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

 
                                   FORM 10-K
 
(Mark One)
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 [FEE REQUIRED]

For the quarterly period ended                     DECEMBER 31, 1996
                              --------------------------------------------------

                                       or

[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934 [NO FEE REQUIRED]

For the transition period from               to
                               --------------  ---------------------------------

Commission file number                 0-9174
                      ----------------------------------------------------------

                         CORPORATE PROPERTY ASSOCIATES
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

       CALIFORNIA                                          94-2572215
--------------------------------------------------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)                            
 
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK                              10020
--------------------------------------------------------------------------------
(Address of principal executive offices)                          (Zip Code)
 
Registrant's telephone number, including area code         (212) 492-1100
                                                  ------------------------------

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

        Title of each class            Name of each exchange on which registered

                NONE                                       NONE
-----------------------------------    -----------------------------------------

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

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

                              LIMITED PARTNERSHIP UNITS
--------------------------------------------------------------------------------
                                (Title of Class)

------------------------------------------------------------------------------- 
                                (Title of Class)
 
    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.
                                                             [X]  Yes  [_]  No


    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
                                                             [X]

    Aggregate market value of the voting stock held by non-affiliates of
Registrant: There is no active market for Limited Partnership Units.
<PAGE>
 
                                    PART I
                                    ------


Item 1.  Business.
         ---------

          Registrant is engaged in the business of investing in commercial and
industrial real estate properties which are net leased to commercial and
industrial entities.  Registrant was organized as a California limited
partnership on July 24, 1978.  The General Partners of Registrant are W.P. Carey
& Co., Inc. (the "Corporate General Partner" or "W.P. Carey") and William Polk
Carey (the "Individual General Partner").  The Corporate General Partner, the
Individual General Partner and/or certain affiliates are also the General
Partners of Corporate Property Associates 2 ("CPA(R):2"), Corporate Property
Associates 3 ("CPA(R):3"), Corporate Property Associates 4, a California limited
partnership ("CPA(R):4"), Corporate Property Associates 5 ("CPA(R):5"),
Corporate Property Associates 6 - a California limited partnership ("CPA(R):6"),
Corporate Property Associates 7 - a California limited partnership ("CPA(R):7"),
Corporate Property Associates 8, L.P., a Delaware limited partnership
("CPA(R):8"), Corporate Property Associates 9, L.P., a Delaware limited
partnership ("CPA(R):9") and the advisor of Corporate Property Associates 10
Incorporated ("CPA(R):10"), Carey Institutional Properties Incorporated
("CIP(TM)") and Corporate Property Associates 12 Incorporated ("CPA(R):12").
Registrant has a management agreement with Carey Corporate Property Management
Company ("Carey Management"), a division of W.P. Carey.  According to the terms
of this agreement, Carey Management performs a variety of management services
for Registrant.  Registrant has entered into an agreement with Fifth Rock L.P.,
an affiliate, for the purpose of leasing office space.  Reference is made to the
Prospectus of Registrant dated January 16, 1979, as supplemented by Supplements
dated January 19, 1979 and April 30, 1979, filed pursuant to Rules 424(b) and
424(c) under the Securities Act of 1933 and such Prospectus and such Supplements
are incorporated herein by reference (said Prospectus, as so supplemented, is
hereinafter called the "Prospectus").

          The properties owned by Registrant are described in Item 2.
Registrant's entire net proceeds from the public offering, less distributions of
cash from sales of properties and a working capital reserve have been fully
invested in net leased commercial and industrial real estate since December 11,
1980.

          Registrant has only one industry segment which consists of the
investment in and the leasing of industrial and commercial real estate.  See
Selected Financial Data in Item 6 for a summary of Registrant's operations.
Also see the material contained in the Prospectus under the heading INVESTMENT
OBJECTIVES AND POLICIES.

          Except for a property in Garland, Texas, all of Registrant's real
estate properties are leased to corporate tenants under long-term net leases.  A
net lease generally requires tenants to pay operating expenses relating to the
leased properties including maintenance, real estate taxes, insurance and
utilities which under other forms of leases are often paid by the lessor.
Lessees are required to include Registrant as an additional insured party on all
insurance policies relating to the leased properties.  In addition,
substantially all of the net leases include indemnification provisions which
require the lessees to indemnify Registrant and the General Partners for
liabilities on all matters related to the leased properties.  Accordingly,
Registrant believes that the insurance and indemnity provided on its behalf by
its lessees provides adequate coverage for property damage and any liability
claims which may arise against Registrant's ownership interests.  In addition to
the insurance and indemnification provisions of the leases, Registrant has
contingent property and liability insurance for its properties.  To the extent
that any lessees are not financially able to satisfy indemnification obligations
which exceed insurance reimbursements, Registrant may incur the costs necessary
to repair property and settle liabilities.  Presently, there are no claims
pending for property damages or liability claims.

          As described above, lessees retain the obligation for the operating
expenses of their leased properties so that, other than rental income, there are
no significant operating data (i.e. expenses) reportable on Registrant's leased
properties. As discussed in Registrant's Management's Discussion and Analysis in
Item 7, Registrant's leases generally provide for periodic rent increases which
are either stated and negotiated at the inception of the lease or based on
formulas indexed to increases in the Consumer Price Index. Registrant's leases
have initial terms ending between 1999 and 2009 with the majority of the leases
providing for multiple renewal terms at the option of the tenants, of generally
5 or 10 years per renewal term. Registrant's lease with Varo, Inc. ("Varo") for
the 5th Street property initially expired in April 1996 and was extended through
February 12, 1997. IMO Industries, Inc. ("IMO"), Varo's parent company and the
guarantor of the Varo lease, and Registrant entered into a settlement agreement
which released Varo and IMO from the 5th Street lease and, in 

                                     - 1 -
<PAGE>
 
exchange, IMO deposited $486,000 into an escrow account held by an affiliate of
the Corporate General Partner representing estimated repair costs and
construction management fees as Varo had not fulfilled its obligation to return
the property in suitable condition. Funds in escrow will be released for the
payment of repairs and maintenance for the property. Various leases include
purchase options which are described in Item 2 and are generally exercisable at
the greater of fair market value, as defined in the lease, or a stated amount.
The Pre Finish Metals Incorporated ("Pre Finish") lease provides for a purchase
option which may be exercised between June 30, 1998 and June 30, 2003.
Registrant and CPA(R):2 own the Pre Finish property as tenants-in-common with
60% and 40% interests, respectively. In September 1996, Registrant entered into
a purchase and sale agreement for the sale of Registrant's property in
Louisville, Kentucky, leased to Winn-Dixie Stores, Inc. ("Winn-Dixie"). There
can be no assurance that the Winn-Dixie sale will be completed, as the
transaction is subject to the completion of certain due diligence procedures and
the buyer's ability to obtain debt financing. If the proposed sale of the Winn-
Dixie property is completed, Registrant would realize net proceeds of
approximately $1,000,000.

          As Registrant's objective has been to invest in properties which are
occupied by a single corporate tenant and subject to long-term net leases with
such lease obligation backed by the credit of the corporate lessee, Registrant's
properties have not been generally subject to the competitive conditions of
local and regional real estate markets.  In selecting its real estate
investments, Registrant's strategy was to identify properties which included
operations of material importance to the lessee so that the lessee might be more
likely to extend its lease beyond the initial term or exercise a purchase option
if such option was provided for in the lease agreement.  Registrant believes
that this strategy reduces its exposure to the competitive conditions of the
local and regional real estate markets.  Because Registrant may be affected by
the financial condition of its lessees rather than the competitive conditions of
the real estate marketplace, Registrant's strategy has been to diversify its
investments among tenants, property types and industries in addition to
achieving geographical diversification.

          For the year ended December 31, 1996, revenues from properties
occupied by Pre Finish, The Gap, Inc. the ("Gap") and Varo, amounted to 32%, 27%
and 19%, respectively, of the total operating revenues of Registrant.  No other
property owned by Registrant accounted for more than 10% of its total operating
revenues during 1996.  Material Sciences Corporation ("MSC") is the guarantor of
the Pre Finish lease.  MSC's stock is traded on the New York Stock Exchange.
For MSC's fiscal year ended February 28, 1996, MSC's audited financial
statements reported net sales of $236,150,000, net income of $11,979,000, total
assets of $202,115,000 and shareowners' equity of $121,708,000. The Gap's stock
is publicly traded, principally on the New York and Pacific Stock Exchanges.
The Gap's audited financial statements for the fiscal year ended February 3,
1996 and the unaudited financial statements for the nine-month period ended
November 2, 1996, reported net sales of $4,395,253,000 and $1,382,996,000,
respectively, net earnings of $354,039,000 and $134,310,000, respectively and
total assets of $2,343,068,000 and $2,628,156,000, respectively and total
stockholders' equity of $1,640,473,000 and $1,632,226,000, respectively. See
Note 9 to the Financial Statements in Item 8.

          Registrant voluntarily conducted Phase I environmental reviews of all
of its properties in 1993.  Registrant believes, based on the results of such
reviews and Phase II environmental reviews of certain properties in 1994, that
its properties are in substantial compliance with Federal and state
environmental statutes and regulations.  Phase II reviews were only performed
based on the recommendations of the Phase I reviews.  Portions of certain
properties have been subject to a limited degree of contamination, principally
in connection with either leakage from underground storage tanks or surface
spills from facility activities.  In many instances, tenants are actively
engaged in the remediation process and addressing identified conditions.  For
those conditions which were identified, Registrant advised its tenants of such
findings and of their obligations to perform any required remediation.  Tenants
are generally subject to environmental statutes and regulations regarding the
discharge of hazardous materials and any related remediation obligations.  In
addition, Registrant's leases generally require tenants to indemnify Registrant
from all liabilities and losses related to the leased properties.  Accordingly,
Management believes that the ultimate resolution of the aforementioned
environmental matters will not have a material adverse effect on Registrant's
financial condition, liquidity or results of operations.

                                     - 2 -
<PAGE>
 
          Registrant does not have any employees.  The Corporate General Partner
of Registrant together with its affiliates employ twelve individuals who perform
accounting, secretarial and transfer services for Registrant.  Gemisys, Inc.
performs certain transfer services for Registrant and The Bank of New York
performs certain banking services for Registrant.  In addition, Registrant has
entered into an agreement with Carey Management pursuant to which Carey
Management provides certain management services for Registrant.
 
Item 2.    Properties.
           -----------

          Registrant's properties are as follows:
<TABLE>
<CAPTION>
 
        LEASE                                                      TYPE OF OWNERSHIP
       OBLIGOR             TYPE OF PROPERTY         LOCATION            INTEREST
----------------------  ----------------------  -----------------  ------------------
<S>                     <C>                     <C>                <C>
 
THE GAP, INC.           Land and Distribution/  Erlanger,          Ownership of land
                        Warehouse Building      Kentucky           and building (1)
 
PRE FINISH METALS       Land and Warehouse/     Walbridge,         Ownership of a 60%
INCORPORATED            Manufacturing Plant     Ohio               interest in land
                                                                   and building (1)
 
BROOMFIELD TECH         Land and Office/        Broomfield,        Ownership of land
CENTER CORPORATION      Warehouse/Manufac-      Colorado           and buildings (1)
                        turing Buildings -
                        2 locations
 
UNISOURCE               Land and Office/        Anchorage,         Ownership of land
WORLDWIDE,              Warehouse Building      Alaska             and building
INC.
 
IMO INDUSTRIES, INC.    Land and Office/        Garland,           Ownership of land
                        Manufacturing Building  Texas              and building (1)
 
KOBACKER STORES,        Land and Retail Stores  In California:     Ownership of land
INC.                    - 12 locations           Fontana,          and buildings (1)
                                                 Merced, Rialto,
                                                 Stockton and two
                                                 in Sacramento
                                                In Ohio:
                                                 Cuyahoga Falls,
                                                 Freemont, Marion,
                                                 Reynoldsburg, and
                                                 Tallmadge
                                                In Indiana:
                                                 Anderson
 
WINN-DIXIE              Land and Supermarket    Louisville,        Ownership of land
STORES, INC.                                    Kentucky           and building
 
(3)                     Land and office/        Garland, Texas     Ownership of land
                        Manufacturing Building                     and building
</TABLE>



(1) These properties are encumbered by mortgage notes payable.
(2) Only one of the locations is encumbered by a mortgage note payable.
(3) This property is vacant

                                     - 3 -
<PAGE>
 
          The material terms of Registrant's leases with its tenants are
summarized in the following table:
<TABLE>
<CAPTION>
 
               Registrant's
                  Share                 Current       Lease
Lease           of Current   Square    Rent Per    Expiration   Renewal     Ownership            Terms of             Gross
Obligor        Annual Rents  Footage   Sq.Ft.(1)    (Mo/Year)    Terms      Interest          Purchase Option       Costs (2)
-------------  ------------  -------  -----------  -----------  -------  ---------------  -----------------------  ------------
<S>            <C>           <C>      <C>          <C>          <C>      <C>              <C>                      <C>
 
Pre Finish       $1,452,379  313,704     $7.72          06/03   YES      60% interest;    Greater of  fair market  $10,263,878
Metals Inc.                                                              as tenant-in     value of the property
                                                                         common,          or an amount equal
                                                                         remaining        to $7,873,226 plus
                                                                         interest owned   2 1/2% thereof per
                                                                         by Corporate     annum, not compounded
                                                                         Property         from 12/9/80 to the
                                                                         Associates 2     closing date.
 
The Gap           1,225,994  391,000      3.14          02/03   YES      100%             The greater of            11,846,079
Inc.                                                                                      fair market value
                                                                                          or $11,956,440
                                                                                          (less other amounts
                                                                                          stated in lease).

IMO
Industries Inc.     687,750  150,203      4.58          09/02   YES      100%             N/A                        5,309,237

Unisource
Worldwide,
Inc.                312,700   44,712      6.99          12/09   YES      100%             Greater of fair            2,922,529
                                                                                          market value
                                                                                          of the property
                                                                                          or purchase cost.
 
Kobacker
Stores, Inc.        267,315   33,032      8.09          12/06   YES      100%             N/A                        2,798,665
 
Broomfield
Tech                300,136  101,100      2.97          12/01    NO      100%             The purchase price         3,988,192
Center                                              AND 05/02                             shall be the greater
Corporation                                                                               of (a) approximately
                                                                                          $2,550,000 as
                                                                                          adjusted for certain
                                                                                          allowances; (b) the
                                                                                          outstanding mortgage
                                                                                          balance at the date of
                                                                                          sale on the properties'
                                                                                          plus 50% of the fair
                                                                                          market value in excess
                                                                                          of the outstanding
                                                                                          mortgage balance less
                                                                                          allowable capital improve-
                                                                                          ments funded by Broomfield
                                                                                          or (c) $2,375,000.
</TABLE> 

                                     - 4 -
<PAGE>
 
<TABLE>
<CAPTION>

                Registrant's
                   Share                 Current       Lease
Lease            of Current   Square    Rent Per    Expiration   Renewal  Ownership      Terms of         Gross
Obligor         Annual Rents  Footage   Sq.Ft.(1)    (Mo/Year)    Terms    Interest   Purchase Option   Costs (2)
--------------  ------------  -------  -----------  -----------  -------  ----------  ---------------  ------------
<S>             <C>           <C>      <C>          <C>          <C>      <C>         <C>              <C>
 
Winn-Dixie
Stores, Inc.        $102,400   25,600      4.00          12/99   YES            100%         N/A        $1,101,904
</TABLE> 
 

(1)  Represents rate for rent per square foot when combined with rents
     applicable to tenants-in-common.
(2)  Includes original cost net of increases or decreases to net investment
     subsequent to purchase.
(3)  Partnership's share of equity rent of $497,104 plus variable debt rent.



          The material terms on the mortgage debt of Registrant's properties are
summarized in the following table:

<TABLE>
<CAPTION>
 
                                                Mortgage
                             Annual Interest    Balance    Annual Debt   Maturity       Estimated
    Lease Obligor                 Rate          12/31/96     Service       Date        Due at Maturity    Prepayment Provisions
---------------------------  ---------------   ----------  -----------  -----------    ---------------    ---------------------
<S>                          <C>               <C>        <C>          <C>            <C>                <C>          
Pre Finish Metals
  Incorporated                9.00%     (1)    $1,408,609   $955,276 (2)  07/01/98            (3)         Loan may be prepaid in
                                                                                                          full or in part (minimum
                                                                                                          of $500,000) at any time.
 
The Gap, Inc.                10.00              6,259,172    701,079      05/01/99       $5,632,543       Loan may be prepaid in
                                                                                                          full at any time, with a
                                                                                                          prepayment premium.
 
IMO Industries Inc.          10.00              2,585,302    586,749      10/01/02            (3)         After november 1, 1997,
                                                                                                          principal balance may be
                                                                                                          paid in full with a
                                                                                                          prepayment premium.
 
Kobacker Stores,
  Inc.                       10.50              1,025,761    174,671      01/17/06            (3)         The loan may be prepaid in
                                                                                                          full or in part (in
                                                                                                          multiples of $10,000) with
                                                                                                          prepayment premium.
Broomfield Tech
Center
  Corporation                 9.00              2,250,640    276,136      09/01/11            (3)         The loan may be prepaid in
                                                                                                          part, at any time, without
                                                                                                          a prepayment premium.
</TABLE>

(1) Variable rate indexed to lender's prime rate.
(2) Estimate based on current interest rates.
(3) Fully amortizing.

                                     - 5 -
<PAGE>
 
Item 3.   Legal Proceedings.
          ------------------

          As of the date hereof, Registrant is not a party to any material
pending legal proceedings.



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

          No matter was submitted during the fourth quarter of the year ended
December 31, 1996 to a vote of security holders, through the solicitation of
proxies or otherwise.



                                    PART II
                                    -------



Item 5.   Market for Registrant's Common Equity and Related
          -------------------------------------------------
          Stockholder Matters.
          -------------------

          Information with respect to Registrant's common equity is hereby
incorporated by reference to page 19 of Registrant's Annual Report contained in
Appendix A.


Item 6.  Selected Financial Data.
         ------------------------

          Selected Financial Data are hereby incorporated by reference to page 1
of Registrant's Annual Report contained in Appendix A.



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

          Management's Discussion and Analysis are hereby incorporated by
reference to pages 2 to 4 of Registrant's Annual Report contained in Appendix A.



Item 8.   Financial Statements and Supplementary Data.
          --------------------------------------------

          The following financial statements and supplementary data are hereby
incorporated by reference to pages 5 to 15 of Registrant's Annual Report
contained in Appendix A.

      (i)    Report of Independent Accountants.
      (ii)   Balance Sheets as of December 31, 1995 and 1996.
      (iii)  Statements of Income for the years ended December 31, 1994, 1995
             and 1996.
      (iv)   Statements of Partners' Capital for the years ended December 31,
             1994, 1995 and 1996.
      (v)    Statements of Cash Flows for the years ended December 31, 1994, 
             1995 and 1996.
      (vi)   Notes to Financial Statements.



Item 9.   Disagreements on Accounting and Financial Disclosure.
          -----------------------------------------------------

          NONE

                                     - 6 -
<PAGE>
 
                                    PART III
                                    --------



Item 10.  Directors and Executive Officers of the Registrant.
          ---------------------------------------------------

          Registrant has no officers or directors.  The directors and executive
officers of the Corporate General Partner are as follows:
<TABLE>
<CAPTION>
  
                                                                        Has Served as a
                                                                        Director and/or
Name                        Age             Positions Held             Officer Since (1)
--------------------------  ---  ------------------------------------  -----------------
<S>                         <C>  <C>                                   <C>
                    
William Polk Carey           66  Chairman of the Board                        7/78
                                 Director                               
Francis J. Carey             71  President                                    7/78
                                 Director                               
George E. Stoddard           80  Chairman of the Investment Committee        12/78
                                 Director                               
Madelon DeVoe Talley         65  Vice Chairman of the Board                   4/86
                                 Director                               
Lawrence R. Klein            76  Chairman of the Economic Policy              4/84
                                 Committee                              
                                 Director                               
Barclay G. Jones III         36  Executive Vice President                     8/82
                                 Director                               
Claude Fernandez             44  Executive Vice President                     3/83
                                 Chief Administrative Officer           
H. Augustus Carey            39  Senior Vice President                        8/88
Anthony S. Mohl              34  Senior Vice President                        9/87
John J. Park                 32  Senior Vice President                        7/91
                                 Treasurer                              
Michael D. Roberts           45  First Vice President                         4/89
                                 Controller
</TABLE>

(1) Each officer and director of the Corporate General Partner will hold office
    until the next annual meeting of the Board of Directors and thereafter until
    his successor shall have been elected and shall have qualified or until his
    prior death, resignation or removal.



          William Polk Carey and Francis J. Carey are brothers.  H. Augustus
Carey is the nephew of William Polk Carey and the son of Francis J. Carey.

          A description of the business experience of each officer and director
of the Corporate General Partner is set forth below:

          William Polk Carey, Chairman and Chief Executive Officer, has been
active in lease financing since 1959 and a specialist in net leasing of
corporate real estate property since 1964.  Before founding W.P. Carey & Co.,
Inc. ("W.P. Carey") in 1973, he served as Chairman of the Executive Committee of
Hubbard,

                                     - 7 -
<PAGE>
 
Westervelt & Mottelay (now Merrill Lynch Hubbard), head of Real Estate and
Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real
Estate and Private Placements, Director of Corporate Finance and Vice Chairman
of the Investment Banking Board of duPont Glore Forgan Inc.  A graduate of the
University of Pennsylvania's Wharton School of Finance and Commerce, Mr. Carey
is a Governor of the National Association of Real Estate Investment Trusts
(NAREIT).  He also serves on the boards of The Johns Hopkins University, The
James A. Baker III Institute for Public Policy at Rice University, Templeton
College of Oxford University and other educational and philanthropic
institutions.  He founded the Visiting Committee to the Economics Department of
the University of Pennsylvania and co-founded with Dr. Lawrence R. Klein the
Economics Research Institute at that University.  Mr. Carey is also a Director
of CPA(R):10, CIP(TM) and CPA(R):12.


          Francis J. Carey was elected President and a Managing Director of W.P.
Carey in April 1987, having served as a Director since its founding in 1973.
Prior to joining the firm full-time, he was a senior partner in Philadelphia,
head of the Real Estate Department nationally and a member of the executive
committee of the Pittsburgh based firm of Reed Smith Shaw & McClay, counsel for
Registrant, the General Partners, the CPA(R) Partnerships, W.P. Carey and some
of its affiliates.  He served as a member of the Executive Committee and Board
of Managers of the Western Savings Bank of Philadelphia from 1972 until its
takeover by another bank in 1982 and is former chairman of the Real Property,
Probate and Trust Section of the Pennsylvania Bar Association.  Mr. Carey served
as a member of the Board of Overseers of the School of Arts and Sciences of the
University of Pennsylvania from 1983 through 1990.  He has also served as a
member of the Board of Trustees of the Investment Program Association since 1990
and on the Business Advisory Council of the Business Council for the United
Nations since 1994.  He holds A.B. and J.D. degrees from the University of
Pennsylvania.  Mr. Carey is also a Director of CPA(R):10 and CIP(TM).


          George E. Stoddard, Chief Investment Officer, was until 1979 head of
the bond department of The Equitable Life Assurance Society of the United
States, with responsibility for all activities related to Equitable's portfolio
of corporate investments acquired through direct negotiation.  Mr. Stoddard was
associated with Equitable for over 30 years.  He holds an A.B. degree from
Brigham Young University, an M.B.A. from Harvard Business School and an LL.B.
from Fordham University Law School.


          Madelon DeVoe Talley, Vice Chairman, is a member of the New York State
Controller's Investment Committee, a Commissioner of the Port Authority of New
York and New Jersey, former CIO of New York State Common Retirement Fund and a
Trustee of the New York State Teachers Retirement System.  She also served as a
managing director of Rothschild, Inc. and as the President of its asset
management division.  Mrs. Talley was also a former Governor of the N.A.S.D. and
a director of Biocraft Laboratories, a New York Stock Exchange company.  She is
an alumna of Sarah Lawrence College and the graduate school of International and
Public Affairs at Columbia University.


          Lawrence R. Klein, Chairman of the Economic Policy Committee since
1984, is Benjamin Franklin Professor of Economics Emeritus at the University of
Pennsylvania, having joined the faculty of Economics and the Wharton School in
1958.  He holds earned degrees from the University of California at Berkeley and
Massachusetts Institute of Technology and has been awarded the Nobel Prize in
Economics as well as over 20 honorary degrees.  Founder of Wharton Econometric
Forecasting Associates, Inc., Dr. Klein has been counselor to various
corporations, governments, and government agencies including the Federal Reserve
Board and the President's Council of Economic Advisers.


          Barclay G. Jones III, Executive Vice President, Managing Director, and
head of the Investment Department.  Mr. Jones joined W.P. Carey as Assistant to
the President in July 1982 after his graduation from the Wharton School of the
University of Pennsylvania, where he majored in Finance and Economics.  He was
elected to the Board of Directors of W.P. Carey in April 1992.  Mr. Jones is
also a Director of the Wharton Business School Club of New York.

                                     - 8 -
<PAGE>
 
          Claude Fernandez, Chief Administrative Officer, Managing Director, and
Executive Vice President, joined W.P. Carey in 1983.  Previously associated with
Coldwell Banker, Inc. for two years and with Arthur Andersen & Co., he is a
Certified Public Accountant.  Mr. Fernandez received his B.S. degree in
accounting from New York University in 1975 and his M.B.A. in finance from
Columbia University Graduate School of Business in 1981.

          H. Augustus Carey, Senior Vice President, returned to W.P. Carey in
1988 and is President of W.P. Carey's broker-dealer subsidiary.  Mr. Carey
previously worked for W.P. Carey from 1979 to 1981 as Assistant to the
President.  Prior to rejoining W.P. Carey, Mr. Carey served as a loan officer of
the North American Department of Kleinwort Benson Limited in London, England.
He received an A.B. from Amherst College in 1979 and an M.Phil. in Management
Studies from Oxford University in 1984.  Mr. Carey is a trustee of the Oxford
Management Centre Associates Council.

          Anthony S. Mohl, Senior Vice President and Director of Portfolio
Management, joined W.P. Carey & Co., in 1987 as Assistant to the President after
receiving his M.B.A. from the Columbia University Graduate School of Business.
Mr. Mohl was employed as an analyst in the strategic planning group at Kurt
Salmon Associates after receiving an undergraduate degree from Wesleyan
University.

          John J. Park, Senior Vice President, Treasurer and Director of
Research, joined W.P. Carey as an Investment Analyst in December 1987.  Mr. Park
received his undergraduate degree from Massachusetts Institute of Technology and
his M.B.A. in Finance from New York University.

          Michael D. Roberts joined W. P. Carey as a Second Vice President and
Assistant Controller in April 1989 and is currently First Vice President and
Controller.  Prior to joining W.P. Carey, Mr. Roberts was employed by Coopers &
Lybrand for over 8 years, where he attained the title of audit manager.  A
certified public accountant, Mr. Roberts received a B.A. in sociology from
Brandeis University and an M.B.A. from Northeastern University.


Item 11.  Executive Compensation.
          -----------------------

          Under the Amended Agreement of Limited Partnership of Registrant (the
"Agreement"), 9/10th of 1% of Distributable Cash From Operations, as defined, is
payable to the Corporate General Partner and 1/10 of 1% of Distributable Cash
From Operations is payable to the Individual General Partner.  The Corporate
General Partner and the Individual General Partner received $12,936 and $1,418,
respectively, from Registrant as their share of Distributable Cash From
Operations during the year ended December 31, 1996.  As owner of 200 Limited
Partnership Units, the Corporate General Partner received cash distributions of
$7,016 ($35.08 per Unit) during the year ended December 31, 1996.  See Item 6
for the net income allocated to the General Partners under the Agreement.
Registrant is not required to pay, and has not paid, any remuneration to the
officers or directors of the Corporate General Partner or any other affiliate of
Registrant during the year ended December 31, 1996.  Although Registrant is
authorized to pay the Individual General Partner a fee of up to $15,000 in any
year beginning after December 31, 1978, no fee will be paid so long as Mr. Carey
is the Individual General Partner and no fee may be paid to any successor
Individual General Partner appointed by Mr. Carey pursuant to the Agreement.

          In the future, the Corporate General Partner will expect to receive
9/10th of 1% of Distributable Cash From Operations, the Individual General
Partner will expect to receive 1/10th of 1% of Distributable Cash From
Operations and each General Partner will continue to be allocated the same
percentage of the profits and losses of Registrant as had been allocated in the
past.  For a description of the subordinated interest of the Corporate General
Partner and the Individual General Partner in Cash From Sales and Cash From
Financings, reference is made to the materials contained in the Prospectus under
the heading MANAGEMENT COMPENSATION.

                                     - 9 -
<PAGE>
 
Item 12.  Security Ownership of Certain Beneficial Owners and
          ---------------------------------------------------
          Management.
          -----------

          As of December 31, 1996, no person owned of record, or was known by
Registrant to own beneficially more than 5% of the Limited Partnership Units of
Registrant.

          The following table sets forth as of March 15, 1997 certain
information as to the ownership by directors and executive officers of
securities of Registrant:
<TABLE>
<CAPTION>
 
                                                 Number of Units
                              Name of             and Nature of       Percent
Title of Class            Beneficial Owner     Beneficial Ownership  of Class
---------------------  ----------------------  --------------------  ---------
<S>                    <C>                     <C>                  <C> 
 
Limited
  Partnership Units    William Polk Carey (1)        205 units          .51%
                       Francis J. Carey
                       George E. Stoddard
                       Madelon DeVoe Talley
                       Barclay G. Jones III
                       Lawrence R. Klein
                       Claude Fernandez
                       H. Augustus Carey
                       John J. Park
                       Michael D. Roberts            ___                ----

All executive officers
and directors as a
group (11 persons)                                   205  units         .51%
                                                     ===                ====

</TABLE> 

          (1) As of March 15, 1997, the Corporate General Partner, W. P. Carey &
Co., Inc., owned 205 Limited Partnership Units of Registrant.  William Polk
Carey, the sole shareholder of the Corporate General Partner, is the beneficial
owner of these Units.


          There exists no arrangement, known to Registrant, the operation of
which may at a subsequent date result in a change of control of Registrant.


Item 13.  Certain Relationships and Related Transactions.
          -----------------------------------------------


          For a description of transactions and business relationships between
Registrant and its affiliates and their directors and officers, see Notes 2 and
3 to the Financial Statements in Item 8.  Michael B. Pollack, Senior Vice
President and Secretary of the Corporate General Partner, is a partner of Reed
Smith Shaw & McClay which is engaged to perform legal services for Registrant.


          No officer or director of the Corporate General Partner or any other
affiliate of Registrant or any member of the immediate family or associated
organization of any such officer or director was indebted to Registrant at any
time since the beginning of Registrant's last fiscal year.

                                     - 10 -
<PAGE>
 
                                    PART IV
                                    -------

Item 14.  Exhibits, Financial Statement Schedules and Reports on
          ------------------------------------------------------
          Form 8-K
          --------


  (a) 1.  Financial Statements:
          ---------------------

          The following financial statements are filed as a part of this Report:

  Report of Independent Accountants.

  Balance Sheets, December 31, 1995 and 1996.

  Statements of Income for the years ended December 31, 1994, 1995 and 1996.

  Statements of Partners' Capital for the years ended December 31, 1994, 1995
  and 1996.

  Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996.

  Notes to Financial Statements.



  The financial statements are hereby incorporated by reference to pages 5 to 15
  of Registrant's Annual Report contained in Appendix A.



  (a) 2. Financial Statement Schedule:
         -----------------------------

         The following schedule is filed as a part of this Report:

  Schedule III - Real Estate and Accumulated Depreciation as of December 31,
  1996.

  Notes to Schedule III.



  Schedule III and notes thereto are hereby incorporated by reference to pages
  16 to 17 of Registrant's Annual Report contained in Appendix A.



          Financial Statement Schedules other than those listed above are
omitted because the required information is given in the Financial Statements,
including the Notes thereto, or because the conditions requiring their filing do
not exist.

                                     - 11 -
<PAGE>
 
  (a) 3   Exhibits:
          ---------

          The following exhibits are filed as part of this Report.  Documents
other than those designated as being filed herewith are incorporated herein by
reference.

<TABLE>
<CAPTION>

Exhibit                                                        Method of
   No.                         Description                      Filing
-------                        -----------                     ---------
<S>       <C>                                             <C>
 
  3.1      Amended Agreement of Limited Partnership of     Exhibit 3(B) to 
           Registrant dated as of October 20, 1978.        Registration 
                                                           Statement S-11) 
                                                           No. 2-62195
                                                           (Form 8-K)
 
  4.4      Straw Party Agreement between Registrant        Exhibit 12(H) to Regis-
           and Broomfield Properties Corp. ("BPC")         tration Statement (Form
           dated as of November 17, 1978.                  S-11) No. 2-62195
 
 
  4.8      Straw Party Agreement by and among Line 6       Exhibit 4.8 to Form
           Corp., Registrant and CPA(R):2 dated            10-K filed March 31,
           December 11, 1980.                              1982
 
  4.9      Secured Note from Line 6 Corp. to               Exhibit 4.9 to Form
           Connecticut General Life Insurance              10-K filed March 31,
           Company ("CG").                                 1982
 
  4.10     Mortgage from Line 6 Corp. to CG dated          Exhibit 4.10 to Form
           as of December 1, 1980.                         10-K filed March 31,
                                                           1982
 
  4.11     Assignment of Lease from Line 6 Corp. to        Exhibit 4.11 to Form
           CG dated as of December 1, 1980.                10-K filed March 31,
                                                           1982
 
  4.12     Agreement to furnish instruments defining       Exhibit 4.12 to Form
           the rights of holders of long-term debt         10-K filed March 31,
           of Registrant.                                  1982
 
  4.13     $11,000,000 Note dated May 30, 1986 from        Exhibit 4.2 to Regis-
           Creditanstalt-Bankverein ("Creditanstalt"),     trant's Form 8-K dated
           as Lender, to the Registrant and CPA(R):2,      July 14, 1986
           Borrower.
 
  4.14     Note Purchase Agreement dated as of May         Exhibit 4.3 to Regis-
           30, 1986 between Material Sciences              trant's Form 8-K dated
           Corporation ("MSC"), as Purchaser, and          July 14, 1986
           Creditanstalt, as Lender.
 
  4.15     Letter dated June 27, 1986 from Registrant      Exhibit 4.4 to Regis-
           and CPA(R):2 to Pre Finish Metals Incorporated  trant's Form 8-K dated
           ("PFM") and MSC regarding Note Purchase         July 14, 1986
           Agreement.
</TABLE>

                                     - 12 -
<PAGE>
 
<TABLE>
<CAPTION>
Exhibit                                                       Method of
   No.                       Description                        Filing
-------                      -----------                      ---------
<S>         <C>                                            <C>
 
   4.16     Mortgage and Security Agreement dated as of    Exhibit 4.5 to Regis-
            May 30, 1986 between Registrant and CPA(R):2,  trant's Form 8-K dated
            as Mortgagor, and Creditanstalt, as Mortgagee  July 14, 1986
            and Secured Party.
 
   4.17     Assignment of Agreements dated as of May 30,   Exhibit 4.6 to Regis-
            1986 from the Registrant and CPA(R):2, as      trant's Form 8-K dated
            Assignors, to Creditanstalt, as Assignee.      July 14, 1986
 
   4.18     Assignment of Sublease dated as of May 30,     Exhibit 4.7 to Regis-
            1986 from PFM, as Assignor, to the Registrant  trant's Form 8-K dated
            and CPA(R):2, as Assignees.                    July 14, 1986
 
   4.19     Letter Agreement dated June 26, 1986 among     Exhibit 4.8 to Regis-
            Creditanstalt, as Lender, and MSC and PFM.     trant's Form 8-K dated
                                                           July 14, 1986
 
   4.20     Joint Tenancy Agreement dated May 30, 1986     Exhibit 4.9 to Regis-
            between Registrant and CPA(R):2.               trant's Form 8-K dated
                                                           July 14, 1986
 
   10.1     Lease Agreement dated July 6, 1979 between     Exhibit A to Form 8-K
            Registrant and The Gap Stores, Inc.            filed July 20, 1979
 
   10.2     Straw Party Agreement between Registrant       Exhibit 12(H) to Regis-
            and BPC dated as of November 17, 1978.         tration Statement (Form
                                                           S-11) No. 2-62195
 
   10.4     Straw Party Agreement by and among Line 6      Exhibit 4.8 to Form
            Corp., Registrant and CPA(R):2 dated           10-K filed March 31,
            December 11, 1980.                             1982
 
   10.5     Lease and Agreement between Line 6 Corp.       Exhibit 10.5 to Form
            and Pre Finish Metals, Inc. dated as of        10-K filed March 31,
            December 1, 1980.                              1982
 
   10.6     Management Agreement between Registrant and    Exhibit 12(C) to Regis-
            Carey Corporate Property Management, Inc.      tration Statement (Form
                                                           S-11) No. 2-62195
 
   10.7     Support Agreement among Registrant, Carey      Exhibit 12(E) to Regis-
            Corporate Property Management, Inc. and        tration Statement (Form
            W.P. Carey & Co., Inc.                         S-11) No. 2-62195
 
   10.8     First Amendment to Lease and Agreement dated   Exhibit 10.2 to Regis-
            as of May 30, 1986 between Registrant and      trant's Form 8-K dated
            CPA(R):2, as Lessor, and PFM, as Lessee.       July 14, 1986
 
   10.9     Memorandum of First Amendment to Lease and     Exhibit 10.3 to Regis-
            Agreement dated May 30, 1986 between           trant's Form 8-K dated
            Registrant and CPA(R):2, as Lessor, and PFM,   July 14, 1986
            as Lessee.
 
   10.10    Letter dated June 30, 1986 from Creditanstalt  Exhibit 10.4 to Regis-
            to PFM regarding Lease as amended by First     trant's Form 8-K dated
            Amendment to Lease and Agreement, dated May    July 14, 1986
            30, 1986.
</TABLE>

                                     - 13 -
<PAGE>
 
<TABLE>
<CAPTION>
 
 
Exhibit                                                                     Method of
  No.                      Description                                        Filing
-------                    -----------                                      ---------
<S>         <C>                                                        <C>
   10.11    Lease Guaranty dated as of May 30, 1986                    Exhibit 10.5 to Regis-
            from MSC to Registrant and CPA(R):2 and                    trant's Form 8-K dated
            Creditanstalt.                                             July 14, 1986
 
   10.12    Sublease dated as of May 30, 1986 between                  Exhibit 10.6 to Regis-
            PFM and Walbridge Coatings ("Walbridge").                  trant's Form 8-K dated
                                                                       July 14, 1986
 
   10.13    Memorandum of Sublease dated as of May 30,                 Exhibit 10.7 to Regis-
            1986 by and between PFM and Walbridge.                     trant's Form 8-K dated
                                                                       July 14, 1986
 
   10.14    Lease Agreement between Registrant as landlord and         Exhibit 10.1 to Registrant's Form
            Varo as tenant.                                            8-K dated November 4, 1992
 
   10.15    Guaranty and Suretyship Agreement from IMO to Registrant.  Exhibit 10.2 to Registrant's Form
                                                                       8-K dated November 4, 1992
 
   10.16    Construction Contract between Registrant, as owner, and    Exhibit 10.3 to Registrant's Form
            Rule Construction Incorporated as contractor.              8-K dated November 4, 1992
 
   10.17    Construction Agency Agreement between Registrant, as       Exhibit 10.4 to Registrant's Form
            owner, and Varo as agent.                                  8-K dated November 4, 1992
 
   10.18    Promissory Note of Registrant to MetLife.                  Exhibit 10.5 to Registrant's Form
                                                                       8-K dated November 4, 1992
 
   10.19    Commercial Deed of Trust from Registrant to George C.      Exhibit 10.6 to Registrant's Form
            Dunlap, Jr. as trustee for the benefit of MetLife.         8-K dated November 4, 1992
 
   10.20    Indemnity Agreement between Registrant as indemnitor and   Exhibit 10.7 to Registrant's Form
            MetLife as indemnitee.                                     8-K dated November 4, 1992
 
   10.21    Lease Modification Agreement between Registrant and Varo.  Exhibit 10.8 to Registrant's Form
                                                                       8-K dated November 4, 1992
 
   28.1     Instruction Letters from Cigna Corporation                 Exhibit 28.1 to Regis-
            dated June 25, 1986 to Creditanstalt and                   trant's Form 8-K dated
            Louisville Title Agency regarding repayment                July 14, 1986
            of loan.
 
   28.2     Estoppel Certificate dated as of June 30,                  Exhibit 28.2 to Regis-
            1986 from PFM to Creditanstalt.                            trant's Form 8-K dated
                                                                       July 14, 1986
 
   28.3     Estoppel Certificate dated as of June 30,                  Exhibit 28.3 to Regis-
            1986 from Walbridge to Creditanstalt.                      trant's Form 8-K dated
                                                                       July 14, 1986
 
   28.4     Seller's/Lessee's Certificate dated as of                  Exhibit 28.4 to Regis-
            June 30, 1986 from PFM to Registrant and                   trant's Form 8-K dated
            CPA(R):2.                                                  July 14, 1986
 
   28.5     Bill of Sale dated as of May 30, 1986 from                 Exhibit 28.5 to Regis-
            PFM to Registrant and CPA(R):2.                            trant's Form 8-K dated
                                                                       July 14, 1986
</TABLE> 

                                     - 14 -
<PAGE>
 
<TABLE>
<CAPTION>

Exhibit                                                                 Method of
  No.                 Description                                         Filing
--------              -----------                                       ---------
<S>        <C>                                                     <C>
   28.6    Deed dated as of May 30, 1986 from PFM                  Exhibit 28.6 to Regis-
           to Registrant and CPA(R):2.                             trant's Form 8-K dated
                                                                   July 14, 1986
 
   28.7    Environmental Indemnity Agreement between Varo and IMO  Exhibit 28.1 to Registrant's Form
           as indemnitors and MetLife as indemnitee.               8-K dated November 4, 1992
 
   28.8    Press release dated June 30, 1993                       Exhibit 28.1 to Form 8-K
           announcing the suspension of secondary                  dated July 12, 1993
           market sales of Limited Partnership Units.
</TABLE>




  (b)     Reports on Form 8-K
          -------------------

          During the quarter ended December 31, 1996 the Registrant was not
required to file any reports on Form 8-K.

                                     - 15 -
<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.


                    CORPORATE PROPERTY ASSOCIATES
                    (a California limited partnership)

                    BY:  W. P. CAREY & CO., INC.


       4/3/97       BY:  /s/ Claude Fernandez
  ----------------       ---------------------
  Date                   Claude Fernandez
                         Executive Vice President and
                         Chief Administrative Officer
                         (Principal Financial Officer)


          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.

                    BY:  W. P. CAREY & CO., INC.

                         William P. Carey
                         Chairman of the Board
                         and Director
                         (Principal Executive Officer)

                         Francis J. Carey          BY: /s/ George E. Stoddard
                         President and Director        -----------------------
                                                       George E. Stoddard
                                                       Attorney in fact
                                                       April 3, 1997
                         George E. Stoddard
                         Chairman of the Investment
                         Committee and Director
 
                         Dr. Lawrence R. Klein
                         Chairman of the Economic Policy
                         Committee and Director

                         Madelon DeVoe Talley
                         Vice Chairman of the Board of
                         Directors and Director

       4/3/97        BY: /s/ Claude Fernandez
  ------------------     ---------------------
  Date                   Claude Fernandez
                         Executive Vice President and
                         Chief Administrative Officer
                         (Principal Financial Officer)

       4/3/97        BY: /s/ Michael D. Roberts
  ------------------     -----------------------
  Date                   Michael D. Roberts
                         First Vice President and Controller
                         (Principal Accounting Officer)

                                     - 16 -
<PAGE>
 
                                                         APPENDIX A TO FORM 10-K



                         CORPORATE PROPERTY ASSOCIATES
                       (A CALIFORNIA LIMITED PARTNERSHIP)









                                    1996 ANNUAL REPORT
<PAGE>
 
SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------


(In thousands except per unit amounts)
<TABLE>
<CAPTION>
 
 
                                    1992     1993     1994     1995     1996
                                   -------  -------  -------  -------  -------
<S>                                <C>      <C>      <C>      <C>      <C>
 
OPERATING DATA:
 
Revenues                            $4,102   $4,418   $4,480   $4,831   $4,589
 
Income before extraordinary
 item                                1,058    1,160    1,108    1,842    1,927
 
Net income                           1,058    1,160    1,108    1,842    1,672
 
Income before extraordinary
 item allocated:
   To General Partner                   11       12       11       19       19
   To Limited Partner                1,047    1,148    1,097    1,823    1,908
    Per Unit                         26.18    28.71    27.43    45.58    47.70
 
Net income allocated
   To General Partner                   11       12       11       19       17
   To Limited Partner                1,047    1,148    1,097    1,823    1,655
    Per Unit                         26.18    28.71    27.43    45.58    41.38
 
Distributions attributable (1):
   To General Partners                  12       13       13       13       14
   To Limited Partners               1,234    1,250    1,264    1,333    1,405
     Per unit                        30.86    31.25    31.53    33.32    35.13
 
Payment of mortgage
principal (2)                          972    1,178    1,306    1,417    1,425
 
BALANCE SHEET DATA:

Total assets                        26,776   25,531   24,418   23,530   22,226

Long-term
obligations (3)                     17,324    9,564   14,889   13,432   11,822
</TABLE> 


(1) Includes distributions attributable to the fourth quarter of each fiscal
    year payable in the following fiscal year less distributions in the first
    fiscal quarter attributable to the prior year.
(2) Represents scheduled mortgage principal amortization paid.
(3) Represents mortgage obligations due after more than one year.

                                     - 1 -
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

          Results of Operations
          ---------------------

          Net income for the year ended December 31, 1996 decreased by $170,000
as compared with the prior year, primarily due to the effect of $244,000 of
nonrecurring other income items included in 1995 operating results and an
extraordinary charge of $255,000 relating to the prepayment of higher interest
mortgage debt in 1996.  Income, after adjusting for the effects of these items
and a $23,000 loss from the sale of two properties, would have reflected an
increase of $352,000.  In spite of the lower net income for 1996, cash flow
provided by operations increased.

          The increase in income, as adjusted, in 1996 was due to decreases in
interest and depreciation expenses.  The decrease in interest expense was due to
the continuing amortization of the Partnership's  limited recourse mortgage debt
and the benefit from the refinancing of the mortgage loan collateralized by the
property leased to The Gap, Inc. (the "Gap") in April 1996.  As a result of the
refinancing, the annual interest rate on the Gap property mortgage loan
decreased to 7.25% from 10%.  Depreciation expense decreased as the result of
the full depreciation of certain components of properties of which the
Partnership uses component depreciation methods.  Leasing revenues were stable;
however, as described below, the Partnership anticipates a decrease in lease
revenues in 1997.  The extraordinary charge on the extinguishment of debt
resulted from prepayment charges and the costs incurred in connection with
paying off the mortgage loan on the Gap property.

          Net income for the year ended December 31, 1995 increased by $734,000,
compared with net income for the year ended December 31, 1994.  The results for
1995 benefited from certain nonrecurring items totaling $244,000 of nonrecurring
other income.  The results of operations for 1995 also benefited from a decrease
in property and interest expenses, and an increase in rental revenues.  The
decrease in property expense was due to higher costs incurred in 1994 in
connection with the assessment of liquidity alternatives which included
environmental reviews and property valuations.  The increase in lease revenues
was primarily the result of an increase in the variable mortgage interest rate
on the debt component of rentals from Pre Finish Metals Incorporated ("Pre
Finish").  The increased debt service payments on the Pre Finish mortgage loan
were directly passed through to the tenant in the form of a rent adjustment,
thereby having no impact on the Partnership's cash flow.  Interest expense
decreased as a result of principal payments of $1,417,000 of mortgage balances.
Other income included approximately $119,000 received in cash and securities as
final settlement of a bankruptcy claim on a lease which was terminated in 1985.

          Leasing revenues are projected to decrease in 1997 as the result of
the sale of two properties to Kobacker Stores, Inc. ("Kobacker") in November
1996, the anticipated sale of the property leased to Winn-Dixie Stores, Inc.
("Winn-Dixie") and the termination of one of the Partnership's leases with IMO
Industries, Inc. ("IMO").  The Kobacker, IMO and Winn-Dixie leases provided
annual revenues of $36,000, $91,000 and $102,000, respectively.  As the sale of
the Winn-Dixie property is subject to certain contingencies, there is no
assurance that the sale will be completed.  In the event that the Winn-Dixie
sale is not completed, the lease will expire in 1999.  A portion of the proceeds
of the Kobacker sale was applied as a principal prepayment on the mortgage loan
collateralized by the Kobacker properties.  The loan has been reamortized and
the annual debt service requirement on the loan has been reduced by $24,000.  In
addition, in October 1997, annual rents on the remaining IMO lease will increase
by $135,000.  Accordingly, $159,000 of the $229,000 decrease in cash flow will
be offset.  Because the rents on the IMO lease are recorded on a straight-line
basis for financial reporting purposes, the rental increase will not increase
reported income.  Operating cash flow will also benefit from the full year
effect of the mortgage refinancing on the Gap property.  As a result of this
refinancing, annual debt service decreased by $143,000.  In addition, a rent
increase on the Gap lease is scheduled in 1998.

          Because of the long-term nature of the Partnership's net leases,
inflation and changing prices have not unfavorably affected the Partnership's
revenues and net income.  Certain of the Partnership's net leases have increases
based on formulas indexed to increases in the Consumer Price Index ("CPI") and
may have caps on such CPI increases, periodic mandated rent increases or sales
overrides which should increase operating revenues in the future. Future rent
increases may be affected by changes in the method of the calculation of the
CPI.  Although there are indications that there may be legislation which changes
the method

                                     - 2 -
<PAGE>
 
of calculating the CPI, the Partnership cannot predict the outcome of any
proposed changes relating to the CPI formula.


          Financial Condition
          -------------------

          Except for a property in Garland, Texas formerly leased to IMO, all of
the Partnership's properties are leased to corporate tenants under long-term net
leases which generally require tenants to pay all operating expenses relating to
the leased properties.  The Partnership depends on relatively stable cash flow
from its net leases to meet operating expenses, service its debt, fund
distributions and maintain adequate cash reserves.  The Partnership maintains a
cash reserve to fund major outlays such as capital improvements and balloon debt
payments.  Such expenditures may also be funded from additional borrowing on the
Partnership's real estate portfolio.  Since its inception, the Partnership has
distributed to its partners a substantial portion of its cash flow.  The
Partnership's current strategy has been to utilize its funds from operations and
excess cash reserves to fund an increasing rate of distributions to its
partners.  The Partnership's cash balance of $865,000 at December 31, 1996 is
substantially unchanged from the prior year.

          Cash generated from operating activities has generally remained stable
or increased over the past several years.  Management generally considers its
projections of cash flows and cash provided from operations as well as the
Partnership's current cash balances rather than reported earnings in determining
the distributions paid to limited partners.  In 1996, cash provided from
operations of $2,827,000 was sufficient to fund distributions of $1,418,000 and
$1,325,000 of scheduled mortgage principal amortization.  Management believes
that its cash flow from operations and cash reserves are sufficient to continue
to sustain the rate of distributions  As discussed above, cash flows from
operating activities are expected to decrease in 1997 due to the termination of
certain leases; however, due to future rent increases and the current benefit
being realized from the refinancing of a mortgage loan, such decrease is not
expected to negatively impact the ability of the Partnership to maintain the
current distribution rate.

          The Partnership's net cash from investing activities for 1996
consisted of $356,000 received from the sale of  two properties leased to
Kobacker and $100,000 from the release of funds from an escrow account.  The
Partnership assigned $240,000 of such proceeds to mortgage lenders as mandatory
partial prepayments on mortgage loan obligations.  The Partnership was not
required to fund any improvements during 1996.  In connection with the February
1997 agreement to release IMO from a lease on one of its properties, IMO has
deposited $485,000 in an escrow account held by an affiliate of the Partnership
which will be used to fund necessary repairs and maintenance on the property.
Accordingly, the Partnership does not expect to use any cash reserves to
maintain or improve the property.  The Partnership is also considering the
possibility of attempting to sell the property in its current condition in which
event, it would be entitled to receive any unused funds remaining in escrow.  If
the proposed sale of the Winn-Dixie property is completed, the Partnership would
realize net proceeds of approximately $1,000,000.

          In addition to paying quarterly distributions to partners of
$1,418,000 and $1,325,000 of scheduled principal payment installments on
mortgage debt, the Partnership's financing activities in 1996 included paying
off the existing mortgage loan of $6,195,000 on the Gap property and obtaining a
new limited recourse mortgage loan of $6,400,000 collateralized by the Gap
property.  The excess funds from the refinancing were used to pay the costs of
obtaining the funds.  Annual cash flow will increase by $143,000 as a result of
the substantial decrease in the annual interest rate on the property loan.

          As a result of its stable cash flow and ability to maintain adequate
reserves, the Partnership has no lines of credit or other short-term financing
arrangements.  Management believes the Partnership has additional borrowing
capacity based on the unleveraged portion of its real estate portfolio and the
continuing principal reductions of existing mortgage loans.  Except for the
mortgage loan on the Gap property which matures with a balloon payment of
$5,608,000 in 1999, all of the Partnership's mortgage debt is fully amortizing,
with such loans scheduled to be fully paid between 1998 and 2011.

          Pre Finish may exercise an option to purchase its leased property
between June 1998 and 2003.  Pre Finish's  option would be exercisable at the
greater of fair market value or $7,873,000 plus 2 1/2% per annum from December
1980 (the date of the Partnership's purchase of the property) to the closing
date of sale.  The Pre Finish lease provides annual cash flow (rent, net of
mortgage debt service) of $497,000.  Broomfield

                                     - 3 -
<PAGE>
 
Tech Center Corporation has an option to purchase its leased properties.
Exercise of such option has not been consummated due to lack of agreement as to
the option purchase price.

          Except for a property in Garland, Texas, all of the properties are
currently leased to corporate tenants, all of whom are subject to environmental
statutes and regulations regarding the discharge of hazardous materials and any
related remediation obligations.  The Partnership normally structures its leases
to require tenants to comply with all laws.  In addition, substantially all of
the Partnership's net leases include indemnification provisions which require
tenants to indemnify the Partnership from all liabilities and losses related to
their operations at the leased properties.  If the Partnership undertakes to
clean up or remediate any of its leased properties, the General Partners believe
that in most cases the Partnership will be entitled to full reimbursement from
tenants for such costs.  If the Partnership either is responsible or becomes
responsible for such costs because of a tenant's failure to fulfill its
obligations, the General Partners believe that the ultimate resolution of the
aforementioned environmental matters will not have a material adverse effect on
the Partnership's financial condition, liquidity or results of operations.

          In 1994, the Partnership voluntarily conducted Phase II reviews of
certain of its properties based on the results of the Phase I environmental
reviews conducted in 1993.  The Partnership believes, based on the results of
such reviews, that its properties are in substantial compliance with Federal and
state environmental statutes and regulations.  Portions of certain properties
have been documented as having a limited degree of contamination, principally in
connection with either leakage from underground storage tanks or surface spills
from facility activities.  For those conditions which were identified, the
Partnership advised its tenants of such findings and of their obligations, if
any, to perform any required remediation.

          The General Partners are continuing to investigate ways to provide
liquidity for limited partners on a tax-effective basis.

                                     - 4 -
<PAGE>
 
                       REPORT of INDEPENDENT ACCOUNTANTS



To the Partners of
Corporate Property Associates:


          We have audited the accompanying balance sheets of Corporate Property
Associates (a California limited partnership) as of December 31, 1995 and 1996,
and the related statements of income, partners' capital and cash flows for each
of the three years in the period ended December 31, 1996.  We have also audited
the financial statement schedule included on pages 16 to 17 of this Annual
Report.  These financial statements and financial statement schedule are the
responsibility of the General Partners.  Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

          We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audits 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 the General Partners, 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 financial position of Corporate Property
Associates (a California limited partnership) as of December 31, 1995 and 1996,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.  In addition, in our opinion, the Schedule of Real Estate
and Accumulated Depreciation as of December 31, 1996, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the financial information required to be included therein
pursuant to Securities and Exchange Commission Regulation S-X Rule 12-28.



                                                  /s/ Coopers & Lybrand L.L.P.
New York, New York
March 17, 1997

                                     - 5 -
<PAGE>
 
                         CORPORATE PROPERTY ASSOCIATES
                       (a California limited partnership)

                                 BALANCE SHEETS

                           December 31, 1995 and 1996
<TABLE>
<CAPTION>
 
 
                                                   1995          1996
                                               ------------  ------------
<S>                                            <C>           <C>
    ASSETS:
Real estate leased to others:
 Accounted for under the
   operating method:
     Land                                      $ 3,546,994   $ 3,335,260
     Buildings                                  30,785,997    29,769,093
                                               -----------   -----------
                                                34,332,991    33,104,353
     Accumulated depreciation                   17,950,541    18,252,546
                                               -----------   -----------
                                                16,382,450    14,851,807
 Net investment in direct
   financing leases                              4,895,886     4,660,571
                                               -----------   -----------
     Real estate leased to others               21,278,336    19,512,378
Real estate held for sale                                        434,339
Cash and cash equivalents                          872,864       864,889
Escrow funds                                       100,000
Accrued interest and rents receivable              377,471       397,309
Other assets, net of accumulated
 amortization of $56,946 in 1995
 and $119,157 in 1996                              901,434     1,017,079
                                               -----------   -----------
       Total assets                            $23,530,105   $22,225,994
                                               ===========   ===========
 
    LIABILITIES:
Mortgage notes payable                         $14,888,807   $13,429,484
Accrued interest payable                           190,843       108,755
Accounts payable and accrued expenses               81,726        83,443
Prepaid rental income and security deposits        263,548       198,610
Accounts payable to affiliates                      46,304        45,840
                                               -----------   -----------
       Total liabilities                        15,471,228    13,866,132
                                               -----------   -----------
 
Commitments and contingencies
 
    PARTNERS' CAPITAL:
General Partners                                   (98,679)      (95,847)
 
Limited Partners (40,000
 Limited Partnership Units
 issued and outstanding)                         8,157,556     8,455,709
                                               -----------   -----------
       Total partners' capital                   8,058,877     8,359,862
                                               -----------   -----------
 
       Total liabilities and
       partners' capital                       $23,530,105   $22,225,994
                                               ===========   ===========
 
</TABLE>

The accompanying notes are an integral part of the financial statements.

                                     - 6 -
<PAGE>
 
                         CORPORATE PROPERTY ASSOCIATES
                       (a California limited partnership)

                              STATEMENTS of INCOME

              For the years ended December 31, 1994, 1995 and 1996

<TABLE>
<CAPTION>
 
 
                                                     1994        1995        1996
                                                  ----------  ----------  -----------
<S>                                               <C>         <C>         <C>
 
Revenues:
 Rental income                                    $3,907,692  $3,994,281  $4,030,182
 Interest income from direct financing leases        518,483     525,673     510,293
 Other interest income                                54,285      66,654      48,670
 Other income                                                    244,010
                                                  ----------  ----------  ----------
                                                   4,480,460   4,830,618   4,589,145
                                                  ----------  ----------  ----------
 
Expenses:
 Interest on mortgages                             1,598,614   1,524,837   1,280,995
 Depreciation                                      1,106,712   1,089,758     969,570
 General and administrative                          222,086     237,800     202,551
 Property expenses                                   428,358     109,460     123,722
 Amortization                                         16,511      27,068      62,211
                                                  ----------  ----------  ----------
                                                   3,372,281   2,988,923   2,639,049
                                                  ----------  ----------  ----------
 
   Income before loss on sale and
     extraordinary item                            1,108,179   1,841,695   1,950,096
 
Loss on sale of real estate                                                   22,871
                                                  ----------  ----------  ---------- 

   Income before extraordinary item                1,108,179   1,841,695   1,927,225
 
Extraordinary charge on extinguishment of debt                               255,438
                                                  ----------  ----------  ---------- 

   Net income                                     $1,108,179  $1,841,695  $1,671,787
                                                  ==========  ==========  ==========
 
Net income allocated to:
 Individual General Partner                       $    1,108  $    1,842  $    1,672
                                                  ==========  ==========  ==========
 
 Corporate General Partner                        $    9,974  $   16,575  $   15,046
                                                  ==========  ==========  ==========
 
 Limited Partners                                 $1,097,097  $1,823,278  $1,655,069
                                                  ==========  ==========  ==========
 
Net income per Unit:
 (40,000 Limited Partnership
 Units outstanding)
  Income before extraordinary item                    $27.43      $45.58      $47.70
  Extraordinary item                                                           (6.32)
                                                  ----------  ----------  ----------
                                                      $27.43      $45.58      $41.38
                                                  ==========  ==========  ==========
 </TABLE>

The accompanying notes are an integral part of the financial statements.

                                     - 7 -
<PAGE>
 
                         CORPORATE PROPERTY ASSOCIATES
                       (a California limited partnership)

                        STATEMENTS of PARTNERS' CAPITAL

              For the years ended December 31, 1994, 1995 and 1996

<TABLE>
<CAPTION>
                                                      Partners' Capital Accounts
                                        ----------------------------------------------------
                                                                                   Limited
                                                                                  Partners'
                                                        General      Limited     Amount Per
                                           Total       Partners      Partners     Unit  (a)
                                        ------------  -----------  ------------  -----------
<S>                                     <C>           <C>          <C>           <C>
Balance, December 31, 1993              $ 7,690,289    $(102,363)  $ 7,792,652         $195
 
Distributions                            (1,269,699)     (12,699)   (1,257,000)         (31)
 
Net income, 1994                          1,108,179       11,082     1,097,097           27
                                        -----------    ---------   -----------         ----
 
Balance, December 31, 1994                7,528,769     (103,980)    7,632,749          191
 
Distributions                            (1,313,535)     (13,135)   (1,300,400)         (33)
 
Change in unrealized appreciation
 in marketable securities                     1,948           19         1,929
 
Net income, 1995                          1,841,695       18,417     1,823,278           46
                                        -----------    ---------   -----------         ----
 
Balance, December 31, 1995                8,058,877      (98,679)    8,157,556          204
 
Distributions                            (1,417,554)     (14,354)   (1,403,200)         (35)
 
Change in unrealized appreciation in
marketable securities                        46,752          468        46,284            1
 
Net income, 1996                          1,671,787       16,718     1,655,069           41
                                        -----------    ---------   -----------         ----
 
Balance, December 31, 1996              $ 8,359,862    $ (95,847)  $ 8,455,709         $211
                                        ===========    =========   ===========         ====
</TABLE>

(a) Based on 40,000 Units issued and outstanding during all periods.



The accompanying notes are an integral part of the financial statements.

                                     - 8 -
<PAGE>
 
                         CORPORATE PROPERTY ASSOCIATES
                       (a California limited partnership)

                            STATEMENTS of CASH FLOWS
              For the years ended December 31, 1994, 1995 and 1996


<TABLE>
<CAPTION>
                                                                  1994          1995          1996
                                                              ------------  ------------  ------------
<S>                                                           <C>           <C>           <C>
Cash flows from operating activities:
  Net income                                                  $ 1,108,179   $ 1,841,695   $ 1,671,787
  Adjustments to reconcile net income
   to net cash provided by operating activities:
   Depreciation and amortization                                1,123,223     1,116,826     1,031,781
   Scheduled rents on direct financing leases in
     excess of (less than) amortization of unearned income         38,590        23,576       (16,780)
   Scheduled rents on operating leases less
     than income recognized                                       (67,500)      (67,500)      (67,500)
   Securities received in connection with settlement                            (44,561)
   Loss on sale of real estate                                                                 22,871
   Extraordinary charge on extinguishment of debt                                             255,438
   Net change in operating assets and liabilities                  13,980      (203,857)      (71,066)
                                                              -----------   -----------   -----------
      Net cash provided by operating
        activities                                              2,216,472     2,666,179     2,826,531
                                                              -----------   -----------   -----------
 
Cash flows from investing activities:
  Proceeds from sale of real estate, net                                                      355,958
  Release of escrow funds                                                                     100,000
  Purchase of note receivable                                     (77,254)
                                                              -----------                 -----------
      Net cash (used in) provided by
        investing activities                                      (77,254)                    455,958
                                                              -----------                 -----------
 
Cash flows from financing activities:
  Distributions to partners                                    (1,269,699)   (1,313,535)   (1,417,554)
  Proceeds from mortgage note payable                           2,400,000                   6,400,000
  Deferred refinancing costs                                     (272,746)                   (158,149)
  Prepayment charges paid on extinguishment of debt                                          (255,438)
  Payments of mortgage principal                               (1,305,967)   (1,417,411)   (1,424,875)
  Prepayment of mortgage payable                               (2,112,194)                 (6,434,448)
                                                              -----------   -----------   -----------
      Net cash used in financing activities                    (2,560,606)   (2,730,946)   (3,290,464)
                                                              -----------   -----------   -----------
 
      Net decrease in cash
        and cash equivalents                                     (421,388)      (64,767)       (7,975)
 
Cash and cash equivalents, beginning of year                    1,359,019       937,631       872,864
                                                              -----------   -----------   -----------
 
   Cash and cash equivalents, end of year                     $   937,631   $   872,864   $   864,889
                                                              ===========   ===========   ===========
 </TABLE>


The accompanying notes are an integral part of the financial statements.
 

                                     - 9 -
<PAGE>
 
                        CORPORATE PROPERTY ASSOCIATES
                       (a California limited partnership)

                         NOTES to FINANCIAL STATEMENTS



1.  Summary of Significant Accounting Policies:
    -------------------------------------------

     Use of Estimates:
     -----------------

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


     Real Estate Leased to Others:
     -----------------------------

      Real estate is leased to others on a net lease basis, whereby the tenant
        is generally responsible for all operating expenses relating to the
        property, including property taxes, insurance, maintenance, repairs,
        renewals and improvements.

      Corporate Property Associates (the "Partnership") diversifies its real
        estate investments among various corporate tenants engaged in different
        industries and by property type throughout the United States.

      The leases are accounted for under either the direct financing or
        operating methods.  Such methods are described below:


            Direct financing method - Leases accounted for under the direct
            -----------------------
            financing method are recorded at their net investment (Note 5).
            Unearned income is deferred and amortized to income over the lease
            terms so as to produce a constant periodic rate of return on the
            Partnership's net investment in the lease.

            Operating method - Real estate is recorded at cost, revenue is
            ----------------
            recognized as rentals are earned and expenses (including
            depreciation) are charged to operations as incurred.

      The Partnership assesses the recoverability of its real estate assets,
        including residual interests, based on projections of undiscounted cash
        flows over the life of such assets.  In the event that such cash flows
        are insufficient, the assets are adjusted to their estimated net
        realizable value.

      Substantially all of the Partnership's leases provide for either scheduled
        rent increases, periodic rent increases based on formulas indexed to
        increases in the Consumer Price Index or sales overrides.

     Depreciation:
     -------------

      Depreciation is computed using the straight-line method over the estimated
        useful lives of components of the particular properties, which range
        from 5 to 50 years.

     Cash Equivalents:
     -----------------

      The Partnership considers all short-term, highly-liquid investments that
        are both readily convertible to cash and have a maturity of generally
        three months or less at the time of purchase to be cash equivalents.
        Items classified as cash equivalents include commercial paper and money
        market funds.  Substantially all of the Partnership's cash and cash
        equivalents for both years ended December 31, 1995 and 1996 were held in
        the custody of three financial institutions.



                                   Continued

                                     - 10 -
<PAGE>
 
                         CORPORATE PROPERTY ASSOCIATES
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


     Other Assets:
     -------------

      Included in other assets are deferred rental income, deferred charges and
        marketable equity securities.  Deferred rental income is the aggregate
        difference for operating method leases between scheduled rents which
        vary during the lease term and income recognized on a straight- line
        basis.  Deferred charges are primarily costs incurred in connection with
        mortgage note refinancing and are amortized on a straight-line basis
        over the terms of the mortgages.

      The Partnership's marketable equity securities, which consist of 1,948
        shares of Storage Technology Corporation common stock are classified as
        available-for-sale securities and are reported at fair market value with
        the Partnership's interest in unrealized gains and losses on these
        securities reported as a separate component of partners' capital.

     Income Taxes:
     -------------

      A partnership is not liable for federal income taxes as each partner
        recognizes his proportionate share of the partnership income or loss in
        his tax return.  Accordingly, no provision for income taxes is
        recognized for financial statement purposes.

     Reclassification:
     -----------------

      Certain 1994 and 1995 amounts have been reclassified to conform to the
        1996 financial statement presentation.

2.   Partnership Agreement:
     ----------------------

      The Partnership was organized on July 24, 1978 under the Uniform Limited
        Partnership Act of the State of California for the purpose of engaging
        in the business of investing in and leasing industrial and commercial
        real estate.  The Corporate General Partner purchased 200 limited
        partnership units in connection with the Partnership's public offering.
        The Partnership will terminate on December 31, 2016, or sooner, in
        accordance with the terms of the Amended Agreement of Limited
        Partnership (the "Agreement").


      The Agreement provides that the General Partners are allocated 1% (1/10 of
        1% to the Individual General Partner, William P. Carey, and 9/10 of 1%
        to the Corporate General Partner, W. P. Carey & Co., Inc. ("W.P.
        Carey")) and the Limited Partners are allocated 99% of the profits and
        losses as well as distributions of Distributable Cash From Operations,
        as defined in the Agreement. The partners are also entitled to receive
        net proceeds from the sale of the Partnership properties as defined in
        the Agreement. The General Partners may be entitled to receive a
        subordinated preferred return, measured based upon the cumulative
        proceeds arising from the sale of Partnership assets. Pursuant to the
        subordination provisions of the Agreement, the preferred return may be
        paid only after the limited partners receive 100% of their initial
        investment from the proceeds of asset sales and a cumulative annual
        return ranging from 6% to 9% since the inception of the Partnership. The
        General Partners interest in such preferred return amounts to
        approximately $145,000 based upon the cumulative proceeds from the sale
        of assets since the inception of the Partnership through December 31,
        1996. The Partnership's ability to satisfy the subordination provisions
        of the Agreement may not be determinable until liquidation of a
        substantial portion of the Partnership's assets has been made.

3.      Transactions with Related Parties:
        ----------------------------------

      The Partnership holds a 60% ownership interest in a property as tenants-
        in-common with an affiliate which holds the remaining 40% interest.  The
        Partnership accounts for its assets and liabilities relating to tenants-
        in-common interests on a proportional basis.


                                   Continued

                                     - 11 -
<PAGE>
 
                         CORPORATE PROPERTY ASSOCIATES
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


      Under the Agreement, a division of W.P. Carey is entitled to receive a
        property management fee and reimbursement of certain expenses incurred
        in connection with the Partnership's operations.  General and
        administrative expense reimbursements consist primarily of the actual
        cost of personnel needed in providing administrative services necessary
        for the operation of the Partnership.  Property management fees and
        general and administrative expense  reimbursements are summarized as
        follows:
<TABLE>
<CAPTION>
                                                                       
                                             1994      1995      1996  
                                            -------  --------  --------
              <S>                           <C>      <C>       <C>     
              Property management fee       $44,581  $ 72,881  $ 66,815
              General and administrative                               
               expense reimbursements        51,607    44,250    43,956
                                            -------  --------  --------
                                            $96,188  $117,131  $110,771
                                            =======  ========  ======== 
</TABLE>

      During 1994, 1995 and 1996, fees aggregating $97,438, $18,338 and $10,329,
        respectively, were incurred for legal services performed by a firm in
        which the Secretary of the Corporate General Partner and other
        affiliates is a partner.

      The Partnership is a participant in an agreement with W.P. Carey and
        certain other affiliates for the purpose of leasing office space used
        for the administration of real estate entities and W.P. Carey and for
        sharing the associated costs.  Pursuant to the terms of the agreement,
        the Partnership's share of rental, occupancy and leasehold improvement
        costs is based on adjusted gross revenues, as  defined.  Net expenses
        incurred in 1994, 1995 and 1996 were $15,615, $61,243 and $30,477,
        respectively.

4.      Real Estate Leased to Others Accounted for Under the Operating Method:
        ----------------------------------------------------------------------

      Scheduled future minimum rents, exclusive of renewals, under
        noncancellable operating leases amount to approximately $3,708,000 in
        1997; $3,804,000 in each of the years 1998 through 2001; and aggregate
        approximately $23,526,000 through 2006.

      Contingent rents were approximately $56,000 in 1995 and $89,000 in 1996.
        There were no contingent rents in 1994.

5.      Net Investment in Direct Financing Leases:
        ------------------------------------------

      Net investment in direct financing leases is summarized as follows:
<TABLE>
<CAPTION>
                                                   December 31,      
                                             ------------------------
                                                1995         1996    
                                             -----------  -----------
              <S>                            <C>          <C>        
              Minimum lease payments                                 
               receivable                    $ 6,666,724  $ 5,945,229
              Unguaranteed residual value      5,075,137    4,823,041
                                             -----------  -----------
                                              11,741,861   10,768,270
               Less, Unearned income           6,845,975    6,107,699
                                             -----------  -----------
                                             $ 4,895,886  $ 4,660,571
                                             ===========  =========== 
</TABLE>

      Scheduled future minimum rents, exclusive of renewals, under
        noncancellable direct financing leases amount to approximately $477,000
        in each of the years 1997 to 1999, $492,000 in each of the years 2000
        and 2001 and aggregate approximately $5,945,000 through 2009.



                                   Continued

                                     - 12 -
<PAGE>
 
                         CORPORATE PROPERTY ASSOCIATES
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


6.      Mortgage Notes Payable:
        -----------------------

      Mortgage notes payable, all of which are limited recourse obligations of
        the Partnership or the partners, are collateralized by real property
        with a carrying amount as of December 31, 1996 of approximately
        $34,206,000, before accumulated depreciation, and the assignment of
        various leases.  As of December 31, 1996, mortgage notes payable bear
        interest at rates varying from 7.25% to 10.5% per annum and mature
        between 1998 and 2011.

      Scheduled principal payments during each of the next five years following
        December 31, 1996 are as follows:
<TABLE>
<CAPTION>
                                                              
                   Year Ending December 31,                   
                   ------------------------                   
              <S>                     <C>                     
                        1997                       $ 1,607,968
                        1998                         1,361,997
                        1999                         6,325,539
                        2000                           658,765
                        2001                           727,079
                        Thereafter                   2,748,136
                                                   -----------
                         Total                     $13,429,484
                                                   =========== 
</TABLE>
      Interest paid was $1,604,379, $1,536,914 and $1,363,083 in 1994, 1995 and
      1996, respectively.


7.  Distributions to Partners:
    --------------------------

      Distributions are declared and paid to partners quarterly and are
        summarized as follows:
<TABLE>
<CAPTION>
 
Year Ending     Distributions Paid to  Distributions Paid to  Limited Partners'
December 31,      General Partners       Limited Partners      Per Unit Amount
--------------  ---------------------  ---------------------  -----------------
<S>             <C>                    <C>                    <C>
      1994            $12,699                 $1,257,000             $31.43
                      =======                 ==========             ======
      1995            $13,135                 $1,300,400             $32.51
                      =======                 ==========             ======
      1996            $14,354                 $1,403,200             $35.08
                      =======                 ==========             ======
</TABLE>

    Distributions of $3,556 to the General Partners and $352,000 to the Limited
    Partners for the quarter ended December 31, 1996 were declared and paid in
    January 1997.

8.  Income for Federal Tax Purposes:
    --------------------------------

      Income for financial statement purposes differs from income for Federal
        income tax purposes because of the difference in the treatment of
        certain items for income tax purposes and financial statement purposes.
        A reconciliation of accounting differences is as follows:
<TABLE>
<CAPTION>
 
                                                 1994         1995         1996
                                              -----------  -----------  -----------
<S>                                           <C>          <C>          <C>
       Net income per Statements of Income    $1,108,179   $1,841,695   $1,671,787
       Excess tax depreciation                   (24,267)       1,115      (16,894)
       Other                                    (153,863)      (1,759)      38,919
                                              ----------   ----------   ----------
             Income reported for
               Federal income tax purposes    $  930,049   $1,841,051   $1,693,812
                                              ==========   ==========   ==========
 
</TABLE>

                                   Continued

                                     - 13 -
<PAGE>
 
                         CORPORATE PROPERTY ASSOCIATES
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


9.  Industry Segment Information:
    -----------------------------

      The Partnership's operations consist of the investment in and the leasing
        of industrial and commercial real estate.

      In 1994, 1995 and 1996, the Partnership earned its total operating
        revenues (rental income plus interest income from direct financing
        leases) from the following lease obligors:
<TABLE>
<CAPTION>
 
                               1994      %       1995      %       1996      %
                            ----------  ----  ----------  ----  ----------  ----
<S>                         <C>         <C>   <C>         <C>   <C>         <C>
 Pre Finish Metals
  Incorporated              $1,345,442   30%  $1,407,841   31%  $1,441,238   32%
 The Gap, Inc.               1,225,994   28    1,225,994   27    1,225,994   27
 IMO Industries, Inc.          846,743   19      846,743   19      846,743   19
 Unisource Worldwide           332,110    8      339,300    8      329,480    7
 Broomfield Tech Center
  Corporation                  269,946    6      294,136    6      300,136    7
 Kobacker Stores, Inc.         303,540    7      303,540    7      294,484    6
 Winn-Dixie Stores, Inc.       102,400    2      102,400    2      102,400    2
                            ----------  ---   ----------  ---   ----------  ---
                            $4,426,175  100%  $4,519,954  100%  $4,540,475  100%
                            ==========  ===   ==========  ===   ==========  ===
 
</TABLE>

10.  Sale of Real Estate:
     --------------------

      On October 17, 1996, Kobacker Stores, Inc. ("Kobacker") exercised options
        under the terms of its leases for properties in Eastlake and Cleveland,
        Ohio to purchase such properties for stated purchase prices of $165,000
        and $200,000, respectively, resulting in a loss of $22,871.  A portion
        of the net sales proceeds was assigned to the mortgage lender on the
        Kobacker properties as a partial prepayment.  As a result of the sale
        and the related mortgage prepayment of $139,507, Kobacker's annual rent
        will decrease by $36,225 and the Partnership's debt service on the
        mortgage loan will decrease $23,756.


11.     Real Estate Held for Sale:
        --------------------------

      On September 17, 1996, the Partnership entered into a purchase and sale
        agreement for the sale of the Partnership's property in Louisville,
        Kentucky, leased to Winn-Dixie Stores, Inc. ("Winn-Dixie") for
        $1,100,000, less selling costs, including a 5% brokerage commission.
        The transaction is subject to completion of certain due diligence
        procedures and the ability of the buyer to obtain debt financing.
        Accordingly, there can be no assurance that the sale of the property
        will be completed.  The Winn-Dixie lease, which is scheduled to expire
        in December 1999, provides annual rentals of $102,000.


12.  Settlement Agreement:
     ---------------------

      One of the Partnership's leases with IMO Industries, Inc. ("IMO") had been
        scheduled to terminate in March 1996.  The Partnership granted IMO an
        extension of three months to enable IMO to meet its lease obligation to
        return the property in suitable condition.  As IMO did not satisfy such


                                   Continued

                                     - 14 -
<PAGE>
 
                         CORPORATE PROPERTY ASSOCIATES
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued



        obligation, the Partnership refused to release IMO from the lease and
        continued to collect monthly rental payments from IMO.  On February 12,
        1997, the Partnership and IMO entered into an agreement which released
        IMO from the lease.  Under the agreement, IMO returned the property in
        "as is" condition to the Partnership, paid $485,766, representing
        estimated repair costs and construction management fees, into an escrow
        account held by an affiliate of the Partnership.  Funds in escrow will
        only be released under certain conditions including, but not limited to,
        the payment of repairs and maintenance for the property.


      Rents from the terminated IMO lease contributed annual revenues of
        approximately $91,000.  The Partnership's lease with IMO for an adjacent
        property currently provides for annual rent of $687,750 and has a lease
        term through 2002.


13.     Disclosures About Fair Value of Financial Instruments:
        ------------------------------------------------------

      The carrying amounts of cash, receivables and accounts payable and accrued
        expenses approximate fair value because of the short maturity of these
        items.

      The Partnership's estimate of fair value of mortgage notes payable
        approximates the carrying amount of such mortgage note at December 31,
        1996.  The fair value of debt instruments was evaluated using a
        discounted cash flow model with discount rates which take into account
        the credit of the tenants and interest rate risk.



14.     Environmental Matters:
        ----------------------

      The Partnership's properties are currently leased to corporate tenants,
        all of which are subject to environmental statutes and regulations
        regarding the discharge of hazardous materials and related remediation
        obligations.  The Partnership generally structures a lease to require
        the tenant to comply with all laws.  In addition, substantially all of
        the Partnership's net leases include provisions which require tenants to
        indemnify the Partnership from all liabilities and losses related to
        their operations at the leased properties.  Any costs of remediation are
        expected to be performed and paid by the affected tenant.  In the event
        that the Partnership absorbs a portion of any costs because of a
        tenant's failure to fulfill its obligations, the General Partners
        believe such expenditures will not have a material adverse effect on the
        Partnership's financial condition, liquidity or results of operations.

      In 1994, based on the results of Phase I environmental reviews performed
        in 1993, the Partnership voluntarily conducted Phase II environmental
        reviews on certain of its properties.  The Partnership believes, based
        on the results of Phase I and Phase II reviews, that its properties are
        in substantial compliance with Federal and state environmental statutes
        and regulations.  Portions of certain properties have been documented as
        having a limited degree of contamination, principally in connection with
        either leakage from underground storage tanks or surface spills from
        facility activities.  For those conditions which were identified, the
        Partnership advised the affected tenants of the Phase II findings and of
        their obligations to perform required remediation.

                                     - 15 -
<PAGE>
 
                         CORPORATE PROPERTY ASSOCIATES
                       (a California limited partnership)

              SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION

                            as of December 31, 1996
<TABLE>
<CAPTION>
                                                Initial Cost to        Cost                       Gross Amount at which Carried
                                                  Partnership       Capitalized     Decrease in   at Close of Period (c)(d)
                                              -------------------   Subsequent         Net        ------------------------------
Description                  Encumbrances     Land      Buildings  Acquisition (a) Investment (b) Land      Buildings      Total   
-----------                  ------------     ----      ---------  --------------- -------------  ----      ---------      -----
<S>                          <C>           <C>         <C>          <C>           <C>         <C>         <C>          <C>        
Operating Method:
Office, warehouse and
 manufacturing buildings
  leased to Broomfield                                                                                                            
 Tech Center Corporation      $ 2,250,640  $  354,970  $ 3,073,575   $  559,647               $  354,970  $ 3,633,222  $ 3,988,192
Office and manufacturing
 building leased to IMO
  Industries Inc.               2,485,302     685,026    2,006,559    2,617,652                  685,026    4,624,211    5,309,237
Office and manufacturing
 building formerly leased
  to IMO Industries Inc.                      221,474      448,641        4,384   $ (38,155)     183,319      453,025      636,344
Distribution facility
 and warehouse
 leased to
 The Gap, Inc.                  6,259,172     669,722   10,990,000      186,357                  669,722   11,176,357   11,846,079
Land leased to                                                                                                                    
 Kobacker Stores, Inc.            395,944   1,236,735                              (176,112)   1,060,623                 1,060,623
Warehouse and manufac-
 turing plant
 leased to Pre Finish                                                                                                             
 Metals Incorporated            1,408,609     381,600    9,882,278                               381,600    9,882,278   10,263,878
                              -----------  ----------  -----------   ----------   ----------  ----------  -----------  -----------
                              $12,799,667  $3,549,527  $26,401,053   $3,368,040   $(214,267)  $3,335,260  $29,769,093  $33,104,353
                              ===========  ==========  ===========   ==========   =========   ==========  ===========  ===========
 
Direct financing method:
Office building and
 warehouse leased to
Unisource Worldwide,                                                                                                              
 Inc.                                      $  298,655  $ 2,786,345                $(162,471)                           $ 2,922,529
Retail stores leased
 to Kobacker Stores,                                                                                                              
 Inc.                         $   629,817                2,008,850   $  105,207    (376,015)                             1,738,042
                              -----------  ----------  -----------   ----------   ---------                            -----------
                              $   629,817  $  298,655  $ 4,795,195   $  105,207   $(538,486)                           $ 4,660,571
                              ===========  ==========  ===========   ==========   =========                            ===========
 
Real estate held for sale:
  Supermarket
  leased to Winn-Dixie                    
  Stores, Inc.                             $   85,000  $ 1,004,300   $   12,604               $   85,000  $ 1,016,904  $ 1,101,904
                                           ==========  ===========   ==========               ==========  ===========  ===========  

<CAPTION>
                                                
                                                                Life on which
                                                                Depreciation
                                                                 in Latest
                                                                Statement of
                               Accumulated                        Income
Description                  Depreciation (d)  Date Acquired    is Computed
-----------                  ----------------  -------------    ----------- 
<S>                          <C>              <C>              <C>  
 
Operating Method:
Office, warehouse and
 manufacturing buildings
  leased to Broomfield                         November 17,
 Tech Center Corporation        $ 2,194,402       1978            10-30 YRS.
Office and manufacturing      
 building leased to IMO       
  Industries Inc.                 2,391,393    April 20, 1979     17-30 YRS.
Office and manufacturing      
 building formerly leased     
  to IMO Industries Inc.            453,025    April 20, 1979     17 yrs.
Distribution facility         
 and warehouse                
 leased to                    
 The Gap, Inc.                    8,189,583    July 6, 1979       5-50 yrs.
Land leased to                                 January 17, 1979
 Kobacker Stores, Inc.                            
Warehouse and manufac-        
 turing plant                 
 leased to Pre Finish                          December 11, 1980  5-30 yrs.
 Metals Incorporated              5,024,143    and June 30, 1986
                                -----------   
                                $18,252,546
                                ===========
                              
Direct financing method:      
Office building and           
 warehouse leased to          
Unisource Worldwide,                           December 28, 
 Inc.                                             1979
Retail stores leased          
 to Kobacker Stores,                           January 17,
 Inc.                                             1979
                              
Real estate held for sale:    
  Supermarket                 
  leased to Winn-Dixie                         December 28,
  Stores, Inc.                  $   667,565        1979
                                ===========
</TABLE> 

See accompanying notes to Schedule.

                                     - 16 -
<PAGE>
 
                         CORPORATE PROPERTY ASSOCIATES
                       (a California limited partnership)

                        NOTES to SCHEDULE of REAL ESTATE
                          and ACCUMULATED DEPRECIATION



    (a) Consists of the cost of improvements and acquisition costs subsequent to
        acquisition, including legal fees, appraisal fees, title costs and other
        related professional fees.

    (b) The decrease in net investment is due to (i) the amortization of
        unearned income producing a constant periodic rate of return on the net
        investment which is less than lease payments received and (ii) sales of
        property.
 
    (c) At December 31, 1996, the aggregate cost of real estate owned for
        Federal income tax purposes is $39,079,392.

    (d)

                           Reconciliation of Real Estate Accounted
                           ---------------------------------------
                              for Under the Operating Method
                              ------------------------------
<TABLE>
<CAPTION>
 
                                              December 31,
                                        -------------------------
                                           1995          1996
                                        -----------  ------------
<S>                                     <C>          <C>
 
     Balance at beginning
       of year                          $34,332,991  $34,332,991
 
     Sales                                              (126,734)
 
     Reclassification to real estate
       held for sale                                  (1,101,904)
                                        -----------  -----------
 
     Balance at close of year           $34,332,991  $33,104,353
                                        ===========  ===========
</TABLE>

                           Reconciliation of Accumulated Depreciation
                           ------------------------------------------
<TABLE>
<CAPTION>
 
                                              December 31,
                                        -------------------------
                                           1995          1996
                                        -----------  ------------
<S>                                     <C>          <C>
 
     Balance at beginning
       of year                          $16,860,783  $17,950,541
 
     Reclassification to real estate
       held for sale                                    (667,565)
 
     Depreciation expense                 1,089,758      969,570
                                        -----------  -----------
     Balance at close of year           $17,950,541  $18,252,546
                                        ===========  ===========
</TABLE> 

                                     - 17 -
<PAGE>
 
PROPERTIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
 
 
        LEASE                                                    TYPE OF OWNERSHIP
       OBLIGOR             TYPE OF PROPERTY        LOCATION           INTEREST
----------------------  ----------------------  ---------------  ------------------
<S>                     <C>                     <C>              <C>
 
THE GAP, INC.           Land and Distribution/  Erlanger,        Ownership of land
                        Warehouse Building      Kentucky         and building (1)
 
PRE FINISH METALS       Land and Warehouse/     Walbridge,       Ownership of a 60%
INCORPORATED            Manufacturing Plant     Ohio             interest in land
                                                                 and building (1)
 
BROOMFIELD TECH         Land and Office/        Broomfield,      Ownership of land
CENTER CORPORATION      Warehouse/Manufac-      Colorado         and buildings (1)
                        turing Buildings -
                        2 locations
 
UNISOURCE               Land and Office/        Anchorage,       Ownership of land
WORLDWIDE,              Warehouse Building      Alaska           and building
INC.
 
IMO INDUSTRIES, INC.    Land and Office/        Garland,         Ownership of land
                        Manufacturing           Texas            and building (1)
                        Building
 
(2)                     Land and Office/        Garland,         Ownership of land
                        Manufacturing           Texas            and building
                        Building
 
KOBACKER STORES,        Land and Retail Stores In California:    Ownership of land
INC.                      - 12 locations        Fontana,         and buildings (1)
                                                Merced, Rialto,
                                                Stockton and two
                                                in Sacramento
                                               In Ohio:
                                                Cuyahoga Falls,
                                                Freemont, Marion,
                                                Reynoldsburg
                                                and Tallmadge
                                               In Indiana:
                                                Anderson

WINN-DIXIE         Land and Supermarket        Louisville,       Ownership of land
STORES, INC.                                   Kentucky          and building
</TABLE> 


(1)  These properties are encumbered by mortgage notes payable.
(2)  This property is currently vacant.

                                     - 18 -
<PAGE>
 
MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED
     UNITHOLDER MATTERS
--------------------------------------------------------------------------------


          Except for limited or sporadic transactions, there is no established
public trading market for the Limited Partnership Units of the Partnership.  As
of December 31, 1996 there were 1,714 holders of record of the Limited
Partnership Units of the Partnership.

          In accordance with the requirements of the Partnership's Amended
Agreement of Limited Partnership (the "Agreement"), contained as Exhibit A to
the Prospectus, the Corporate General Partner expects to continue to make
quarterly distributions of Distributable Cash from Operations as defined in the
Agreement.  The following table shows the frequency and amount of distributions
paid per Unit since 1993:
<TABLE>
<CAPTION>
                            Cash Distributions Paid Per Unit
                            --------------------------------
                               1994       1995       1996
                            ----------  ---------  ---------
<S>                         <C>         <C>        <C>
 
          First quarter         $ 7.84     $ 7.94     $ 8.75
          Second quarter          7.85       8.00       8.76
          Third quarter           7.86       8.13       8.78
          Fourth quarter          7.88       8.44       8.79
                                ------     ------     ------
                                $31.43     $32.51     $35.08
                                ======     ======     ======
</TABLE>


REPORT ON FORM 10-K
--------------------------------------------------------------------------------


          The Corporate General Partner will supply to any owner of Limited
Partnership Units, upon written request and without charge, a copy of the Annual
Report on Form 10-K for the year ended December 31, 1996 as filed with the
Securities and Exchange Commission.

                                     - 19 -