  4% per year,  as
described  above).  The  rate  of  interest  on the  Credit  Facilities  will be
influenced  by changes in  short-term  rates and is sensitive  to inflation  and
other  economic  factors.  A significant  increase in interest  rates may have a
negative impact on the earnings of the Company due to the variable interest rate
under the Credit Facilities.

The  privatization,  assisted  living and student housing sectors are subject to
incremental  rent increases each year.  The Company  believes that  inflationary
increases will be offset by these rent increases.

RECENT PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting  for  Derivative  Instruments  and  Hedging  Activities",  which  is
required to be adopted in years  beginning  after June 15, 1999.  The  Statement
permits  early  adoption as of the  beginning  of any fiscal  quarter  after its
issuance.  The Company expects to adopt the new Statement  effective  January 1,
2000. The Company does not  anticipate  that the adoption of this Statement will
have any effect on its results of operations or financial position.

                                II-8
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary  market risk facing the Company is interest  rate risk on its Credit
Facilities.  The  Company  does not hedge  interest  rate risk  using  financial
instruments.  The Credit  Facilities  bear  interest at the greater of the prime
rate plus 2% or 12% (with balances  outstanding more than one year increasing 4%
per year,  as described  above).  The rate of interest on the Credit  Facilities
will be  influenced by changes in short term rates and is sensitive to inflation
and other economic factors. A significant  increase in interest rates may have a
negative impact on the earnings of the Company due to the variable interest rate
under the Credit Facilities.

The following  table sets forth the  Company's  Credit  Facilities  obligations,
principal cash flows by scheduled maturity,  weighted average interest rates and
estimated fair market value ("FMV") at December 31, 1998.

<TABLE>
<CAPTION>


                        1999          2000            2001            2002      2003         Thereafter      Total         FMV
                        ----          ----            ----            ----      ----         ----------      -----         ---
<S>                 <C>           <C>            <C>             <C>            <C>              <C>             <C>             <C>
Variable rate       $   ------ $     -----    $      ------   $     -----    $ 40,981,500      $ -----    $40,981,500    $40,981,500
Average interest        ------       -----           ------         -----        12%             -----        12%             ------
rate

</TABLE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is included in a separate section of this Form 10-K.

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

None.



                                      II-9

<PAGE>

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  contained in the section  captioned  "Proposal I:  Election of
Directors"  of the  Company's  definitive  proxy  statement  for the 1999 annual
meeting of stockholders is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information  contained in the section captioned "Executive  Compensation" of
the  Company's  definitive  proxy  statement  for the  1999  annual  meeting  of
stockholders is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  contained in the section  captioned  "Principal and Management
Stockholders"  of the Company's  definitive  proxy statement for the 1999 annual
meeting of stockholders is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information  contained in the section captioned  "Certain  Relationships and
Related  Transactions" of the Company's  definitive proxy statement for the 1999
annual meeting of the stockholders is incorporated herein by reference.



                                      III-1

<PAGE>

                                     PART IV



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

(a) (1 and 2)              Financial Statements and Schedules

         The  following  consolidated  financial  information  is  included as a
separate section of this annual report on Form 10-K:


<TABLE>
<CAPTION>

                                                                                                      PAGE
                                                                                                   -----------
RECKSON SERVICE INDUSTRIES, INC.
<S>                                                                                                      <C>
Report of Independent Auditors....................................................................    IV-6
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997.........................    IV-7
Consolidated Statements of Operations for the year ended December 31, 1998 and for
   the period from July 15, 1997 (commencement of operations) to December 31, 1997................    IV-8
Consolidated Statements of Shareholders' Equity for the year ended December 31, 1998
   and for the period from July 15, 1997 (commencement of operations) to December 31, 1997........    IV-9
Consolidated Statements of Cash Flows for the year ended December 31, 1998 and for
   the period from July 15, 1997 (commencement of operations) to December 31, 1997................    IV-10
Notes to Consolidated Financial Statements........................................................    IV-11

</TABLE>
   
                                   IV-1  
<PAGE>
<TABLE>
<CAPTION>


FINANCIAL STATEMENTS INCLUDED PURSUANT TO RULE 3-09 OF REGULATION S-X

<S>                                                                                    <C>
     INTEROFFICE SUPERHOLDINGS CORPORATION AND SUBSIDIARIES
     Report of Independent Auditors .............................................   IV-26
     Consolidated Balance Sheet as of December 31, 1998 .........................   IV-27
     Consolidated Statement of Operations for the period from November 9, 1998
       to December 31, 1998 .....................................................   IV-28
     Consolidated Statement of Stockholders' Equity for the period from November
       9, 1998 to December 31, 1998.............................................    IV-29

     Consolidated Statement of Cash Flows for the period from November 9, 1998 to
       December 31, 1998 ........................................................   IV-30
     Notes to Consolidated Financial Statements .................................   IV-31


     RSVP HOLDINGS, LLC
     Report of Independent Auditors .............................................   IV-41
     Consolidated Balance Sheet as of December 31, 1998 .........................   IV-42
     Consolidated Statement of Operations for the period from February 26, 1998
       (commencement of operations) to December 31, 1998 ........................   IV-43
     Consolidated Statement of Members' Equity for the period from February 26,
       1998 (commencement of operations) to December 31, 1998 ...................   IV-44
     Consolidated Statement of Cash Flows for the period from February 26, 1998
       (commencement of operations) to December 31, 1998 ........................   IV-45
     Notes to Consolidated Financial Statements .................................   IV-46
</TABLE>

Other  schedules  are omitted since the required  information  is not present in
amounts  sufficient  to  require  submission of the the  schedule or because the
information required is included in the financial statements and notes thereto.




                                      IV-2

<PAGE>

EXHIBIT INDEX

EXHIBIT
NUMBER               DESCRIPTION
------               -----------
3.1*     Certificate of Incorporation

3.2*     By-Laws of Registrant

3.3      Amended and Restated Certificate of Incorporation

4.1*     Specimen Share Certificate of Common Stock

10.1     Intercompany Agreement between Reckson Operating Partnership, L..P. and
         Reckson Service Industries, Inc. dated May 13, 1998

10.2A    Credit  Agreement  between  Reckson  Operating  Partnership,  L.P.  and
         Reckson Service Industries,  Inc. relating to the operations of Reckson
         Strategic Venture Partners,LLC dated June 15, 1998

10.2B    Credit  Agreement  between  Reckson  Operating  Partnership,  L.P.  and
         Reckson Service Industries,  Inc. relating to the operations of Reckson
         Service Industries, Inc. dated June 15, 1998

10.3*    Limited Liability Company Agreement of OnSite Ventures, LLC

10.4*    StandBy Purchase Agreement

10.5*    Limited Liability Company Agreement of RSVP Holdings, LLC

10.6A*   Operating Agreement of Reckson Strategic Venture Partners, LLC

10.6B*   Supplemental  Agreement  to Operating  Agreement  of Reckson  Strategic
         Venture Partners, LLC

10.7*    Registration Rights Agreement between Reckson Service Industries,  Inc.
         and certain affiliates thereof dated May 13, 1998

10.8*    Option to acquire Interoffice Superholdings Corporation

10.9     Loan Agreement regarding On-Site Convertible Loans

10.10A*  Stock Option Plan

10.10B   1998 employee stock option plan

10.11*   Employment Agreement of Steven H. Shepsman

10.12*   Employment Agreement of Seth B. Lipsay

10.13*   Limited Liability Company Agreement of Interoffice  Superholdings,  LLC
         by and among Interoffice  Superholdings,  LLC, RSI I/O Holdings,  Inc.,
         JAH I/O, LLC and Rieger I/O LLC

10.14*   Fourth Amended and Restated  Stockholder's  Agreement  dated January 8,
         1999 by and  among  Alliance  National  Incorporated  and the  security
         holders identified therein.

10.15**  Letter  Agreement dated November 9, 1998 by and between JAH I/O LLC and
         Reckson Management Group, Inc., Reckson Service  Industries,  Inc., RSI
         I/O Holdings, Inc., and Reckson Office Centers, LLC

10.16**  Letter Agreement by and between Reckson Service  Industries,  Inc., and
         RFIA, LLC

10.17*** Amended and Restated Operating Agreement of Assisted Living Investments
         LLC

10.18#   Operating Agreement of Dominion Venture Group LLC

10.19##  Agreement   and  Plan  of  Merger  by  and  among   Alliance   National
         Incorporated,   Alliance   Holding  Inc.,   Interoffice   Superholdings
         Corporation and Interoffice Superholdings, LLC

10.20##  Agreement   and  Plan  of  Merger  by  and  among   Alliance   National
         Incorporated,  ANI Holdings, Inc., Reckson Executive Centers, Inc., and
         Reckson Office Centers, LLC

10.21    $4 million Senior Secured Promissory Note of On-Site Ventures, LLC

12.1     Statement of Ratios of Earnings to Fixed Charges

21.1     Statement of Subsidiaries of Reckson Service Industries, Inc.

24.1     Powers of Attorney (included in Part IV of this Form 10-K)

27.0     Financial Data Schedule

99.1*    Form of Letter to Stockholders regarding Rights Offering

99.2*    Subscription Agent Agreement between Reckson Service Industries,  Inc.,
         and American Stock Transfer & Trust Company
-------------

*    Previously  filed as an exhibit to Registration  Statement on Form S-1 (No.
     333-44419) and incorporated herein by reference.

**   Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
     on January 25, 1999 and incorporated herein by reference.

***  Previously  filed as an exhibit to the Company's form 8-K report filed with
     the SEC on September 8, 1998 and incorporated herein by reference.

#    Previously  filed as an exhibit to the Company's form 8-K report field with
     the SEC on September 11, 1998 and incorporated herein by reference.

##   Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
     on December 1, 1998 and incorporated herein by reference.



                                      IV-3

<PAGE>





(3) Exhibits


(b) Reports on Form 8-K

On November  9, 1998 the  Company  filed a report on Form 8-K/A in order to file
financial  statements  relating  to RSVP's  purchase  of an interest in Assisted
Living Investments, LLC.

On November  10, 1998 the Company  filed a report on Form 8-K/A in order to file
financial  statements  relating  to the  formation  of joint  venture  (Dominion
Venture Group, LLC) between RSVP and Dominion.

On  November  20,  1998 the Company  filed a report on Form 8-K  announcing  the
exercise  of  its  option  to  acquire  a  majority   interest  in   Interoffice
SuperHoldings Corporation from Reckson Management Group, Inc.

On  December  1, 1998,  the Company  filed a report on Form 8-K  announcing  its
execution of merger agreements with Alliance  National  Incorporated and Reckson
Executive Centers, Inc., and Interoffice SuperHoldings Corporation.




                                      IV-4

<PAGE>





                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 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 on March ___________, 1999.

                                            RECKSON SERVICE INDUSTRIES, INC.

                                            By:       /s/ SCOTT RECHLER
                                              ---------------------------------
                                                       (Scott Rechler)
                                             President, Chief Executive Officer
                                                        and Director

         KNOW ALL MEN BY THESE PRESENTS,  that we, the undersigned  officers and
directors of Reckson Service Industries, Inc., hereby severally constitute Scott
H. Rechler, Mitchell D. Rechler and Michael Maturo, and each of them singly, our
true and lawful  attorneys with full power to them, and each of them singly,  to
sign for us and in our names in the capacities  indicated  below,  the Form 10-K
filed herewith and any and all amendments to said Form 10-K, and generally to do
all such things in our names and in our  capacities as officers and directors to
enable  Reckson  Service  Industries,  Inc. to comply with the provisions of the
Securities  Exchange Act of 1934,  and all  requirements  of the  Securities and
Exchange Commission,  hereby ratifying and confirming our signatures as they may
be signed by our said  attorneys,  or any of them, to said Form 10-K and any and
all amendments thereto.

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

<TABLE>
<CAPTION>
                 Name                                             Title                                          Date
                 ----                                             -----                                          ----

<S>                                     <C>                                                                <C>
     /s/ SCOTT H. RECHLER
---------------------------------------
          (Scott H. Rechler)           President,-Chief-Executive-Officer-and-Director                       March 30, 1999

     /s/   MICHAEL MATURO
---------------------------------------
           (Michael Maturo)            Executive Vice President, Chief Financial Officer and Director        March 30, l999
                                       Financial-Officer-and-Accounting-Officer)

     /s/ DONALD J. RECHLER
---------------------------------------
         (Donald J. Rechler)          Chairman of the Board and Director                                     March 30, 1999

     /s/ ROGER M. RECHLER
---------------------------------------
     (Roger M. Rechler)               Member of Management Advisory Committee and Director                   March 30, 1999


      /s/ MITCHELL D.. RECHLER
---------------------------------------
       (Mitchell D. Rechler)          Secretary,-Member-of-Management-Advisory-Committee-and-Director        March 30, 1999


        /s/ GREGG M.. RECHLER
--------------------------------------
          (Gregg M. Rechler)           Member of Management Advisory Committee  and Director                 March 30, 1999


--------------------------------------
            (Paul Amoruso)             Director                                                              March 30, 1999

        /s/ RONALD COOPER
--------------------------------------
            (Ronald Cooper)            Director                                                              March 30, 1999

</TABLE>

                                      IV-5

<PAGE>


                         REPORT OF INDEPENDENT AUDITORS


Board of Directors and Shareholders
Reckson Service Industries, Inc.

We have audited the accompanying  consolidated balance sheets of Reckson Service
Industries,  Inc. as of December 31, 1998 and 1997, and the related consolidated
statements  of  operations,  shareholders'  equity,  and cash flows for the year
ended December 31, 1998 and for the period from July 15, 1997  (commencement  of
operations)  to  December  31,  1997.   These   financial   statements  are  the
responsibility of the Company'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 Reckson Service
Industries,  Inc. as of December 31, 1998 and 1997, and the consolidated results
of its  operations  and its cash flows for the year ended  December 31, 1998 and
for the period July 15, 1997  (commencement  of operations) to December 31, 1997
in conformity with generally accepted accounting principles.


                             /S/ERNST & YOUNG LLP


New York, New York
March 12, 1999


                                      IV-6

<PAGE>

<TABLE>
<CAPTION>

                        RECKSON SERVICE INDUSTRIES, INC.
                           CONSOLIDATED BALANCE SHEETS


                                                                             December 31, 1998            December 31, 1997
                                                                             -----------------            -----------------
<S>                                                                       <C>                          <C>
Assets:
Cash and cash equivalents                                                 $             2,025,527      $               129,704
Equity investments (Note 3)                                                            45,837,711                    5,845,258
Affiliate receivables (Notes 3 and 5)                                                   9,396,070                      832,854
Organization and pre-acquisition costs net of amortization of $8,214, (1997)                -----                      681,694
Equipment (net of depreciation of $15,337)                                                 99,928                        -----
Other assets                                                                            1,483,427                       30,185
                                                                          -----------------------      -----------------------
     Total Assets                                                         $            58,842,663     $              7,519,695
                                                                          =======================      =======================

Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses                                     $             1,893,657     $                119,384
Loans payable to affiliates                                                                  ----                    3,177,857
Credit facilities with related parties (Note 5)                                        40,981,500                          ---
                                                                          -----------------------      -----------------------
     Total Liabilities                                                                 42,875,157                    3,297,241
                                                                          -----------------------      -----------------------

Commitments and Contingencies (Note 8)          
Shareholders' Equity: (Notes 1 and 4)
Preferred stock, $.01 par value 25,000,000 shares authorized, none issued                   -----                        -----
     and outstanding
Common stock, $.01 par value, 100,000,000 shares authorized, 24,685,514
     and 1,000 shares issued and outstanding, respectively                                246,855                           10
Additional paid in capital                                                             24,126,341                    4,480,331
Accumulated deficit                                                                  ( 8,405,690)                    (257,887)
                                                                          -----------------------      -----------------------
     Total Shareholders' Equity                                                        15,967,506                    4,222,454
                                                                          -----------------------      -----------------------
     Total Liabilities and Shareholders' Equity                           $            58,842,663     $              7,519,695
                                                                          =======================      =======================

</TABLE>



          (See accompanying notes to consolidated financial statements)

                                      IV-7

<PAGE>
<TABLE>
<CAPTION>


                        RECKSON SERVICE INDUSTRIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                                For the year              For the period from
                                                                                    ended                   July 15, 1997 to
                                                                            December 31, 1998            December 31, 1997
                                                                           -------------------------------------------------------
<S>                                                                        <C>                          <C>
Revenues:
Interest income                                                            $     1,006,551                 $     30,383
Management fee income (Note 5)                                                     277,778                         ---
Other income                                                                        58,175                         ---
                                                                           -----------------------      ------------------------
       Total Revenues                                                            1,342,504                      30,383
                                                                           -----------------------      ------------------------
Equity in  earnings (loss) of investments (Note 3)                              (3,966,399)                    223,437
                                                                           -----------------------      ------------------------
Expenses:
Professional fees                                                                  457,901                      12,575
General and administrative expenses                                              2,086,989                     466,538
Amortization and depreciation                                                       39,179                       8,214
Terminated transaction and related costs                                         1,220,694                        ---
Interest expense (Note 5)                                                        1,651,200                      24,380
                                                                          -----------------------      ------------------------
       Total Expenses                                                            5,455,963                     511,707
                                                                           -----------------------      ------------------------
Loss before cumulative effect of change in accounting principle                 (8,079,858)                   (257,887)

Cumulative effect of change in accounting principle (Note 2)                       (67,945)                      ---
                                                                           -----------------------      ------------------------
    NET LOSS                                                               $    (8,147,803)               $   (257,887)
                                                                           =======================      ========================
Basic and diluted net loss per weighted average common share               $          (.56)                $     ---
                                                                           =======================      ========================
Basic and diluted weighted average common shares outstanding                    14,522,513                       ---
                                                                           =======================      ========================

</TABLE>


          (See accompanying notes to consolidated financial statements)


                                      IV-8

<PAGE>

                        RECKSON SERVICE INDUSTRIES, INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                                           Total
                                                  Common       Additional Paid      Accumulated        Shareholders'
                                                   Stock          in Capital          Deficit              Equity
                                                ----------------------------------------------------------------------------
<S>                                              <C>             <C>             <C>                 <C>
Initial capitalization, July 15, 1997..........  $     10        $ 4,480,331     $        --         $     4,480,341
Net Loss.......................................        --                --            (257,887)            (257,887)
                                               --------------    ----------------    -------------     ----------------
Shareholders' equity, December 31,1997.........        10          4,480,331           (257,887)          4,222,454
Distribution of shares.........................    41,142              --                --                  41,142
Proceeds from rights offering,
  Net of costs of $1,296,537...................   205,703         19,646,010             --              19,851,713
Net loss.......................................     --                --             (8,147,803)         (8,147,803)
                                                -------------    -------------      --------------      --------------
Shareholders' equity, December 31, 1998........ $ 246,855        $24,126,341      $  (8,405,690)      $  15,967,506
                                               -----------------------------------------------------------------------------

</TABLE>

          (see accompanying notes to consolidated financial statements)


                                      IV-9
<PAGE>
                        RECKSON SERVICE INDUSTRIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                 Twelve months                 Period from
                                                                                     ended                  July 15, 1997 to
                                                                               December 31, 1998            December 31, 1997
                                                                            -----------------------      -----------------------
CASH FLOWS FROM OPERATING:
<S>                                                                                <C>                      <C>
Net Loss                                                                           $  (8,147,803)           $    (257,887)
Adjustments to reconcile net loss to net cash used in operating activities:
           Amortization and depreciation                                                  39,179                    8,214
           Cumulative effect of change in accounting principle                            67,945                     ----
           Equity in (earnings) loss of investments                                    3,966,399                 (223,437)
Changes in operating assets and liabilities:
           Other assets                                                               (1,453,242)                 (30,185)
           Purchase of equipment                                                        (115,265)                    ----
           (Increase) decrease in organization and pre-acquisition costs                 589,907                 (689,908)
           Accounts payable and accrued expenses                                       1,774,273                  119,384
           Advances to affiliates                                                    (11,741,073)                (832,854)
                                                                                   ---------------           --------------
Net cash used in operating activities                                                (15,019,680)              (1,906,673)
                                                                                   ---------------           --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
           Investment in  American Campus Communities, LLC                              (278,985)              (1,674,321)
           Investment in and advances to Reckson Executive Centers, LLC               (1,041,973)                    ----
           Investment in and convertible loans to On-Site Ventures, LLC               (6,806,885)               (325,000)
           Investment in and advances to RSVP Holdings, LLC                          (13,602,579)                    ----
           Investment in Interoffice SuperHoldings Corporation                       (22,228,430)                    ----
                                                                                   ---------------           -------------
Net cash used in investing activities                                                (43,958,852)              (1,999,321)
                                                                                   ---------------           -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
           Capital contributions                                                           ----                  857,841
           Net proceeds from credit facilities                                        40,981,500                     ----
           Proceeds from affiliate loans                                                   ----                 3,177,857
           Net proceeds from rights offering                                          19,892,855                     ----
                                                                                   ---------------          -------------- 
Net cash provided by financing activities                                             60,874,355                4,035,698
                                                                                   ---------------          --------------
Net increase in cash and cash equivalents                                              1,895,823                  129,704
Cash and cash equivalents at beginning of period                                         129,704                    ----
                                                                                   ---------------          --------------
Cash and cash equivalents at end of period                                         $   2,025,527               $  129,704
                                                                                   ===============          ==============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
           Cash paid during the period for interest                                $     815,604              $    ----
                                                                                   ===============          =============
NON-CASH TRANSACTIONS:
           Contributions of assets from ROP                                        $       ----               $ 3,622,500
                                                                                   ===============          =============
           Contribution of non cash assets to Reckson Strategic
              Venture Partners, LLC  -                                             $  (1,879,646)             $     ----
           Investment in American Campus Communities, LLC
                                                                                   ===============          =============

</TABLE>


          (see accompanying notes to consolidated financial statements)


                                      IV-10

<PAGE>

                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



1.   Organization and Formation of the Company


Reckson  Service  Industries  ("RSI"  or  the  "Company"),  a  business  service
provider,  was  formed  on July 15,  1997 by  Reckson  Associates  Realty  Corp.
("Reckson"),  to create,  operate and manage a system of inter-related  business
services offered for sale to its customer pool which includes business customers
of Reckson Operating  Partnership,  L.P. ("ROP") a commercial real estate owner,
Advantis,  the  Company's  executive  suite  business,  On-Site  Ventures,  LLC,
("On-Site") the Company's  telecommunications  business,  and Reckson  Strategic
Venture Partners, LLC ("RSVP") (collectively, the "RSI Customer Pool") and third
parties in the general  marketplace  through a centralized  infrastructure.  The
Company's  growth  strategy  is to  acquire  or form  strategic  alliances  with
established businesses with strong  entrepreneurial  management a reputation for
high quality  services  within each of its  targeted  business  service  sectors
("Business Service  Platforms").  Specifically,  the Company seeks opportunities
for which there is broad demand in the RSI Customer Pool. Such Business  Service
Platform  investment  or  alliance  serves as a basis for sale and  delivery  of
business  services  to the RSI  Customer  Pool.  The  Company  believes  the RSI
Customer Pool will attract  exceptional  investment  opportunities and strategic
alliances which can capitalize on enhanced revenue opportunities through a cross
selling  effort.  The Company will  establish  Business  Service  Platforms that
present  significant  opportunities  to  provide  business  services  to the RSI
Customer Pool and other third parties.  Currently, the RSI Customer Pool retains
third parties to provide many business to business services for their day-to-day
operations.  Of these services, the Company may seek to provide the RSI Customer
Pool  with  telecommunications,  document  storage,  document  reproduction  and
logistics services (i.e.,  inventory  services,  messenger services and delivery
services),  as well as the other business  services that the Company  determines
may be utilized by the RSI  Customer  Pool.  The RSI Customer  Pool  consists of
small  to  medium  size  businesses  as well as the  mobile  workforce  of large
corporations.   RSI  seeks  to  provide  the  RSI  Customer  Pool  high  quality
value-added  business  services meeting all of their outsourcing needs providing
them with resources to successfully compete in the marketplace. The Company will
seek growth in each Business  Service Platform by (i) accessing the RSI Customer
Pool as an anchor for  growth  opportunities,  (ii)  integrating  each  Business
Service  Platform  into RSI's  centralized  infrastructure  and (iii)  acquiring
similar businesses, forming strategic alliances or making additional investments
within such Business Service Platform.

In connection with the initial capitalization of RSI, ROP contributed $4,256,324
for a 95% nonvoting  equity interest and certain  members of Reckson  management
contributed  notes of  $224,017  to the  Company  in  exchange  for a 5%  voting
ownership interest. On October 29, 1997 the notes were repaid.

On June 11, 1998, ROP distributed its 95% of the common stock of RSI to its unit
holders of record on May 26, 1998 (the "Distribution"). Immediately prior to the
Distribution,  the shares of non-voting  common stock held by ROP were exchanged
by RSI for RSI common shares. Each share of the Company's common stock issued in
the  Distribution  was  accompanied  by  one  preferred  share  purchase  right.
Simultaneously,  Reckson distributed 100% of the RSI common shares received from
the  Distribution  to its  common  shareholders  of the  same  record  date.  In
addition, simultaneously with the Distribution, the Company issued rights to its
stockholders to subscribe for the purchase of additional  shares of common stock
of the Company.

Immediately after the Distribution, RSI granted to its stockholders (a "Holder")
one  subscription  right for each share of RSI common stock.  Each  subscription
right  entitled  the  Holder  to  purchase  one share of RSI  common  stock at a
purchase price of $1.03 per share (the "Exercise Price") and, at the election of
such Holder,  four additional shares (but not less than four additional  shares)
at a purchase price of $1.03 per share. A Holder of subscription  rights had the
opportunity to acquire up to an aggregate of approximately  20,557,130 shares of
RSI common stock.  RSI and Reckson  Standby,  LLC (the "Standby  Purchaser") (an
entity owned by several members of management), entered into a Standby agreement
pursuant to which the Standby  Purchaser  agreed to purchase,  and RSI agreed to
sell,  any and  all  shares  of RSI  common  stock  that  were  the  subject  of
subscription  rights in the rights  offering  but were not  subscribed  for by a
Holder on the  expiration  date at the Exercise  Price.  The  proceeds  from the
stand-by purchaser were approximately $7,325,000. RSI received net proceeds from
the  rights  offering  of  approximately  $19,852,000.  In  connection  with the
Company's initial  capitalization  the Company  obtained,  from ROP, a five year
$100 million  unsecured credit facility (the "RSI  Facility").  The RSI Facility
bears  interest at a rate equal to the greater of the prime rate plus 2% and (i)
12% per  annum  with  the  rate in  this  clause  (ii)  increasing  annually  on
outstanding borrowings at the rate of 4% per year over the prior years rate.

RSVP  was  formed  on  March  5,  1998  to  invest  in  real   estate  and  real
estate-related  operating companies with experienced  management teams in market
sectors  which are in the early  stages of their  growth  cycle or offer  unique
circumstances for attractive investments as well as platforms for future growth.
Through RSVP Holdings,  LLC  ("Holdings")  the Company is a managing  member and
100% owner of the common equity of RSVP. New World Realty, LLC ("New World"), an
entity owned by two individuals retained by Holdings,(the "Managing Directors"),
acts as a managing member of Holdings, and has a carried interest which provides
for the  Managing  Directors to receive a share in the profits of RSVP after the
Company and Paine Webber Real Estate  Securities,  Inc.  ("PWRES") have received
certain minimum returns and a return of capital.  PWRES is a non-managing member
and preferred equity owner who has committed $200 million in capital (the "PWRES
Equity  Facility")  and  shares 66 2/3% in  profits  and losses of RSVP with the
Company,  subject  to a  maximum  internal  rate of  return  of 16% of  invested
capital.  On April 24, 1998, PWRES assigned 25% of its preferred equity interest
in RSVP,  representing an unfunded capital  commitment of $50 million to Stratum
Realty Fund, LLC ("Stratum").The assignment provides Stratum with similar rights
and priorities.

                                      IV-11

<PAGE>

Holdings, has retained two managing directors (the "RSVP Managing Directors") to
manage the day-to-day  operations of RSVP, subject to the strategic direction of
RSI. New World Realty,  LLC ("New World"),  an entity owned by the RSVP Managing
Directors acts as a managing  member of RSVP  Holdings,  LLC. The RSVP Holdings,
LLC operating agreement (the "Managing Member Operating Agreement") provides for
the payment to New World of distributions out of the cash flow of Holdings after
RSI and affiliated persons have received a return of their capital contributions
to RSVP investments  plus a 12% internal rate of return ("IRR") thereon,  of $15
million and, thereafter,  a share of cash flows ranging from 15% to 27.75% based
upon the IRR received by RSI and affiliated persons above 12% in respect of RSVP
investments. The Managing Member Operating Agreement obligates RSI to contribute
100% of the capital contributions to be made by RSVP Holdings, LLC to RSVP in an
amount up to $100 million.  In the event that RSI defaults in making its capital
contributions,  distributions to New World and RSI's  management  rights will be
reduced and RSI will be obligated to purchase,  at the election of New World,  a
portion  of New  World's  interest  in RSVP  Holdings,  LLC for a minimum of $15
million.  At the  termination of RSVP, New World has a right of first refusal to
purchase any RSVP investment  proposed for sale. New World will also be entitled
to  one-half  of  any  asset   management  fee  earned  by  Holdings  from  ROP.
Additionally,  it is anticipated that New World will receive transaction fees of
up to $1 million a year for identifying investment opportunities for RSVP.

ROP and RSI have entered into an intercompany  agreement (the "ROP  Intercompany
Agreement") to formalize their  relationship and to limit conflicts of interest.
Under  the  ROP  Intercompany  Agreement,  RSI  granted  ROP a  right  of  first
opportunity  to  make  any  Real  Estate  Investment  Trust   ("REIT")-qualified
investment  that  becomes  available to RSI. In  addition,  if a  REIT-qualified
investment opportunity becomes available to an affiliate of RSI, including RSVP,
the  ROP  Intercompany  Agreement  requires  such  affiliate  to  allow  ROP  to
participate in such opportunity to the extent of RSI's interest.

Under  the  ROP  Intercompany  Agreement,  ROP  granted  RSI a  right  of  first
opportunity to provide business services to ROP and its tenants. RSI is required
to provide  services  to ROP at rates and on terms as  attractive  as either the
best available for comparable  services in the market or those offered by RSI to
third  parties.  In addition,  ROP is required to give RSI access to its tenants
with  respect to business  services  that may be provided to such  tenants  and,
under the ROP Intercompany Agreement, subject to certain conditions, ROP granted
RSI a right of first refusal to become the lessee of any real property  acquired
by ROP if ROP determines that, consistent with Reckson's status as a REIT, it is
required to enter into a "master" lease agreement.



                                      IV-12
<PAGE>
                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



2.   Summary of Significant Accounting Policies


Basis of Presentation

The  accompanying   consolidated  financial  statements  present  the  financial
position  of the  Company at  December  31, 1998 and 1997 and the results of its
operations  and its cash flows for the year ended  December 31, 1998 and for the
period July 15, 1997  (commencement  of  operations)  to December 31, 1997.  The
Company  accounts for its investments of less than  controlling  interests under
the equity  method of  accounting.  All  significant  intercompany  balances and
transactions have been eliminated in the consolidated financial statements.

The  investments in Dobie Center  Properties,  Ltd ("Dobie") and American Campus
Communities, LLC ("ACC") through March 31, 1998, and Holdings, Reckson Executive
Centers, Inc. ("REC"), InterOffice Superholdings Corporation ("Interoffice") and
On-Site are reflected in the accompanying  financial statements under the equity
method of accounting.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers highly liquid  investments with a maturity of three months
or less when purchased to be cash equivalents.

Long-Lived Assets

The Company assesses the need to record  impairment  losses on long-lived assets
used in operations  when  indicators of impairment  are present.  On an on-going
basis,  management  reviews the value and period of amortization or depreciation
of long-lived assets, including excess investments of equity investments. During
this  review,  the Company  re-evaluates  the  significant  assumptions  used in
determining the original cost of long-lived assets. Although the assumptions may
vary from  transaction to  transaction,  they generally  include revenue growth,
operating  results,  cash flows and other  indicators of value.  Management then
determines  whether  there  has  been a  permanent  impairment  of the  value of
long-lived  assets based upon events or circumstances  which have occurred since
acquisition.

Stock Options

The Company has elected to follow  Accounting  Principles  Board Opinion No. 25,
"Accounting   for  Stock   Issued  to   Employees"   ("APB   25")  and   related
interpretations  in  accounting  for its  employee  stock  options  because  the
alternative  fair value  accounting  provided for under FASB  Statement No. 123,
"Accounting for Stock-Based  Compensation,"  ("FAS No. 123") requires the use of
option  valuation  models that were not  developed  for use in valuing  employee
stock options.  Under APB 25, no compensation expense was recognized because the
exercise  price of the Company's  employee stock options equals the market price
of the underlying stock on the date of grant.
(See Note 4).

                                      IV-13

<PAGE>

                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

2.   Summary of Significant Accounting Policies (continued)

Income Taxes

At inception,  the Company adopted Statement of Financial  Accounting  Standards
("SFAS")  No.  109,  "Accounting  for  Income  Taxes"  ("SFAS No.  109"),  which
prescribes an asset and liability  method of accounting for income taxes.  Under
SFAS No. 109, deferred tax assets are recognized for temporary  differences that
will  result in  deductible  amounts in future  years and for carry  forward.  A
valuation  allowance  is  recognized  if it is more  likely  than not that  some
portion of the deferred asset will not be  recognized.  At December 31, 1998 any
deferred  tax assets have been  reserved for 100% due to the  uncertainty  as to
whether these assets will have benefit in future periods.

Earnings Per Share

In 1997,  the FASB issued  Statement No. 128,  "Earnings per Share" ("FAS 128").
FAS 128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted  earnings per share.  Unlike primary  earnings per share,
basic earnings per share excludes any dilutive effects of options,  warrants and
convertible  securities.  Diluted  earnings  per  share is very  similar  to the
previously  reported  fully diluted  earnings per share.  All earnings per share
amounts  for  all  periods  have  been  presented  to  conform  to the  FAS  128
requirements.

Comprehensive Income

In 1997, the FASB issued Statement No. 130, ("SFAS 130") Reporting Comprehensive
Income SFAS No. 130 which is effective for fiscal years beginning after December
15, 1997. SFAS 130 established standards for reporting  comprehensive income and
its components in a full set of general-purpose  financial statements.  SFAS 130
requires that all components of comprehensive  income be reported in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements.  The  adoption  of this  standard  had no  impact  on the  Company's
financial position or results of operations.

Fair Value of Financial Instruments

SFAS No. 107,  "Disclosures About Fair Value of Financial  Instruments" requires
RSI to disclose the estimated fair values of its financial instrument assets and
liabilities.  The  carrying  amounts  approximate  fair  value for cash and cash
equivalents  because of the short maturity of those  instruments.  For the loans
payable to  affiliates  the  estimated  fair  value  approximates  the  recorded
balance.

Disclosures about Segments of an Enterprise and Related Information

In 1997,  the FASB issued  Statement No. 131  "Disclosures  about Segments of an
Enterprise and Related  Information"  ("SFAS 131") which is effective for fiscal
years  beginning  after December 15, 1997.  SFAS 131  establishes  standards for
reporting  information about operating  segments in annual financial  statements
and in interim  financial  reports.  It also  establishes  standards for related
disclosures  about products and services,  geographic areas and major customers.
The adoption of this standard had no impact on the Company's  financial position
or results of operations,  but did effect the disclosure of segment information,
see Note 6.

Derivative Instruments and Hedging Activities

In June 1998, the FASB issued Statement No. 133,
"Accounting  for  Derivative  Instruments  and  Hedging  Activities",  which  is
required to be adopted in years  beginning  after June 15, 1999.  The  Statement
permits  early  adoption as of the  beginnning  of any fiscal  quarter after its
issuance.  The Company expects to adopt the new Statement  effective  January 1,
2000. The Company does not  anticipate  that the adoption of this Statement will
have any effect on its results of operations or financial position.

Change in Accounting Principle

In  April  1998,  the  American  Institute  of  Certified  Public   Accountants'
Accounting Standards Executive Committee issued SOP No. 98-5,  "Reporting on the
Costs of Start-Up Activities".  This standard provides guidance on the financial
reporting  for  start-up  costs and  requires  that such  costs be  expensed  as
incurred.  The standard is effective for fiscal years  beginning  after December
15, 1998.  In accordance  with this  standard the Company  changed its method of
accounting  for start-up  costs and  organizational  costs in 1998.  Previously,
start-up activities and organization costs were capitalized and amortized over 5
years. The cumulative effect of this change in accounting principle for 1998
was $67,945, has been included in 1998 operations.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year
presentation.


                                      IV-14

<PAGE>

                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

3.   INVESTMENTS

The Company's equity investments are summarized as follows:


<TABLE>
<CAPTION>
                                                         December 31, 1998            December 31, 1997
                                                       ----------------------      -----------------------
<S>                                                      <C>                             <C>
Investment in Dobie                                      $       --                      3,868,093
Investment in ACC                                                ---                     1,652,165
Investment in and advances to Holdings                    15,560,896                          ---
Investment in and advances to REC                            892,894                          ---
Investment in and convertible loans to On-Site             7,101,330                      325,000
Investment in and advances to Interoffice                 22,282,591                          ---
                                                       -------------                    ----------

TOTAL EQUITY INVESTMENTS                                  45,837,711                 $  5,845,258
                                                       =============                    ==========
</TABLE>


The  following  are the  Company's  summarized  equity  in  earnings  (loss)  of
investments:



<TABLE>
<CAPTION>
                                                             For the year             For the period from
                                                                 ended                  July 15, 1997 to
                                                           December 31, 1998           December 31, 1997
                                                        ----------------------       ----------------------
<S>                                                     <C>                          <C>
Equity in earnings of Dobie                             $     170,567                $   245,593
Equity in loss of ACC                                         (51,504)                   (22,156)
Equity in loss of Holdings                                 (3,959,989)                     -----
Equity in loss of REC                                        (149,079)                     -----
Equity in loss of On-Site                                     (30,555)                     -----
Equity in earnings of Interoffice                               54,161                     -----
                                                        --------------                  ----------

TOTAL EQUITY IN  EARNINGS  (LOSS) OF INVESTMENTS        $  (3,966,399)               $   223,437
                                                        ==============                  ==========

</TABLE>


                                      IV-15

<PAGE>


                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
3.   Investments (Continued)

The Company's significant investments are summarized as follows:


RSVP Holdings, LLC

Summarized  financial  information and a summary of the Company's investment in,
advances to Holdings and RSI's share of loss is as follows:


<TABLE>
<CAPTION>

BALANCE SHEET                                                        December 31, 1998
-------------                                                        -----------------
Assets
<S>                                                                          <C>
Investment in Dobie.....................................................     $     32,296
Investment in ACC.......................................................        1,262,415
Investment in Assisted Living Investments, LLC..........................        4,676,272
Investment in Dominion Venture Group, LLC  .............................       29,288,973
Deferred compensation...................................................        4,938,539
Other assets............................................................        4,552,917
                                                                                ---------
    Total Assets........................................................     $  44,751,412
                                                                            ===============
Liabilities and Members' Equity
Due to affiliates......................................................      $   1,591,459
Other liabilities......................................................          1,397,412
                                                                                 ---------
    Total Liabilities..................................................          2,988,871
                                                                                 ---------

Minority interest......................................................         31,201,645
Preferred capital offering costs.......................................          (5,000,000)
RSI investment in and advances to Holdings ............................          15,560,896
                                                                                 ----------
     Total Liabilities and Members' Equity............................       $   44,751,412
                                                                            ================
</TABLE>


In connection with the PWRES Equity Facility, RSVP paid a commitment fee of 2.5%
of the total preferred equity commitment of $5,000,000.

                                      IV-16

<PAGE>
                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



3.   INVESTMENTS - (CONTINUED)

Statement of Operations
                                                         For the period from
                                                        February 26, 1998 to
                                                          December 31, 1998
                                                          -----------------
Revenues:

Interest income.........................................   $ 193,034
Other income............................................     453,644
                                                             -------
     Total Revenues.....................................     646,678
                                                             -------

Equity in earnings (loss) of investments

Equity in earnings of Dobie.............................      32,296
Equity in loss of ACC...................................    (518,895)
Equity in loss of Gateway Development Group, LLC........    (650,531)
Equity in loss of Assisted Living Investments, LLC......  (2,907,607)
Equity in earnings of Dominion Venture Group, LLC.......     296,970
                                                              ------
Total Equity in loss of investments.....................  (3,747,767)
                                                          ----------
Expenses:
Operating expenses......................................   2,212,440
General and administrative expenses.....................   3,769,716
Organization costs .....................................     757,644
Interest expense........................................     491,172
Depreciation and amortization...........................      30,557
                                                           ---------
      Total Expenses....................................   7,261,529
                                                           ---------

Minority Interest.......................................  (6,263,739)
                                                          ----------
Net loss................................................  (4,098,879)
Less: Elimination of intercompany management fee........     138,890
                                                             -------
RSI's share of net loss................................. $(3,959,989)
                                                          ==========


On April 1, 1998,  the Company  acquired a 9.9%  membership  interest in Reckson
Executive  Centers,  LLC ("REC,  LLC") for $200,000 from ROP and assumed debt of
approximately  $322,000. REC, LLC owns and operates eight executive office suite
centers  in the New York  TriState  Area.  The  Company  also  loaned  REC,  LLC
approximately   $623,000  to  fund  purchases  of  certain  business  assets  in
connection  with the  operation  of the  executive  centers.  These loans accrue
interest at 12%. On October 5, 1998,  the Company  contributed  its  interest in
REC, LLC to Reckson Executive  Centers,  Inc. ("REC") in exchange for 75% of the
Common Stock of REC.  For the period  April 1, 1998 to December  31,  1998,  the
Company recognized a loss of $149,079.

On November 9, 1998, the Company announced the exercise of its option to acquire
a majority interest in Interoffice,  the executive office suite business held by
Reckson Management Group, Inc. ("RMG"). The aggregate purchase price paid by the
Company  to RMG  was  approximately  $20.5  million  and  was  financed  through
borrowings  under the RSI Facility.  The Company also acquired rights to certain
advances made by RMG to the other stockholders' of Interoffice for approximately
$10.3  million.  Such  receivables  are  secured  by the  shares  held by  these
stockholders.

On January 8, 1999 Interoffice and REC merged with Alliance National  
Incorporated ("Alliance") (See Note 8).



                                      IV-17

<PAGE>

                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


3.   INVESTMENTS - (CONTINUED)

Summarized  financial  information and a summary of the Company's investment in,
advances to and share of income from Interoffice is as follows:



<TABLE>
<CAPTION>
Balance Sheet
-------------
                                                                 December 31, 1998
                                                                 -----------------
<S>                                                                     <C>
Assets
     Current assets                                                  $  6,045,328
     Property & Equipment, net                                          8,598,216
        Goodwill                                                       31,811,421
     Other Assets                                                       3,250,511
                                                                -----------------
TOTAL ASSETS                                                         $ 49,705,476
                                                                =================

LIABILITIES AND STOCKHOLDERS' EQUITY
         Current liabilities                                         $  6,312,533
         Long-term liabilities                                          9,544,196
                                                                 ----------------
     Total liabilities                                                 15,856,729
                                                                 ----------------
Stockholders' Equity
         Non-RSI Stockholders                                          13,038,002
         Net RSI investment and advances to Interoffice                22,282,591
         Less: Non-Interoffice equity in RSI investment                (1,471,846
                                                                 ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                           $ 49,705,476
                                                                 ================
</TABLE>


<TABLE>
<CAPTION>
Statement of Operations
                                                                    For the period
                                                                  November 9, 1998 to
                                                                    December 31, 1998
                                                                    -----------------
<S>                                                                   <C>
Revenues
     Rental income                                                    $ 4,089,740
     Services income                                                    4,024,810
     Other income                                                         141,701
                                                                 ------------------
     Total Revenues                                                     8,256,251
                                                                 ------------------
Expenses
     Rent                                                               2,889,699
     Services                                                           1,604,313
     General and administrative                                         3,123,747
     Depreciation and amortization                                        663,127
     Interest expense                                                      48,874
                                                                  -----------------
     Total expenses                                                     8,329,760
                                                                  -----------------
Net loss as reported by Interoffice                                       (73,509)
Add: Adjustment for non-RSI costs incurred                                164,727
                                                               -------------------
Net income as adjusted                                                     91,218

Less: non-RSI share                                                        (37,057)
                                                                -------------------
RSI share of net income                                         $          54,161
                                                                ====================
</TABLE>

                                      IV-18

<PAGE>

                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



3.   INVESTMENTS - (CONTINUED)


Student Housing

The Company  acquired a 33 1/3%  interest in a wholly  owned  subsidiary  of RFG
Capital  Group,  LLC for $1.51  million  whose sole net  investment  is a 76.09%
interest in ACC, a student housing enterprise which owns, develops,  constructs,
manages and acquires,  on-and off campus student housing  projects.  On April 1,
1998, RSI transferred its interest in ACC to RSVP.  RSI's loss for its period of
ownership,  January 1, 1998 to March 31, 1998 was $51,504.  For the period April
1, 1998 to December 31, 1998, RSVP's share of losses was $518,895.

In 1997, the Company invested through other affiliated entities $3.62 million in
Reckson Opportunity Partners, LP ("RO").RO invested  approximately $10.8
million to acquire a 70% interest in Dobie,
which owns 100% in Dobie Center, a mixed-use  student
housing and retail  property  located in Austin,  Texas.  On April 1, 1998,  the
Company  transferred its interest in RO to RSVP, net of certain proceeds related
to the  refinancing  of Dobie Center.  RSI's income for its period of ownership,
January 1, 1998 to March 31, 1998 was $170,567.  For the period April 1, 1998 to
December 31, 1998 RSVP's share of income was $32,296.

Privatization

On August 11, 1998, RSVP acquired  through a wholly owned subsidiary an interest
in Gateway  Development  Group,  LLC  ("Gateway")  with Gateway  Management  for
approximately $377,000.  Gateway is a start up entity that pursues opportunities
in privatized military housing. The Company is uncertain whether it will recover
its invested  dollars from  Gateway's  future cash flows.  At December 31, 1998,
RSVP has  recognized  a loss of  $650,531  which  includes  a reserve  for their
invested dollars plus acquisition costs of $101,293.

On August 27, 1998,  the Company  announced  the  formation  of a joint  venture
between RSVP and Dominion,  an  Oklahoma-based,  privately-owned  group of
companies  that  focuses  on  the  development,  acquisition  and  ownership  of
government  occupied  office  buildings  and  correctional  facilities.  The new
venture,  Dominion  Venture  Group  LLC (the  "Dominion  Venture"),  is owned by
RSVP-Dominion LLC, a subsidiary of RSVP, and by Burgess Services, LLC, an entity
owned and controlled by Calvin Burgess, President and Chief Executive Officer of
Dominion.  The Dominion Venture will engage  primarily in acquiring,  developing
and/or  owning  government-occupied  office  buildings  and  privately  operated
correctional  facilities and related activities.  Under the Operating Agreement,
RSVP is to  invest up to $100  million,  some of which  may be  invested  by ROP
(together,  the "RSVP Capital"), for capital requirements approved by RSVP. RSVP
funded its total  capital  contribution  of  $8,597,455  through draws under its
PWRES  Equity   Facility  and  the  RSVP  Facility  with  ROP.  ROP  contributed
$10,065,338 in connection with the Dominion  Venture.  For the period August 27,
1998 to December 31, 1998, RSVP recognized $296,970 of income.



                                      IV-19

<PAGE>
                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


3.   INVESTMENTS (CONTINUED)


Assisted Living

On August 12,  1998,  RSVP  acquired  through a wholly  owned  subsidiary  a 45%
interest in Assisted Living  Investments,  LLC ("ALI") for  approximately  $3.25
million.  ALI is a joint venture that  develops,  leases,  operates and finances
assisted living  facilities.  In addition,  RSVP has agreed to contribute 80% of
the equity of ALI, up to a maximum $16.0 million for a total maximum  commitment
of $19.25  million.  RSVP funded $7.5 million of its $19.25  million  commitment
upon the closing of the transaction. RSVP funded 50% of its capital contribution
through  draws  under the PWRES  Equity  Facility.  The  remaining  50%  capital
contribution was funded through a draw under the RSVP facility (see Note 5).

As of December 31, 1998, the excess of the RSVP's  investment  over its share of
the equity in the  underlying  net assets of ALI ("Excess ALI  Investment")  was
$2,887,585.  The Excess ALI  Investment is being  amortized over the life of the
investment estimated at 25 years.

Summarized financial information and a summary of RSVP's investment in and share
of loss is as follows:


<TABLE>
<CAPTION>
<S>                                                       <C>                                  
Balance Sheet


                                                             December 31, 1998
                                                         ---------------------

Assets
Property and equipment, net......................       $            79,101,531
Other assets.....................................                     6,483,316
                                                        ------------------------                            
                                                        $            85,584,847
     Total Assets................................       ========================
                                                        
                                                        


Liabilities and Members' Deficit

Note payable.....................................       $            82,883,473
Other liabilities................................                     8,087,520
                                                        -----------------------
    Total Liabilities............................                    90,970,993
                                                        -----------------------
                                                                        

Minority interest................................                    (7,174,833)
RSVP investment in ALI...........................                     4,676,272
Less:  Excess ALI investment.....................                    (2,887,585)
                                                        ------------------------
Total Members' Deficit                                               (5,386,146)
                                                         -----------------------
Total Liabilities and Members' Deficit...........                  $ 85,584,847
                                                        ========================


Statement of Operations

                                                             For the period from
                                                             August 12, 1998 to
                                                              December 31, 1998




     Total Revenues...............................................   $ 2,847,404
                                                                    ------------




     Operating expenses...........................................    3,509,287
     Pre-opening expenses.........................................    1,090,673
     Depreciation and amortization................................    1,180,190
     Interest expense.............................................    1,759,929
     Other expenses...............................................      409,421
                                                                      ----------

            Total expenses........................................    7,949,500
                                                                      ----------
     Net loss as reported by ALI..................................   (5,102,096)
     Adjustment for equity accounting basis.......................      545,337
                                                                      ----------
     Net loss as adjusted.........................................   (4,556,759)

     Less:  Non-RSVP share........................................   (1,708,785)
                                                                      ----------                  
     RSVP share of net loss.......................................   (2,847,974)
     Amortization of excess investment and pre-opening costs......      (59,633)
                                                                      ----------
     Total RSVP share of net loss.................................  $(2,907,607)
                                                                     ===========
</TABLE>


                                      IV-20

<PAGE>
                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



3. INVESTMENTS (CONTINUED)

With respect to RSVP's  investment  in ALI, on February 1, 1999, a member of Sun
Healthcare  Group,  Inc.,  ("SUN")  the  parent  of an ALI  member,  reported  a
significant  loss from  operations  during the quarter ended  December 31, 1998.
Additionally,  SUN continues to implement a comprehensive  restructuring  of its
operations. The restructuring of SUN's operations had led the partners of ALI to
enter into  negotiations  regarding ALI's ongoing  business plan and potentially
modify  allocations  and  priorities  of cash flow,  profits and  losses.  These
negotiations  are in progress.  As of December 31, 1998,  RSVP  determined  that
there was no impairment on its investment in ALI.


Telecommunications


RSI holds a  subordinated  note  convertible  into a 58.69%  equity  interest in
On-Site,  a  company  that  provides  advanced  telecommunications  systems  and
services within commercial buildings and/or building complexes.  The Company has
advanced OnSite $6.5 million  through  December 31, 1998 to fund operating costs
under the terms of the note. The loan bears interest at a rate of 12% per annum.
On May 18, 1998, the Company purchased a membership interest in On-Site equal to
1% of the  aggregate  membership  interests.  At December 31, 1998,  the Company
recognized a loss of $30,555 relating to its 1% interest.

In May 1998, the Company made an initial capital  contribution of $300,000 for a
58.69%  interest  in  On-Site  Commerce  and  Content,  LLC  ("OCC"),  a Company
established to acquire and develop  software  products.  As of December 31, 1998
OCC had no operations.


4. SHAREHOLDERS' EQUITY

The  Company has  established  the 1998 stock  option plan (the  "Plan") for the
purpose of attracting and retaining executive officers,  directors and other key
employees.  Pursuant to the Plan  3,700,376 of the Company's  authorized  shares
have been  reserved for issuance  under the Plan.  On January 10, 1998 and March
30,  1998,  the  Company  granted  options to purchase  542,892  and  2,732,085,
respectively  of the Company's  common shares at an exercise  price of $1.10 and
$1.04  respectively  per  share  based on the fair  value on each date of grant,
which the board of directors  of the Company has  concluded to be the book value
on each date of grant. These options fully vest on January 1, 1999.

On August 4, 1998, the Board of Directors of the Company adopted a "broad based"
stock option plan for the purpose of awarding options to non-executive  officers
and new hires.  Pursuant to such adoption,  100,000 of the Company's  authorized
shares have been reserved for this purpose.

Additionally, on August 4, 1998, the Company granted options to purchase 456,564
shares at an exercise price of $2 per share, which approximated  market value at
the time of the grant. These options have a five year vesting period.


                                      IV-21

<PAGE>



                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998




4. SHAREHOLDERS' EQUITY (CONTINUED)


Stock Option Plan

Options  granted under the 1998 qualified  stock option plan are  exercisable at
the  market  price on the date of the  grant  and,  subject  to  termination  of
employment,  expire ten years from date of the grant, are not transferable other
than on death.

Pro forma information regarding net income and earnings per share is required by
FAS No. 123, and has been  determined  as if the Company had  accounted  for its
employee stock options under the fair value method of that  Statement.  The fair
value for these options was estimated at the date of grant using a Black-Scholes
option  pricing model with the following  weighted-average  assumption for 1998,
risk-free  interest rate of 5%, no expected  dividend yield, a volatility factor
of the  expected  market  price of the  Company's  common  stock of 1.723  and a
weighted-average expected life of the option of 7 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the  options'  vesting  period.  For the year ended
December 31, 1998 the Company's pro forma information follows:


     Pro forma net loss (in thousands)          $ (11,495,683)
                                                 -------------

     Basic and diluted net loss per share       $        (.79)
                                                 -------------

     A summary of the Company's stock option activity,  and related  information
for the year ended December 31, 1998 is as follows:


<TABLE>
<CAPTION>
                                                                      Weighted-              Weighted-
                                                                       Average               Average
                                                    Options         Exercise Price          Fair Value
<S>                                             <C>                     <C>                   <C>
     Outstanding - December 31, 1997              -----                $ -----          $    ----
          Granted                               3,731,541               1.16                  1.15
          Exercised                                ----                 -----                 -----
          Forfeited                                ----                 -----                 -----
                                              ---------------     -----------------    -------------------
     Outstanding - December 31, 1998            3,731,541              $1.16            $     1.15
                                              ===============     =================    ===================
</TABLE>


                                      IV-22

<PAGE>

                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31,1998

5. TRANSACTIONS WITH RELATED PARTIES

On June 15,1998 RSI established the RSI Facility with ROP in the amount of
$100 million for RSI's service sector operations and other general corporate
purposes. ROP has advanced the Company $33,699,719 at December 31,1998. These
advances bear interest at 12% per annum. Additionally, RSI established the RSVP
Facility with ROP for funding the RSVP investments. The amount available under
RSVP Facility is reduced by any amount invested by ROP in joint ventures with
RSVP. As of December 31,1998, ROP has advanced RSI $7,281,781 under the RSVP
Facility and has invested $10,065,338 in joint ventures with RSVP. The total
outstanding at December 31,1998 owed by RSI under both credit facilities was
$40,981,500.

In February 1998, Holdings entered into employment agreements with the two
Managing Directors of RSVP. The agreements provide for a minimum annual salary
of $500,000 and have a seven-year term. In addition to the base salary each
Managing Director has received from the Company a $3.0 million grant of common
stock of Reckson (the "Reckson Stock") which will vest equally over five years.
The Reckson Stock was purchased by the Company and contributed to Holdings. In
addition, in April 1998, the Company advanced each managing director a tax loan
of approximately $1.4 million in connection with the grant of Reckson Stock.
These loans bear interest at 8% per annum and are due in April, 2003 and are
secured by the Reckson Stock. Additionally, New World will receive transaction
fees of up to $1 million per year related to identifying RSVP investment
opportunities. In August of 1998, $1 million of such fees were paid to New World
by third parties.

RSI and Reckson Standby, LLC (the "Standby Purchaser") (an entity owned by
several members of management), entered into an agreement pursuant to which the
Standby Purchaser agreed to Purchase, and RSI agreed to sell, any and all shares
of RSI common stock that were subject of subscription rights in the rights
offering but were not subscribed for by Holders on the expiration date at 
the Expiration Price.  Pursuant to the standby agreement, in July 1998, the 
Standby Purchaser acquired 7,111,650 shares of RSI common stock for an 
aggregate purchase price of approximately $7,325,000.

The Company is entitled to a cumulative management fee of $2 million with 
respect to RSVP, of which $1.5 million is subordinate to PWRES receiving an 
annual minimum rate of return of 16% and a return of its capital.  The 
unsubordinated amount for the period March 5, 1998 to December 31, 1998 was 
$416,667.

The Comapny reimburses ROP with respect to general and administrative expenses
(including payroll expenses) incurred by ROP for the benefit of the Company.
During 1998, the Company reimbursed ROP $399,387 for such activities.

                                 IV-23

<PAGE>

                        RECKSON SERVICE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



6. SEGMENT DISCLOSURE

Each of the segments has a managing  director who reports  directly to the Board
of  Directors/Executive  Committees  who  have  been  identified  as  the  Chief
Operating  Decision  Makers  ("CODM")  because  of their  final  authority  over
resource allocation decisions and performance assessment.

The CODM evaluate the operating performance of these segments based on sectors.

RSI's  governance  and control rights are generally  exercised  through Board of
Directors seats and through  representation  on the executive  committees of the
various segment entities.

The  following  table sets for the  Company's  segments  and their  revenues and
expenses  and other  related  disclosures  as  required by SFAS 131 for the year
ended December 31, 1998.

<TABLE>
<CAPTION>
                                   TELE
              EXEC. OFFICE         COMMU        ASSISTED                           STUDENT           OTHER
              SUITES               NICATIONS    LIVING         PRIVATIZATION       HOUSING           HOLDINGS             TOTAL
            ------------  ---------------  -----------------  ------------    ----------------  --------------     -------------
<S>           <C>              <C>                <C>           <C>                 <C>              <C>             <C>
INVESTMENT    $ 23,175,485     $7,101,330       $  2,338,136    $2,970,770        $  1,294,711       $8,957,279      $45,837,711
            ------------  ---------------  -----------------  ------------    ----------------  --------------     -------------
REVENUES      13,012,817          950,015          2,847,404    19,442,953          17,036,554
            ------------  ---------------  -----------------  ------------    ----------------  --------------     -------------
EXPENSES      13,226,017        5,863,052          7,949,500    18,892,316          18,393,472       1,819,736
            ------------  ---------------  -----------------  ------------    ----------------  --------------     -------------
NET INCOME     (213,200)       (4,913,037)       (5,102,096)       550,637         (1,356,918)
(LOSS)
            ------------  ---------------  -----------------  ------------    ----------------  --------------     -------------
RSI/EQUITY    $ (94,918)       $ (30,555)       $(1,453,804)    $(199,850)        $  (367,536)     $ (1,819,736)    $(3,966,399)
IN LOSS
            ------------  ---------------  -----------------  ------------    ----------------  --------------     -------------

</TABLE>

7. OFFICE LEASES

The Company leases office space,  pursuant to a  non-cancelable  operating lease
from a ROP affiliated entity.  Future minimum lease commitments  relating to the
lease as of December 31, 1998 is as follows:

                  1999...................................   $ 48,798
                  2000...................................     50,568
                  2001...................................     52,404
                  2002...................................     54,318
                  2003...................................     56,310
                  Thereafter.............................    274,418
                                                             -------
                                                           $ 536,816
                                                             =======
8. SUBSEQUENT EVENTS

On January 8, 1999, each of Interoffice (36 executive  office suite centers) and
REC (8 executive office suite centers) an executive center business  acquired by
the  Company  from ROP and an officer  of REC,  merged  with  Alliance a holding
company which owns and operates  approximately 90 nationally  located  executive
office  suites  centers.  The merged  entity  changed its name to Advantis.  The
stockholders  of Interoffice  and REC received  shares of the Series C Preferred
Stock of Advantis which represent approximately 40% of the equity interest in 
Advantis.  The Company thereafter owned  approximately 23% of Advantis.  
The holders of the Series C Preferred Stock have the right to appoint
four of the ten  members  of the  board  of  directors  of  Advantis,  including
Chairman  of the Board  and  specified  preemptive  rights  and other  specified
rights.  RSI and the  other  stockholders  of  Interoffice  hold  the  Series  C
Preferred  Stock  received  in  respect  of the  Merger of  Interoffice  through
Interoffice  Superholdings  LLC ("IS  LLC"),  a newly  formed  Delaware  limited
liability  company  of which RSI is the sole  manager.  Likewise,  RSI holds the
Series C  Preferred  Stock  received in respect of the merger of REC through REC
LLC, a newly formed Delaware limited  liability company of which a subsidiary of
RSI is the managing member.


                                      IV-24
<PAGE>



Advantis and RSI have also entered into an  intercompany  agreement  pursuant to
which RSI has the opportunity to be the exclusive  provider of certain  business
services to Advantis,  provided  certain third party and  "most-favored  nation"
conditions are satisfied.

RSI acquired certain ownership rights related to the Series C Preferred Stock of
Advantis  from a  stockholder  of  Interoffice  which  provided the Company with
enhanced governance rights for $6.5 million. In addition,  the Company paid $3.5
million to another  stockholder  of  Interoffice  for an option to purchase that
stockholders  effective  interest in the Series C Preferred Stock for a purchase
price of $6.75 million. If the option is not exercised,  the stockholder has the
right to sell such  interests  to the Company at fair value,  as  determined  in
accordance  with  the  applicable  agreement.  A  significant  number  of  items
presented to the Board will  require the separate  approval of a majority of the
representatives  of  the  Series  C  Preferred  Stock  on the  Board,  including
significant  acquisitions,  sale or  leasing of assets,  approval  of  Advantis'
annual  operating  budget,   certain  borrowings  and  capital  expenditures  by
Advantis,  the hiring or termination of senior executives and other matters. The
holders of Series C Preferred  Stock also have the right to appoint  half of the
members  of the  executive  and audit  committees  of the Board.  The  preferred
stockholders  of Advantis  (including  the holders of Advantis Class A Preferred
Stock,  Class B  Preferred  Stock  and Class C  Preferred  Stock)  were  granted
super-majority   voting  rights  with  respect  to  certain  corporate  actions,
including the issuance of equity securities, changes to the charter documents of
Advantis and other matters.

On February 10,  1999,  the Company  along with  another  member of On-Site (the
"Members"),   executed  a  senior  secured   promissory  note  with  On-Site for
$4,000,000.  The  Members  initially  funded  $2,000,000,  in which  RSI  funded
approximately  $1.35  million.  The note matures in February  2000.  Interest in
compounded  monthly  at a  variable  rate  subject  to the  terms  in  the  loan
agreement.

On March 17, 1999,  PWRES  transferred all of its rights,  title and interest in
its invested capital to date in RSVP to Stratum.  This transfer will include the
rights to distributions  based upon the amount of funded capital  contributions.
(Unaudited)


10. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following  summary  represents the Company's  results of operations for each
quarter during 1998:

<TABLE>
<CAPTION>
                                                                       
                                             First Quarter             Second Quarter        Third Quarter       Fourth Quarter
                                             -------------             ------------          -------------       ------------  
<S>                                          <C>                       <C>                   <C>                 <C>
     Total revenues........................  $     46,661              $   205,382           $   495,135         $    595,326
                                             ------------              -----------           -----------         ------------
     Equity in loss of investments.......        (424,353)                 (26,751)              (735,458)         ( 2,779,837)
                                             --------------            ------------          -------------       --------------
     Total expenses......................    $    331,517              $   595,107           $ 1,003,678         $   3,525,661
                                             ------------              -----------           -----------         ------------
     Cumulative effect of change in
     accounting principle..............           (67,945)                  ------                 ------             -----
                                             ============              ============          =============        =============
     Net loss.............................       (777,154)                 (416,476)            (1,244,001)          (5,710,172)
                                             ============              ============          =============        =============
     Basic and diluted net loss per
     weighted average common share           $      (.20)          $        (.09)        $           (.05)       $         (.23)
                                             ============             =============         ==============        =============
     Basic and diluted weighted average
     common shares outstanding.....             3,864,573               4,513,975               24,685,514           24,685,514
                                             ============              ==========            =============         ============
</TABLE>


     The above quarterly  information has been restated to reflect the Company's
early adoption of SOP 98-5.

                                      IV-25


<PAGE>




                         Report of Independent Auditors



To the Board of Directors of
Interoffice Superholdings Corporation

We have  audited the  accompanying  consolidated  balance  sheet of  Interoffice
Superholdings  Corporation and Subsidiaries  ("Interoffice")  as of December 31,
1998 and the related consolidated statements of operations, stockholders' equity
and cash flows for the period  November  9, 1998 to  December  31,  1998.  These
financial  statements are the  responsibility of Interoffice's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We conducted our audit 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 audit provides 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  Interoffice
Superholdings  Corporation  and  Subsidiaries  at  December  31,  1998  and  the
consolidated  results  of their  operations  and their cash flows for the period
November 9, 1998 to December 31, 1998, in  conformity  with  generally  accepted
accounting principles.


                                                s/Ernst & Young LLP


New York, New York
March 12, 1999


                                     IV-25

<PAGE>


             Interoffice Superholdings Corporation and Subsidiaries

                           Consolidated Balance Sheet

                                December 31, 1998

<TABLE>
<S>                                                                                       <C>
Assets
Current assets:
   Cash and cash equivalents                                                              $    3,420,947
   Accounts receivable, net of allowance for doubtful accounts of $48,400                      2,053,508
   Prepaid expenses, prepaid taxes and other assets                                              459,218
   Due from related party                                                                        111,655
                                                                                        -------------------
Total current assets                                                                           6,045,328

Goodwill, net                                                                                 31,811,421
Property and equipment, net                                                                    8,598,216
Deferred acquisition costs                                                                     1,346,536
Restricted cash                                                                                  688,246
Certificate of deposits                                                                          565,125
Deposits                                                                                         544,309
Other assets                                                                                     106,295
                                                                                        -------------------
Total assets                                                                              $   49,705,476
                                                                                        ===================

Liabilities and Stockholders'Equity
Current liabilities:
   Accounts payable and accrued expenses                                                  $    4,624,897
   Capital lease obligations                                                                   1,644,345
   Notes payable                                                                                  43,291
                                                                                        -------------------
Total current liabilities                                                                      6,312,533

Notes payable                                                                                    365,440
Deferred rent payable                                                                          1,332,822
Due to stockholder                                                                             1,750,000
Capital lease obligations                                                                        460,484
Security deposits                                                                              4,767,348
Deferred income taxes                                                                          2,618,102
                                                                                        ------------------
Total liabilities                                                                             17,606,729
                                                                                        ------------------

Stockholders' equity:
   Common stock, $1 par value; 50,000 Class A shares authorized, 50,000 Class B
     shares; 11,468 Class A shares issued and outstanding                                         11,468
   Additional paid-in-capital                                                                 32,918,835
   Accumulated deficit                                                                          (831,556)
                                                                                        -------------------
Total stockholders' equity                                                                    32,098,747
                                                                                        -------------------
Total liabilities and stockholders' equity                                               $    49,705,476
                                                                                        ===================

</TABLE>

                            See accompanying notes.

                                     IV-26


<PAGE>
             Interoffice Superholdings Corporation and Subsidiaries

                      Consolidated Statement of Operations

              For the period November 9, 1998 to December 31, 1998


Business center operations:
   Revenues:
     Office rentals                                             $   4,089,740
     Support services                                               4,024,810
                                                               -----------------
                                                                    8,114,550
                                                               -----------------
Expenses:
   Rent                                                             2,889,699
   Support services                                                 1,604,313
   Center general and administrative                                1,626,694
                                                               -----------------
                                                                    6,120,706
                                                               -----------------
Contribution from operation of business centers                     1,993,844
                                                               -----------------
Other (expense) income:
   Corporate general and administrative                            (1,497,053)
   Depreciation and amortization                                     (663,127)
   Interest expense                                                   (48,874)
   Other income                                                       138,623
                                                               -----------------
                                                                   (2,070,431)
                                                               -----------------
Loss before income taxes                                              (76,587)

Benefit from income taxes                                               3,078
                                                               -----------------

Net loss                                                        $     (73,509)
                                                               =================

Share information
   Net loss per common share-basic and diluted                  $          (6)
                                                               =================
   Cash distributions per common share                          $          77
                                                               =================

                            See accompanying notes.


                                     IV-27

<PAGE>

             Interoffice Superholdings Corporation and Subsidiaries

                 Consolidated Statement of Stockholders' Equity

              For the period November 9, 1998 to December 31, 1998



<TABLE>
<CAPTION>

                                 Class A and Class B                         Retained
                                 Common Shares $1 par                         Earnings
                                        value              Additional       (Accumulated
                                                         Paid-In Capital      Deficit)              Total
                                ----------------------------------------------------------------------------------
<S>                                <C>               <C>                  <C>                  <C>
Balance at November 9, 1998        $     11,468      $     32,918,835     $        123,762     $     33,054,065
Net loss for the period                                             -              (73,509)             (73,509)
Stockholders' distributions                   -                     -             (881,809)            (881,809)
                                ==================================================================================
Balance at December 31, 1998       $     11,468      $     32,918,835     $       (831,556)    $     32,098,747
                                ==================================================================================
</TABLE>


                            See accompanying notes.



                                     IV-28


<PAGE>


             Interoffice Superholdings Corporation and Subsidiaries

                      Consolidated Statement of Cash Flows

              For the period November 9, 1998 to December 31, 1998


<TABLE>

<S>                                                                                        <C>
Operating activities
Net loss                                                                                   $      (73,509)
Adjustments to reconcile net loss to net cash provided by operating activities:
     Depreciation and amortization                                                                663,127
     Deferred income taxes                                                                        (46,848)
     Bad debt expense                                                                              46,573
     Changes in operating assets and liabilities:
       Accounts receivable                                                                       (515,605)
       Prepaid expenses                                                                            59,324
       Certificates of deposit                                                                     (4,586)
       Restricted cash                                                                           (267,953)
       Deposits                                                                                   (67,032)
       Accounts payable and accrued expenses                                                    2,049,537
       Deferred rent payable                                                                      236,270
       Security deposits                                                                          100,540
       Due from stockholder                                                                     1,750,000
                                                                                        -------------------
Net cash provided by operating activities                                                       3,929,838
                                                                                        -------------------

Investing activities
Purchases of property and equipment                                                              (769,606)
Deferred acquisition costs                                                                     (1,453,205)
                                                                                        -------------------
Net cash used in investing activities                                                          (2,222,811)

Financing activities
Payments of notes payable                                                                         (16,824)
Payments of capital lease obligations                                                            (429,844)
Distributions to stockholders                                                                    (881,809)
                                                                                        -------------------
Net cash used in financing activities                                                          (1,328,477)
                                                                                        -------------------
Change in cash and cash equivalents                                                               378,550
Cash and cash equivalents, beginning of period                                                  3,042,397
                                                                                        -------------------
Cash and cash equivalents, end of period                                                   $    3,420,947
                                                                                        ===================

Supplemental disclosure
Interest paid                                                                              $       48,874
                                                                                        ===================
Income taxes paid                                                                          $      118,364
                                                                                        ===================
</TABLE>

                            See accompanying notes.





                                     IV-29
<PAGE>
             Interoffice Superholdings Corporation and Subsidiaries

                   Notes to Consolidated Financial Statements

              For the period November 9, 1998 to December 31, 1998


1. Organization

Interoffice  Superholdings  Corporation (the "Company"),  was formed on November
20,  1997  in  connection  with  its   acquisition  of  Interoffice   (Holdings)
Corporation ("Interoffice" - see Acquisition Transaction below).

The Company operates 36 office centers throughout the United States. The Company
leases  executive  office  suites and provides  secretarial  and  administrative
services and amenities to their tenants for lease terms  generally  ranging from
one month to one year.

2. Acquisition Transactions

On  January  29,  1998,  the  Company  purchased  from the sole  stockholder  of
Interoffice  (the  "Seller") all of the  outstanding  shares of common stock for
approximately  $24.5  million  pursuant to the terms and  conditions  of a stock
purchase agreement  assigned to the Company by RFG Capital Management  Partners,
L.P.  ("RFG").  The  purchase  price was paid by RFG  directly to the Seller and
resulted  in an increase to  goodwill  and  additional  paid in capital for that
amount.  Concurrently  with the  purchase of  Interoffice,  the  Company  caused
Interoffice  to issue 10,000 shares of common stock to the Company at par value.
The Company wholly owns Interoffice.

On July 14, 1998, Interoffice  reclassified its common stock into Class A common
stock and Class B common stock.  Each share of common stock is identical  except
that the Class B shares do not entitle the holder to vote for, or consent to any
matter,  transaction or event. Each share of issued and outstanding common stock
of Interoffice was converted to a share of Class A common stock.

Based on the above  transactions,  Interoffice  has  50,000  authorized  Class A
common  shares  and  50,000  authorized  Class B common  shares.  In July  1998,
Interoffice issued  approximately  1,468 shares to the Company,  the proceeds of
which were used to fund the purchase of Xebec Management  Services  Incorporated
and XMS Greenhaven Incorporated  (collectively referred to as "Xebec") discussed
below.




                                     IV-30

<PAGE>


9

2. Acquisition Transactions (continued)

In  connection  with  the  sale,  Interoffice   transferred  its  investment  in
residential real estate to the Seller and forgave all loans to the Seller.

Reckson Management Group, Inc. ("RMG") originally owned 58.9% of the Company and
granted Reckson  Services  Industries,  Inc. ("RSI") an option to purchase RMG's
entire interest in the Company. This option was exercised on November 9, 1998.

On July 20,  1998,  the  Company  purchased  substantially  all of the assets of
Xebec.  Xebec is engaged in the business of developing  and operating  executive
office suites at six locations in the Sacramento,  California area. The purchase
price for the purchased assets was $8,875,000. The transaction was accounted for
under the purchase  method of accounting  with the goodwill  resulting  from the
purchase after adjustments amounting to approximately  $7,944,000.  In addition,
the  Company  paid the  principal  shareholders  of Xebec for a covenant  to not
compete for a period of three  years.  The  agreement  provides  for  additional
amounts  not to exceed  $1,000,000  to be paid by the  Company to Xebec  through
December  31,  1999  if  Earnings   Before  Interest  Taxes   Depreciation   and
Amortization (EBITDA) exceeds certain agreed upon benchmarks.

3. Summary of Significant Accounting Policies

Basis of Presentation

The  consolidated  financial  statements  have been  prepared for the purpose of
complying  with Rule  3.09 of  Regulation  S-X of the  Securities  and  Exchange
Commission.

Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its  wholly-owned  subsidiaries.   All  significant  intercompany  balances  and
transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from these estimates.


                                     IV-31


<PAGE>


3. Summary of Significant Accounting Policies (continued)

Income Recognition

Office rental revenue and support services revenue are recognized as the related
services are provided.

Cash and Cash Equivalents

Investments  with  maturities at purchase of three months or less are considered
to be cash equivalents.

Accounts Receivable

Accounts  receivable  primarily  consists of fixed and variable charges due from
tenants, net of prepayments.

Property and Equipment

Furniture, equipment and leasehold improvements are stated at cost. Depreciation
is computed  using  straight-line  methods  over terms  ranging from 3 1/2 to 15
years.  Expenditures  for major renewals and betterments  that extend the useful
lives of property and equipment are  capitalized.  Expenditures  for maintenance
and repairs are charged to expense when paid.

Restricted Cash

Restricted  cash  represents  monies pledged as collateral for letters of credit
required under certain lease  agreements  and monies in escrow for  transactions
not closed at December 31, 1998.

Goodwill

Goodwill  represents the excess of the Company's purchase price over the amounts
allocated  to the  underlying  assets and  liabilities  of both the  purchase of
InterOffice  (Holdings) Corporation in January 1998 and the Xebec acquisition in
July 1998 (see Note 2). Goodwill is amortized over a period of 30 years based on
the Company's  assessment of the significant  barriers to entry due to the rapid
consolidation  in the executive  suites  business and the increase over the last
several years of the large national corporations


                                     IV-32


<PAGE>


3. Summary of Significant Accounting Policies (continued)

Goodwill (continued)

which  utilize  executive  suites  companies  that  have  an  expanded  national
presence.  Goodwill is evaluated  when  indicators of impairment are present and
provisions  for  possible  losses  are  recorded  when  undiscounted  cash flows
estimated to be  generated  by those assets are less than the carrying  amounts.
Accumulated amortization of goodwill, through December 31, 1998 is $1,050,584.

Income Taxes

The  Company  accounts  for  income  taxes  under the  provisions  of  Financial
Accounting  Standards  Board  Statement No. 109,  "Accounting for Income Taxes".
Statement  109  utilizes  the asset  and  liability  method  for  computing  tax
expenses.  Under the asset  and  liability  method,  deferred  income  taxes are
recognized  for the tax  consequences  of  "temporary  differences"  by applying
statutory  tax rates to  differences  between the financial  statement  carrying
amounts  and the tax bases of  existing  assets and  liabilities.  Deferred  tax
assets are recognized for temporary  differences  that will result in deductible
amounts  in  future  years  and for  carryforwards.  A  valuation  allowance  is
recognized if it is more likely than not that some portion of the deferred asset
will not be  recognized.  When  evaluating  whether  a  valuation  allowance  is
appropriate,  Statement  109  requires a company  to  consider  such  factors as
previous operating results,  future earnings potential,  tax planning strategies
and future reversals of existing temporary differences.  The valuation allowance
is increased or decreased in future years based on changes in these criteria.

Rent Expense

Generally accepted accounting principles require that rent expense be recognized
on a  straight-line  basis over the term of the related  lease.  The  difference
between the rent expense  recognized  for financial  reporting  purposes and the
actual  payments  made in accordance  with the lease  agreement is recognized as
deferred rent payable.

Earnings Per Common Share

Basic earnings per common share is computed using the weighted average number of
shares outstanding. Diluted earnings per common share is equal to basic earnings
per


                                     IV-33


<PAGE>


3. Summary of Significant Accounting Policies (continued)

Earnings Per Common Share (continued)

common share as the strike price of the options outstanding approximates current
estimated market value.

4. Certificates of Deposit - Restricted

The Company has  certificates  of deposit  totaling  $565,125 as of December 31,
1998,  which are pledged as  collateral  for letters of credit,  required  under
certain lease agreements  totaling  approximately  $1,631,000 as of December 31,
1998.

5. Property and Equipment

Property and equipment as of December 31, 1998 consists of:

         Furniture and fixtures                         $     5,021,344
         Equipment                                            4,496,707
         Leasehold improvements                               1,398,171
                                                      -------------------

         Less:  Accumulated depreciation                     (2,318,006)
                                                      ===================
                                                        $     8,598,216
                                                      ===================

6. Capital Lease Obligations

The Company  leases  substantially  all of the  furniture  and  equipment  under
capital leases. At December 31, 1998, approximately  $10,460,000 of property and
equipment were under capital  leases.  The present value of future minimum lease
payments under these leases and the corresponding liabilities have been recorded
in the  financial  statements  as  property  and  equipment  and  capital  lease
obligations, respectively.



                                     IV-34

<PAGE>
6. Capital Lease Obligations (continued)

The future minimum lease payments under capital leases together with the present
value of minimum lease payments as of December 31, 1998 are as follows:

         Year ending December 31,
            1999                                         $     1,600,941
            2000                                                 527,271
            2001                                                 113,561
            2002                                                  35,251
                                                       -------------------
                                                               2,277,024
         Less - amount representing interest                     172,195
                                                       -------------------
         Present value of minimum lease payments         $     2,104,829
                                                       ===================

7. Notes Payable

The Company has three notes payable to a related party  totaling  $124,876 as of
December 31, 1998, as discussed below and in note 9. The remaining notes payable
are due to unrelated third parties.

Two notes  provide for  interest  only  payments at 8.56% until June 2004,  when
balloon  payments  will be due  totaling  $94,750.  The third note  provides for
interest only payments at 8.56% until August 2005,  when a balloon  payment will
be due totaling $31,126.

A subsidiary  rented  office space under a lease that expired in July 1997.  The
original lease, including amendments,  provided for a note payable in the amount
of $252,172 to be due at lease end. At lease end, the subsidiary signed a new 10
year lease  expiring July 2007. The lease requires the original note payable due
in July 1997, to become due in July 2007. This note will be reduced each year by
5% of the total amount of the note, provided the monthly lease payments are made
on a timely basis.

Another subsidiary signed a note payable in the amount of $192,348 plus interest
of prime plus 1.5% due to the landlord as an  amendment  to its original  lease.
The note is to be paid in 24 equal  installments  that were to begin  June 1997.
During 1997, note payments were not made as management was in negotiations  with
the landlord to reduce the note amount and extend the current lease that expires
in  May  1999.  The  full  amount  due  is  included  in  notes  payable  on the
accompanying consolidated balance sheets. In


                                     IV-35

<PAGE>
7. Notes Payable (continued)

February  1998,  the  Company  made a lump sum  payment  covering  the June 1997
through February 1998 period.

At December 31, 1998 the aggregate maturities of notes payable are as follows:

                   December 31, 1999          $       43,291
                                2000                       -
                                2001                       -
                                2002                       -
                                2003                       -
                          Thereafter                 365,440
                                            ===================
                                              $      408,731
                                            ===================

8. Income Taxes

The Company  accounts for income taxes in accordance  with Financial  Accounting
Standards  Board  Statement No. 109,  "Accounting  for Income  Taxes."  Deferred
income tax assets and liabilities are determined based upon differences  between
financial  reporting  and tax bases of assets and  liabilities  and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.

The components of the income tax benefit are as follows:

                                               For the period
                                              November 9, 1998
                                               to December 31,
                                                    1998
                                              ------------------
Current federal tax                             $        43,770
Current state tax                                             -
Deferred federal tax                                    (51,438)
Deferred state tax                                        4,590
                                              ==================
                                                $        (3,078)
                                              ==================



                                     IV-36

<PAGE>


8. ncome Taxes (continued)

The  reconciliation of income tax computed at the U.S. federal statutory rate to
income tax benefit is as follows:

                                        For the period from November 9 to
                                                December 31, 1998
                                            Amount           Percent
                                       ------------------------------------
Tax at U.S. statutory rate               $       (26,806)      35.0%
State taxes, net of federal benefit               (3,829)       5.0%
Change in valuation allowance                     67,353       51.9%
Effect of permanent differences                  (39,796)     (87.9)%
                                       ====================================
                                         $        (3,078)       4.0%
                                       ====================================

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying amount of assets and  liabilities  for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:

                                                               December 31,
                                                                   1998
                                                            -------------------
Deferred tax assets:
   Net operating loss carryforwards                           $      720,937
   AMT credit carryforward                                           251,879
   Book/tax basis difference                                         286,501
   Less: valuation allowance                                        (360,470)
                                                            -------------------
                                                                     898,847
                                                            -------------------
Deferred tax liabilities:
   Rent accrual                                                    2,442,016
   Depreciation                                                      265,794
   Book/tax basis difference                                         776,660
   Goodwill                                                           32,479
                                                            -------------------
                                                            -------------------
                                                                   3,516,949
                                                            -------------------

Net deferred tax liability after valuation allowance          $   (2,618,102)
                                                            ===================


                                     IV-37

<PAGE>

8. Income Taxes (continued)

Statement  109 requires a valuation  allowance to reduce the deferred tax assets
reported  if,  based on the weight of the  evidence,  it is more likely than not
that some portion or all of the deferred tax assets will not be realized.  After
consideration  of all the evidence,  both positive and negative,  management has
determined that approximately  $284,000 of a valuation allowance at December 31,
1998 is necessary to reduce the deferred tax assets to the amount that will more
likely than not be realized.

At December  31, 1998,  Interoffice  has  available  unused net  operating  loss
carryforwards of approximately $1,246,000.

9. Related Parties

An executive  of  Interoffice  owns a real estate  brokerage  company  which has
received   commissions  from  landlords  of  the  centers  for  leasing  certain
facilities at the sites the  subsidiaries  are located.  The  brokerage  company
received  commissions  from the landlords  and shared an allocated  portion with
Interoffice.  Total  commissions  earned  for the  period  November  9,  1998 to
December 31, 1998 were approximately  $75,000, and have been included in service
income on the accompanying consolidated statements of income.

The Company has notes payable to the above mentioned  related party as discussed
in note 7.

In connection  with the Company's  acquisition of three  executive  office suite
centers in France (see note 13), a  stockholder  loaned the Company  $1,750,000.
This amount was repaid in January 1999.

10. 401(k) Profit Sharing Plan

The Company has an  established  profit sharing plan under Section 401(k) of the
Internal Revenue Code. The plan,  which is open to substantially  all employees,
provides for employer  matching  contributions of 50%, up to a maximum of $2,400
per employee per year.  Employer  contributions  totaled  $19,042 for the period
November 9, 1998 to December 31, 1998.



                                     IV-38
<PAGE>

11. Management Incentive Bonus Structure

Certain members of the senior management team of the Company, consisting of five
employees,  by contract are paid an incentive bonus based on Interoffice's  cash
flow, as defined,  monthly.  Senior  management  bonus  percentages  during 1998
averaged 11%.  Also,  most other Company  employees  receive  incentive  bonuses
through a discretionary bonus structure monitored by senior management.

12. Commitments and Contingencies

The Company  leases the premises from which  operations are conducted from third
parties. These noncancellable  arrangements expire from January 1998 to May 2009
and  contain  rent  escalations  up to 5% per year.  Rent paid during the period
November 9, 1998 to December 31, 1998 was approximately $2,578,000.

As of December 31, 1998, the approximate  minimum lease payments under the terms
of these agreements are as follows:

         December 31,        1999         $    15,724,000
                             2000              16,121,000
                             2001              16,203,000
                             2002              15,046,000
                             2003              13,821,000
                       Thereafter              32,844,000
                                        ===================
                                          $   109,759,000
                                        ===================

Included in rent expense is escalation expenses of approximately $127,000 in the
period November 9, 1998 to December 31, 1998.

The Company has  guaranteed  approximately  $2.5  million of lease  payments for
certain of its subsidiaries.

During 1998, the Company entered into four separate employment  agreements.  The
employees  have been  awarded  options to purchase  225 shares of Class B common
stock of the  aggregate  issued  and  outstanding  shares of Class A and Class B
common  stock of the  Company  at an  aggregate  purchase  price per  share,  as
defined.  Such  options  vest in equal  installments  over a two to  three  year
period.




                                     IV-39
<PAGE>
13. Subsequent Events (Unaudited)

On January 5, 1999, the Company closed on a contract to acquire three  executive
office suite centers in France for  approximately  $1.5  million.  In connection
with this acquisition,  the Company has guaranteed certain leases and bank loans
of  approximately  $500,000 which were previously  personally  guaranteed by the
Seller.

On January  8, 1999,  the  Company  merged  with a  wholly-owned  subsidiary  of
Alliance National Incorporated ("Alliance"), a Nevada corporation. In connection
with the merger,  Alliance issued  11,567,247 shares of Series C preferred stock
to  shareholders  of the Company.  In addition,  the Company issued 1,357 common
stock in connection with the merger.

On May 8, 1998,  the Company  entered into a stock  purchase  agreement  whereby
Interoffice  will  purchase  all of the  issued  and  outstanding  shares of the
capital stock of Pacific Office Centers,  Inc. for  approximately  $7.1 million.
Pacific Office Center,  Inc. consists of nine office centers located in southern
California.  Alliance,  as  successor  to the  Company,  closed  this  agreement
effective February 1, 1999.

14. Impact of Year 2000 (Unaudited)

The Company's  management has assessed the Year 2000 issue, and has developed an
action plan to address the issue.  Management believes that its action plan will
be  implemented  and  completed  in a  timely  fashion,  and  that it  will  not
materially  affect the Company's  future  operating  results or future financial
condition.


                                     IV-40
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

MEMBERS OF RSVP HOLDINGS, LLC

We have audited the  accompanying  consolidated  balance sheet of RSVP Holdings,
LLC  as of  December  31,  1998  and  the  related  consolidated  statements  of
operations,  members'  equity,  and cash flows for the period from  February 26,
1998  (commencement  of  operations)  to  December  31,  1998.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We conducted our audit 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 audit provides 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 RSVP Holdings, LLC
as of December 31, 1998 and the  consolidated  results of its operations and its
cash flows for the period  February 26, 1998  (commencement  of  operations)  to
December 31, 1998 in conformity with generally accepted accounting principles.



                                                           /S/ERNST & YOUNG, LLP



New York, New York
March 5, 1999




                                     IV-41

<PAGE>




RSVP HOLDINGS, LLC
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998

ASSETS


Cash                                                               $    123,020
Equity Investments (Note 3)                                          35,259,956
Affiliate receivables (Note 4)                                        3,637,471
Deferred Compensation (Notes 1 and 4)                                 4,938,539
Equipment (net of accumulated depreciation of $30,557)                  105,699
Other assets (Note 5)                                                   686,727
                                                                   -------------

TOTAL ASSETS                                                        $44,751,412
                                                                    ===========



LIABILITIES AND MEMBERS' EQUITY

Accounts payable and accrued expenses                               $ 1,397,412
Affiliate payables (Note 4 and 5)                                     5,232,929
                                                                   ------------

TOTAL LIABILITIES                                                     6,630,341
                                                                      ---------

Minority Interest                                                    31,201,645

COMMITMENTS AND CONTINGENCIES (Notes 1, 4 and 6)                              -

Members' equity                                                       6,919,426
                                                                      ---------

TOTAL LIABILITIES AND MEMBERS' EQUITY                               $44,751,412
                                                                    ===========




          (See accompanying notes to consolidated financial statements)



                                     IV-42

<PAGE>
RSVP HOLDINGS, LLC
CONSOLIDATED STATEMENT OF OPERATIONS


                                                       FOR THE PERIO
                                                    FEBRUARY 26, 1998 TO
REVENUES                                              DECEMBER 31, 1998
--------                                              -----------------

Fee income (Note 4)                                  $       92,791
Interest income                                             193,034
Other income                                                360,853
                                                     --------------
         TOTAL REVENUES                                     646,678
                                                      --------------
EQUITY IN LOSS ON INVESTMENTS (Note 3)                   (3,747,767)
                                                      --------------
EXPENSES
Payroll & related costs (Note 4)                          2,893,914
Office expenses                                             493,781
Professional fees                                           382,021
Management fees (Note 4)                                    416,667
Travel                                                      109,384
Terminated transaction costs (Note 2)                     1,686,389
Amortization and depreciation                                30,557
Organization costs (Note 2)                                 757,644
Interest expense                                            491,172
                                                     --------------

         TOTAL EXPENSES                                   7,261,529
                                                      --------------
LOSS BEFORE MINORITY INTEREST                           (10,362,618)

Minority Interest                                        6,263,739
                                                      --------------
         NET LOSS                                       $(4,098,879)
                                                        ===========



          (See accompanying notes to consolidated financial statements)



                                      IV-43

<PAGE>


RSVP HOLDINGS, LLC
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
For the period February 26, 1998 to December 31, 1998

<TABLE>
<CAPTION>

                                                                          RSI FUND
                                                                        MANAGEMENT, LLC
                                                                        ---------------

<S>                                                                   <C>
Contribution of Reckson Stock (Note 1)                                $   5,887,000
Cost of Capital - March 13, 1998 (Note 1)                                (5,000,000)
Contribution of Investment in American Campus Communities, LLC            1,879,646
Contribution of Investment in Dobie Center Properties, Ltd.               --------
Contributions for Investments in Gateway Development Group, LLC             182,908
Contributions for Investments in Assisted Living Investments, LLC         3,769,125
Contributions for Investments in Dominion Venture Group, LLC              2,865,818
Contributions for working capital                                         1,433,808
Net Loss - February 26, 1998 to December 31, 1998                        (4,098,879)
                                                                        -----------

MEMBERS' EQUITY AT DECEMBER 31, 1998                                  $   6,919,426
                                                                       =============
</TABLE>




          (See accompanying notes to consolidated financial statements)


                                     IV-44
<PAGE>
RSVP HOLDINGS, LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FEBRUARY 26, 1998 TO DECEMBER 31, 1998




<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                     <C>
Net loss                                                                                $        (4,098,879)
Adjustments to reconcile net loss to net cash used in operating activities:
                     Depreciation and amortization                                                    30,557
                     Minority interest                                                           (6,263,739)
                     Equity in loss of investments                                                 3,747,767
                     Write-off of organization costs                                                 757,644

Changes in operating assets and liabilities:
                     Affiliate receivables                                                        (3,637,471)
                     Deposit                                                                        (466,666)
                     Other assets                                                                   (220,061)
                     Accounts payable and accrued expenses                                         1,397,412
                                                                                                 -------------
Net cash used in  operating  activities                                                           (8,753,436)
                                                                                                 -------------  

CASH FLOWS FROM INVESTING ACTIVITIES:
                     Purchase of equipment                                                          (136,256)
                     Distribution from American Campus Communities, LLC                               98,335
                     Investment in Gateway Development Group, LLC                                   (650,531)
                     Investment in Assisted Living Investments, LLC                               (7,583,879)
                     Investment in Dominion Venture Group, LLC                                   (28,992,002)
                     Organization and pre-acquisition costs                                         (757,644)
                                                                                                 -------------

Net cash used in investing activities                                                            (38,021,977)
                                                                                                  ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
                     Proceeds from affiliate loans                                                 5,232,929
                     Offering costs                                                               (5,000,000)
                     Deferred compensation                                                        (4,938,539)
                     Contributions of minority members                                            37,465,384
                     Contributions of members                                                     14,138,659
                                                                                                 ------------

Net cash provided by financing activities                                                         46,898,433
                                                                                                  -----------

Net increase in cash which is cash at end of period                                              $   123,020
                                                                                                 -------------


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                     Cash paid during the period for interest                                     $  130,296
                                                                                                 ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
                     Contribution of non-cash assets to Reckson Strategic Venture Partners,
                     LLC-Investment in American Campus Communities, LLC                           $1,879,646
                                                                                                  ==========


</TABLE>

          (See accompanying notes to consolidated financial statements)


                                     IV-45

<PAGE>
                               RSVP HOLDINGS, LLC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


1.     ORGANIZATION AND FORMATION OF THE COMPANY

RSVP Holdings, LLC ("Holdings" or the "Company") was formed on February 26, 1998
to be the managing member of Reckson Strategic Venture Partners, LLC and related
entities  ("RSVP") a real estate venture capital fund, of which the Company owns
100% of the common equity interests. The Company is composed of two members, RSI
Fund  Management LLC, a wholly owned  subsidiary of Reckson Service  Industries,
Inc., ("RSI") and New World Realty,  LLC ("New World"),  an entity formed by the
two RSVP managing directors to manage the day-to-day operations of RSVP, subject
to the strategic  direction of RSI. RSI Fund  Management,  LLC, owns 100% of the
common  equity  interests and New World has a carried  interest in profits.  The
Holdings  operating  agreement  (the  "Managing  Member  Operating   Agreement")
provides  for the payment to New World  after RSI and  affiliated  persons  (the
"Reckson  Investors")  have received a return of their capital  contributions to
RSVP  investments  plus a 12% internal  rate of return ("IRR ") thereon,  of $15
million and, thereafter,  a share of cash flows ranging from 15% to 27.75% based
upon the IRR received by the Reckson Investors in respect of RSVP investments.

RSVP  was  formed  on  March  5,  1998  to  invest  in  real   estate  and  real
estate-related  operating companies with experienced  management teams in market
sectors  which are in the early  stages of their  growth  cycle or offer  unique
circumstances for attractive investments as well as platforms for future growth.
RSVP has retained highly experienced  professionals  that who source,  structure
and execute  transactions  within each platform as well as manage the day-to-day
operations  of RSVP,  subject  to the  overall  management  of  RSI's  executive
officers.

On March 5, 1998, Paine Webber Real Estate Securities,  Inc., ("PWRES") became a
non-managing  member and sole  preferred  equity  owner of RSVP,  with a capital
commitment of $200 million (the "Preferred Equity  Facility").  PWRES will share
in profits  and losses of RSVP,  as  defined in the RSVP'S  operating  agreement
subject to a maximum IRR of 16% on invested  capital.  Allocations of income and
losses  are  made  in  accordance  with  provisions  defined  in  the  operating
agreement. In connection with the PWRES preferred equity financing,  RSVP paid a
commitment  fee of  $5,000,000.  On April 24,  1998,  PWRES  assigned 25% of its
preferred equity interest in RSVP,  representing an unfunded capital  commitment
of $50 million to Stratum Realty Fund, LLC ("Stratum").  The assignment provides
Stratum with similar rights and priorities.

Each of the RSVP Managing  Directors  has entered into an  employment  agreement
with the Company which provides for a minimum annual base salary of $500,000 and
has a term of the earlier of seven years or the term of RSVP,  but not less than
five years.  Each of the RSVP  Managing  Directors  has  received  from RSI a $3
million  grant of common stock of Reckson  Associates  Realty Corp.  ("Reckson")
which vests equally  throughout the first five years of employment (see Note 4).
New World is also  entitled to one-half  of any asset  management  fee earned by
Holdings from the Reckson  Investors.  Additionally,  it is anticipated that New
World will receive  transaction  fees of up to $1 million a year for identifying
investment opportunities for RSVP.

The Managing Member Operating  Agreement  provides New World with certain rights
regarding major capital  decisions of RSVP,  including the disposition of RSVP's
investments  except for dispositions at an independently  determined fair value.
The Managing Member Operating  Agreement obligates RSI to contribute 100% of the
capital  contributions  to be made by  Holdings  to RSVP in an amount up to $100
million.  At the  termination of RSVP, New World has a right of first refusal to
purchase any RSVP investment proposed for sale.




                                      IV-46

<PAGE>


                               RSVP HOLDINGS, LLC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The  consolidated  financial  statements  have been  prepared for the purpose of
complying  with Rule  3-09 of  regulation  S-X of the  Securities  and  Exchange
Commission.

Basis of Presentation

The  accompanying   consolidated  financial  statements  include  the  financial
position of the Company  and RSVP,  at December  31, 1998 and the results of its
operations  and its cash flows for the period  February 26, 1998 to December 31,
1998.  All  significant   intercompany   balances  and  transactions  have  been
eliminated in the consolidated  financial  statements. The preferred interest of
PWRES  and  Stratum  in  RSVP  are  reflected  in  minority   interests  in  the
accompanying consolidated financial statements.

The  investments  accounted  for  under  the  equity  method  are  Dobie  Center
Properties, Ltd., American Campus Communities, LLC, Assisted Living Investments,
LLC,   Dominion   Venture  Group,  LLC  and  Gateway   Development   Group,  LLC
(collectively, the "RSVP Investments").

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from those estimates.

Cash Equivalents

The Company considers highly liquid  investments with a maturity of three months
or less when purchased to be cash equivalents.

Long-Lived Assets

The Company assesses the need to record  impairment  losses on long-lived assets
used in operations  when  indicators of impairment  are present.  On an on-going
basis,  management  reviews the value and period of amortization or depreciation
of long-lived assets, including excess investments of equity investments. During
this  review,  the  Company  reevaluates  the  significant  assumptions  used in
determining the original cost of long-lived assets. Although the assumptions may
vary from  transaction to  transaction,  they generally  include revenue growth,
operating  results,  cash flows and other  indicators of value.  Management then
determines  whether  these  have  been a  permanent  impairment  of the value of
long-lived  assets based upon events or circumstances  which have occurred since
acquisition.

Transaction Costs

Costs incurred in connection with potential  acquisitions are deferred until the
transaction is consummated, or if terminated, such costs are expensed.

Change in Accounting Principle

In April 1998, the  Accounting  Standards'  Executive  Committee of the American
Institute of Certified Public Accountants issued SOP No. 98-5, "Reporting on the
Costs of Start-Up Activities".  This standard provides guidance on the financial
reporting  for  start-up  costs and  requires  that such  costs be  expenses  as
incurred.  The standard is effective for fiscal years  beginning  after December
15, 1998.  In accordance  with this standard the Company  adopted this policy in
1998. The Company expensed organization costs of $757,644 in 1998.

Income Taxes

The  Company  is not  subject  to federal or state  income  taxes.  As such,  no
provisions for these taxes has been made, since the aforementioned taxes are the
responsibility of the individual members of the Company.  The Company is subject
to New York State Limited Liability Company fees.





                                     IV-47
<PAGE>
                               RSVP HOLDINGS, LLC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

3.       INVESTMENTS

As of December 31, 1998, the Company's equity investments are as follows:

         Investment in American Campus Communities,LLC      $  1,262,415
         Investment in Dobie Center Properties, Ltd.              32,296
         Investment in Assisted Living Investments, LLC        4,676,272
         Investment in Dominion Venture Group, LLC            29,288,973
                                                            ------------
                  TOTAL EQUITY INVESTMENTS                  $ 35,259,956
                                                             ===========


The following are the Company's equity in earnings (loss) of investments for the
period February 26, 1998 to December 31, 1998:

         Equity in loss of American Campus  Communities,  LLC    $ (518,895)
         Equity  in earnings of Dobie Center  Properties,  Ltd.      32,296
         Equity in loss of Gateway  Development  Group,  LLC       (650,531)
         Equity in loss of Assisted Living  Investments,  LLC    (2,907,607)
         Equity in  earnings of Dominion  Venture Group, LLC        296,970
                                                                 -----------

                  TOTAL EQUITY IN LOSS OF INVESTMENTS           $(3,747,767)
                                                                 ============

Student Housing
---------------

In 1997,  RSI acquired a 33 1/3%  interest in a wholly owned  subsidiary  of RFG
Capital  Group,  LLC ("RFG") for $1.51  million.  RFG's sole net investment is a
76.09% interest in American Campus  Communities,  LLC ("ACC"), a student housing
enterprise which owns, develops,  constructs,  manages and acquires,  on-and off
campus student  housing  projects.  On April 1, 1998, RSI transferred its equity
interest  to RSVP.  For the period  April 1, 1998 to  December  31,  1998,  RSVP
recognized a loss of $518,895 attributable to ACC.

In 1997, RSI invested  through  affiliated  entities $3.62 million for a 33 1/3%
interest in Reckson Opportunity Partners, LP ("RO"). RO used such proceeds along
with equal  proceeds  from RO's two other  owners to acquire a 70%  interest  in
Dobie Center  Properties,  Ltd.  ("Dobie"),  which owns 100% of Dobie Center,  a
mixed-use student housing and retail property located in Austin, Texas. On April
1, 1998, RSI transferred its interest in RO, net of certain  proceeds related to
the  refinancing of Dobie, to RSVP. For the period April 1, 1998 to December 31,
1998, RSVP recognized income of $32,296 attributable to Dobie.

Privatization
-------------

On August 27, 1998, a joint  venture was formed  between RSVP and  Dominion,  an
Oklahoma-based,   privately-owned   group  of  companies  that  focuses  on  the
development,  acquisition and ownership of government  occupied office buildings
and correctional facilities.  The new venture,  Dominion Venture Group, LLC (the
"Dominion  Venture") is owned by RSVP-Dominion LLC, a subsidiary of RSVP, and by
Burgess  Services,  LLC,  an entity  owned  and  controlled  by Calvin  Burgess,
President and Chief Executive Officer of Dominion.

The Dominion Venture consists of two operating  divisions.  Dominion Properties,
LLC,  will  directly  or  indirectly  own real  estate  and  other  Real  Estate
Investment Trust ("REIT") qualified investments (the "Properties  Division").  A
subsidiary  of ROP  owns a  membership  interest  in  the  Properties  Division.
Dominion Asset  Services,  LLC, owns  companies  that engage in businesses  that
create non-REIT qualifying income (the "Services  Division").  The businesses of
the Services Division will include (i) leasing correctional  facilities from the
Properties  Division and  contracting  with a third party for the  management of
such facilities,  (ii) acting as a general  contractor or a construction  manger
for the  construction  of real estate both for the  Properties  Division and for
third  parties,  and (iii) the  management  of existing and newly  developed and
constructed government leased office buildings.

In 1998,  total RSVP  contributions  to the Dominion Venture were $28,728,130 of
which $25,862,312 was contributed by PWRES and $2,865,818 by RSI.

Allocations of income and cash flow  distributions  are made in accordance  with
provisions defined in the Operating Agreement.



                                     IV-48

<PAGE>


                               RSVP HOLDINGS, LLC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

3.       INVESTMENTS (CONTINUED)

As of December 31, 1998, the excess of the RSVP's  investment  over its share of
the  equity in the  underlying  net  assets  of the  Dominion  Venture  ("Excess
Investment")  was $263,873.  This Excess  Investment is being amortized over the
life of the investment estimated at 25 years.

Summarized financial information and a summary of RSVP's investment in and share
of income of the Dominion Venture is as follows:


Balance Sheet                                      December 31, 1998
                                                    ----------------
Property and equipment, net.....................      $ 132,872,232
Intangibles.....................................         15,777,941
Other assets....................................          9,505,124
                                                      -------------

Total Assets....................................    $   158,155,297
                                                      =============

Current liabilities.............................    $    25,222,798
Mortgage payable................................         48,847,698
                                                      -------------

Total Liabilities...............................         74,070,496
                                                      =============


Minority Interest...............................         10,188,332

Preferred equity................................         44,871,369
RSVP investment in Dominion Venture.............         29,288,973
Less:  Excess Investment........................           (263,873)
                                                      -------------

Total Members' Equity...........................         73,896,469
                                                      --------------
Total Liabilities & Members' Equity.............     $   158,155,297
                                                     ===============



Statement of Operations                              For the period from
                                                     August 27, 1998 to
                                                      December 31, 1998
                                                      -----------------
Construction revenue............................     $    10,313,898
Other revenue...................................           8,744,453
Total Revenue...................................           ---------
                                                           19,058,351
                                                           ----------
Cost of sales...................................           14,483,812
General and administrative expenses.............            1,359,293
Depreciation and amortization expense...........            1,418,351
Interest expense, net...........................              703,293
                                                            ---------
Total Expenses..................................           17,964,749
                                                            ---------
Minority Interest...............................              122,994
                                                            ---------
Net income......................................              970,608
Less:  Preferred Members' share.................             (673,638)
                                                            ---------
RSVP's share....................................            $ 296,970
                                                            ==========


On August 11,  1998,  RSVP,  through a wholly owned  subsidiary,  formed a joint
venture Gateway  Development  Group,  LLC ("Gateway"),  with Gateway  Management
Group.  Gateway is a start up entity that pursues  opportunities  in  privatized
military  housing.  In 1998, RSVP has funded $549,238.  The Company is uncertain
whether it will to recover  its  invested  dollars  from  Gateway's  future cash
flows.  At December  31,  1998,  RSVP has  recognized  a loss of $650,531  which
includes a reserve for their total contributed  dollars plus investment costs of
$101,293.



                                     IV-49

<PAGE>

                               RSVP HOLDINGS, LLC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

3.     INVESTMENTS (CONTINUED)

Assisted Living
---------------

On August 12, 1998,  RSVP,  acquired  through a wholly owned  subsidiary,  a 45%
interest in Assisted Living  Investments,  LLC ("ALI") for  approximately  $3.25
million.  ALI is a joint venture that  develops,  leases,  operates and finances
assisted living  facilities.  In addition,  RSVP has agreed to contribute 80% of
the equity of ALI, up to a maximum $16.0 million for a total maximum  commitment
of $19.25  million.  RSVP funded $7.5 million of its $19.25  million  commitment
upon  the  closing  of the  transaction.  RSVP  has  funded  50% of its  capital
contributions through draws under the Preferred Equity Facility.

As of December 31, 1998, the excess of the Company's  investment  over its share
of the equity in the  underlying  net assets of ALI  ("Excess  Investment")  was
$2,887,585.  The  Excess  Investment  is  being  amortized  over the life of the
investment estimated at 25 years.

Summarized financial information and a summary of RSVP's investment in and share
of loss is as follows:

Balance Sheet                                            December 31, 1998
                                                         -----------------
Property and equipment, net                              $    79,101,531
Other assets.................................                  6,483,316
                                                               ---------

     Total Assets............................            $    85,584,847
                                                              ===========

Note payable.................................            $    82,883,473
Other liabilities............................                  8,087,520
                                                              ---------
     Total Liabilities.......................                 90,970,993
                                                              ----------


Minority interest............................                 (7,174,833)
Net RSVP investment in ALI...................                  4,676,272
Less:  Excess investment.....................                  (2,887,585)
                                                               ---------
     Total Members' Deficit..................                 (5,386,146)
                                                               ---------
     Total Liabilities and Members' Deficit..            $    85,584,847
                                                              ============



Statement of Operations                                  For the period from
                                                          August 12, 1998 to
                                                           December 31, 1998
                                                           ----------------
     Total Revenues..........................                  $  2,847,404
                                                                ------------
    Operating expenses.......................                     3,509,287
    Pre-opening expenses.....................                     1,090,673
    Depreciation and amortization............                     1,180,190
    Interest expense.........................                     1,759,929
    Other expenses...........................                       409,421
                                                                  ---------
         Total Expenses......................                     7,949,500
                                                                  ---------
    Net loss as reported by ALI..............                    (5,102,096)
    Adjustment for equity accounting basis...                       545,337
                                                                 ---------
    Net loss as adjusted.....................                    (4,556,759)
    Less:  Non-RSVP share....................                    (1,708,785)
                                                                  ---------
    RSVP share of net loss...................                    (2,847,974)
    Amortization of excess investment and
       pre-opening costs......................                      (59,633)
                                                                  ---------
    Total RSVP share of net loss..............                 $ (2,907,607)
                                                               ==============


                                     IV-50
<PAGE>


                               RSVP HOLDINGS, LLC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



4. TRANSACTIONS WITH RELATED PARTIES

On June 15, 1998,  RSI  established  a credit  facility of $100  million  ("RSVP
Facility") with ROP for funding the common equity component of RSVP investments.
The amount  available  under the RSVP Facility is reduced by any amount invested
by ROP directly in joint  ventures  with RSVP.  The RSVP  Facility has a term of
five years and bears  interest  at a rate equal to the  greater of (i) the prime
rate plus 2% and (ii) 12% per annum,  with the rate  referred to in clause (iii)
increasing  annually  on  outstanding  borrowings  at a rate of 4% of the  prior
year's rate. As of December 31, 1998, ROP has advanced RSI $7,281,781  under the
RSVP Facility and has invested $10,065,338 in the Dominion Venture (See Note 3).

Included in  affiliate  payables  are interim  advances  of  approximately  $1.2
million made to the Company by RSI for working  capital.  These advances  accrue
interest at a rate equal to the rate on the RSVP facility.

Each RSVP  Managing  Director  received a $3.0 million  grant of common stock of
Reckson  Associates  Realty Corp. (the "Reckson  Stock") which will vest equally
over five years.  The Reckson  Stock was  purchased  by RSI and  contributed  to
Holdings.  The amortization of the Reckson stock for the period March 5, 1998 to
December  31,  1998 was  $948,461.  It was  charged to RSVP and is  included  in
payroll  and  related  costs  in  the  accompanying  consolidated  statement  of
operations.  In addition,  in April 1998, RSI advanced each managing  director a
tax loan of  approximately  $1.4 million in connection with the grant of Reckson
Stock.  These loans bear interest at 8% per annum,  are due in April,  2003, and
are secured by the  Reckson  stock.  These  amounts  are  included in  affiliate
receivables.

New World is entitled to receive  transaction  fees of up to $1 million per year
related to  identifying  RSVP  investment  opportunities.  In August of 1998, $1
million of such fees were paid to New World by a third party.

RSI is entitled to a cumulative annual management fee of $2 million with respect
to RSVP,  of which $1.5  million is  subordinate  to PWRES  receiving  an annual
minimum  rate of return of 16% and a return of its capital.  The  unsubordinated
amount  earned by RSI for the  period  March 5, 1998 to  December  31,  1998 was
$416,667.

In 1998, RSVP received an asset management fee of $92,791 for services  provided
to Dobie Center Properties, Ltd.

5. OTHER ASSETS

Included  in other  assets is a  deposit  of  $466,666  which  represents  funds
reserved for future capital  improvements for Dobie Center. Upon release,  these
funds would be payable to RSI.  These funds are held in a trustee's  account and
are not controlled by RSVP.

6. SUBSEQUENT EVENTS (UNAUDITED)

With  respect to RSVP's  investment  in  Assisted  Living  Investments,  LLC, on
February 1, 1999, a member of Sun Healthcare Group,  Inc., ("SUN") the parent of
an ALI member,  reported a significant  loss from operations  during the quarter
ended   December  31,  1998.   Additionally,   SUN   continues  to  implement  a
comprehensive  restructuring  of its  operations.  The  restructuring  of  SUN's
operations  has led the  partners  of ALI to enter into  negotiations  regarding
ALI's ongoing business plan and potentially modify allocations and priorities of
cash flow,  profits  and  losses.  These  negotiations  are in  progress.  As of
December 31, 1998,  the Company  determined  that there was no impairment on its
investment in ALI.

On March 17, 1999, PWRES transferred rights,  title and interest on its invested
capital to date in RSVP to Stratum.  This  transfer  will  include the rights to
distributions based upon the amount of funded capital contributions.



                                     IV-51
<PAGE>

                               RSVP HOLDINGS, LLC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

7. YEAR 2000 COMPLIANCE (UNAUDITED)

The Company and the RSVP  Investments  have completed an assessment to modify or
replace  portions of their software so that their computer systems will function
properly  with  respect to dates in the year 2000 and  thereafter.  Since  their
accounting software is maintained and supported by a third party, the total year
2000 project cost is estimated to be minimal. The year 2000 project is estimated
to be completed no later than July 31, 1999,  which is prior to any  anticipated
impact on their operating  systems.  Additionally,  their mechanical systems are
currently year 2000  compliant.  However,  the Company and the RSVP  Investments
cannot  guarantee  that all  contractors  will comply with their  assurances and
therefore,  they will not be able to  replace  non-compliant  contractors.  They
believe that with  modifications  to existing  software and  conversions  to new
software, the year 2000 issue will not pose significant operational problems for
its computer  systems.  However,  if such  modifications and conversions are not
made, or are not complete timely costs associated with the year 2000 issue could
be significant  and have a material  impact on the operations of the Company and
the RSVP Investments.

To date,  the  Company  and the RSVP  Investments  have  expended  approximately
$21,000 and expect to expend an additional  $60,000 in connection with upgrading
of their  computer  system.  The costs of the project and the date on which they
believe it will complete the year 2000  modifications  are based on management's
best  estimates,  which were derived  utilizing  numerous  assumptions of future
events,  including the  continued  availability  of certain  resources and other
factors.  However,  there  can be no  guarantee  that  these  estimates  will be
achieved and actual  results  could differ  materially  from those  anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the  availability  and costs of personnel  trained in this area, the
ability  to  locate  and  correct  all  relevant  computer  codes,  and  similar
uncertainties.





                                     IV-52
<PAGE>

                                  Exhibit Index



EXHIBIT
NUMBER               DESCRIPTION
------               -----------
3.1*     Certificate of Incorporation

3.2*     By-Laws of Registrant

3.3      Amended and Restated Certificate of Incorporation

4.1*     Specimen Share Certificate of Common Stock

10.1     Intercompany Agreement between Reckson Operating Partnership, L..P. and
         Reckson Service Industries, Inc. dated May 13, 1998

10.2A    Credit  Agreement  between  Reckson  Operating  Partnership,  L.P.  and
         Reckson Service Industries,  Inc. relating to the operations of Reckson
         Strageic Venture Partners, LLC dated June 15, 1998

10.2B    Credit  Agreement  between  Reckson  Operating  Partnership,  L.P.  and
         Reckson Service Industries,  Inc. relating to the operations of Reckson
         Service Industries, Inc. dated June 15, 1998

10.3*    Limited Liability Company Agreement of OnSite Ventures, LLC

10.4*    StandBy Purchase Agreement

10.5*    Limited Liability Company Agreement of RSVP Holdings, LLC

10.6A*   Operating Agreement of Reckson Strategic Venture Partners, LLC

10.6B*   Supplemental  Agreement  to Operating  Agreement  of Reckson  Strategic
         Venture Partners, LLC

10.7*    Registration Rights Agreement between Reckson Service Industries,  Inc.
         and certain affiliates thereof dated May 13, 1998

10.8*    Option to acquire Interoffice Superholdings Corporation

10.9     Loan Agreement regarding On-Site Convertible Loans

10.10A*  Stock Option Plan

10.10B   1998 employee stock option plan

10.11*   Employment Agreement of Steven H. Shepsman

10.12*   Employment Agreement of Seth B. Lipsay

10.13*   Limited Liability Company Agreement of Interoffice  Superholdings,  LLC
         by and among Interoffice  Superholdings,  LLC, RSI I/O Holdings,  Inc.,
         JAH I/O, LLC and Rieger I/O LLC

10.14*   Fourth Amended and Restated  Stockholder's  Agreement  dated January 8,
         1999 by and  among  Alliance  National  Incorporated  and the  security
         holders identified therein.

10.15**  Letter  Agreement dated November 9, 1998 by and between JAH I/O LLC and
         Reckson Management Group, Inc., Reckson Service  Industries,  Inc., RSI
         I/O Holdings, Inc., and Reckson Office Centers, LLC

10.16**  Letter Agreement by and between Reckson Service  Industries,  Inc., and
         RFIA, LLC

10.17*** Amended and Restated Operating Agreement of Assisted Living Investments
         LLC

10.18#   Operating Agreement of Dominion Venture Group LLC

10.19##  Agreement   and  Plan  of  Merger  by  and  among   Alliance   National
         Incorporated,   Alliance   Holding  Inc.,   Interoffice   Superholdings
         Corporation and Interoffice Superholdings, LLC

10.20##  Agreement   and  Plan  of  Merger  by  and  among   Alliance   National
         Incorporated,  ANI Holdings, Inc., Reckson Executive Centers, Inc., and
         Reckson Office Centers, LLC

10.21   $4  Million Senior  Secured Promissory Note of On-Site Ventures, LLC

12.1     Statement of Ratios of Earnings to Fixed Charges

21.1     Statement of Subsidiaries of Reckson Service Industries, Inc.

24.1     Powers of Attorney (included in Part IV of this Form 10-K)

27.0     Financial Data Schedule

99.1*    Form of Letter to Stockholders regarding Rights Offering

99.2*    Subscription Agent Agreement between Reckson Service Industries,  Inc.,
         and American Stock Transfer & Trust Company
-------------

*    Previously  filed as an exhibit to Registration  Statement on Form S-1 (No.
     333-44419) and incorporated herein by reference.

**   Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
     on January 25, 1999 and incorporated herein by reference.

***  Previously  filed as an exhibit to the Company's form 8-K report filed with
     the SEC on September 8, 1998 and incorporated herein by reference.

#    Previously  filed as an exhibit to the Company's form 8-K report field with
     the SEC on September 11, 1998 and incorporated herein by reference.

##   Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
     on December 1, 1998 and incorporated herein by reference.