<PAGE>   1
                                  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
         For the fiscal year ended December 31, 1998

                                  OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
    EXCHANGE ACT OF 1934
         For the transition period from       to

                         Commission file number 1-13092

                          MALAN REALTY INVESTORS, INC.

               (Exact name of registrant as specified in charter)

                 Michigan                                     38-1841410
        (State or other jurisdiction                       (I.R.S. Employer
      of incorporation or organization)                 Identification Number)

        30200 Telegraph Rd., Ste. 105                            48025
           Bingham Farms, Michigan                            (Zip Code)
  (Address of principal executive offices)

       Registrant's telephone number, including area code: (248) 644-7110

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

<S>                                                 <C>
           Title of Each Class                      Name of Each Exchange on Which Registered
          ---------------------                     -----------------------------------------
 Common Stock, Par Value $0.01 Per Share                     New York Stock Exchange

     91/2% Convertible Subordinated
           Debentures due 2004                               New York Stock Exchange
</TABLE>




                                                                               1


<PAGE>   2



    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 at least the past 90 days. YES [X] NO [ ]

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

    The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $65,321,000 (computed on the basis of $14.0625 per
share), which was the last sale price on the New York Stock Exchange on February
26, 1999. (For this computation, the Registrant has excluded the market value of
all shares of its Common Stock reported as beneficially owned by executive
officers and directors of the Registrant; such exclusion shall not be deemed to
constitute admission that any such person is an "affiliate" of the Registrant.)

    As of February 26, 1999, 5,168,742 shares of Common Stock, Par Value $0.01
Per Share, and $44,925,000 aggregate principal 9 1/2% Convertible Subordinated
Debentures due 2004, were outstanding.

                   LIST OF DOCUMENTS INCORPORATED BY REFERENCE

    Part III of this Form 10-K incorporates by reference information from the
Registrant's definitive proxy statement for the annual shareholders' meeting to
be held in 1999, which is to be filed with the Securities and Exchange
Commission within 120 days of the close of Registrant's fiscal year.








2


<PAGE>   3




                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                 PAGE
                                                                                                                ------
                                                           PART I
<S>        <C>                                                                                                    <C>
Item 1.    Business...........................................................................................     4
Item 2.    Properties.........................................................................................     5
Item 3.    Legal Proceedings..................................................................................     7
Item 4.    Submission of Matters to a Vote of Security Holders................................................     7

                                                           PART II

Item 5.    Market for Registrant's Common Stock and Related Stockholder Matters...............................     8
Item 6.    Selected Financial Data............................................................................     8
Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations..............     10
Item 7a.   Quantitative and Qualitative Disclosure About Market Risk..........................................     14
Item 8.    Consolidated Financial Statements and Supplementary Data...........................................     15
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............     32

                                                          PART III

Item 10.   Directors and Executive Officers of the Registrant.................................................     32
Item 11.   Executive Compensation.............................................................................     32
Item 12.   Security Ownership of Certain Beneficial Owners and Management.....................................     32
Item 13.   Certain Relationships and Related Transactions.....................................................     32

                                                             PART IV

Item 14.   Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K......................     33
Signatures ...................................................................................................     34
</TABLE>




                                                                               3


<PAGE>   4
                                     PART I

ITEM 1. BUSINESS

    Malan Realty Investors, Inc. (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") engaged in the ownership,
management, leasing, acquisition, development and redevelopment of commercial
retail properties. The Company's operating units are comprised of approximately
66 commercial retail properties. All financial results are aggregated into one
operating segment since the properties have similar economic characteristics.
The Company also manages properties owned by unrelated third parties on a
limited basis.

    The Company is one of the original developers of properties for Kmart
Corporation ("Kmart") and ranks among the leading operators of shopping centers
in the United States. Since its initial public offering ("IPO") in 1994, the
Company has maintained a strategy of reducing the Kmart concentration of its
portfolio by acquiring shopping centers anchored by national retailers other
than Kmart. Subsequent acquisitions include 18 community shopping centers
anchored by, or containing as a tenant, Wal-Mart Corporation. ("Wal-Mart"),
three community shopping centers located in Michigan having other national
retailers as the major tenant, and a 12-plex cinema complex leased and operated
by a major national motion picture company. In addition, two of the Company's
properties previously anchored by Kmart were redeveloped into multiplex cinema
complexes. These two theaters, completed in September 1998 and March 1999,
respectively, are operated by Cinemark USA ("Cinemark"), which is the nation's
sixth leading theater operator.

    At the time of the IPO Kmart represented 60.1% of the Company's rental
income and 77.5% of the gross leasable area within the Company's portfolio. In
1998, approximately 35.5% of the Company's rental income was derived from Kmart
and at December 31, 1998 50.9% of its gross leasable area was leased to Kmart.
Wal-Mart accounted for approximately 6.0% of the Company's rental income in 1998
and approximately 6.5% of its gross leasable area at December 31, 1998. The
Company's total gross leasable area has grown from approximately 4.7 million
square feet at the time of the IPO to approximately 6.2 million currently.

    Objectives of the Company include maximizing growth and enhancing the value
of its portfolio through effective operating, acquisition, development and
financing strategies and management policies. The Company believes that
attractive opportunities exist to increase rental revenues through effective
leasing and management of the properties in its portfolio. The Company has
demonstrated its ability to create additional value through the acquisition and
redevelopment of existing community shopping centers, freestanding retail stores
and entertainment facilities, as well as the development of new commercial
properties in selected geographical markets with an emphasis on small to
medium-sized communities where such properties can be positioned among the
leading centers in their respective trade area.

    The Company's primary target area is the Midwestern United States; however
management is aware that attractive opportunities may exist outside of this
geographic area and the Company may pursue such opportunities if management
believes they will enhance overall shareholder value. In addition, certain of
the properties owned by the Company have parcels of undeveloped land which are
available for future development. The Company will also pursue certain expansion
opportunities available within the current portfolio.

    The Company is taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company
generally is not subject to federal income taxes to the extent it distributes at
least 95% of its real estate investment trust taxable income (as defined in the
Code) to its shareholders.

    The Company presently has 22 full time employees and believes that its
relationship with its employees is good.





4


<PAGE>   5



ITEM 2. PROPERTIES

<TABLE>
<CAPTION>
                                              OWNERSHIP             YEAR                           GROSS                     
                                              INTEREST           DEVELOPED                       LEASABLE       PERCENT  
                                             (EXPIRATION             OR          LAND AREA      AREA (GLA)      LEASED   
PROPERTY                                   INCL. OPTIONS)        REDEVELOPED      (ACRES)      (SQ. FT.) (A)    OF GLA   
-------------------------------------------------------------------------------------------------------------------------
CALIFORNIA (1)                                                                                                           
<S>                                        <C>                      <C>          <C>              <C>             <C>    
Kmart, Colma, CA                                  Fee               1980          8.29             94,282         100%   
                                                                                                                         
ILLINOIS (15)                                                                                                            
Bricktown Square, Chicago, IL                     Fee               1987         26.00            306,433          97%   
                                                                                                                         
                                                                                                                         
                                                                                                                         
                                                                                                                         
                                                                                                                         
Wal-Mart Plaza, Champaign, IL                     Fee               1994          1.00             11,458         100%   
Kmart, Chicago, IL                                Fee               1977          8.51             96,268         100%   
Kmart, Fairview Heights, IL                Ground Lease (2051)      1976         12.65             96,268         100%   
Kmart, Franklin Park, IL                          Fee               1975          9.84             96,268         100%   
Wal-Mart Plaza, Jacksonville, IL                  Fee               1995          6.89             52,880         100%   
Kmart, Lansing, IL                                Fee               1976         10.48             96,268         100%   
Lincoln, IL                                       Fee               1975          4.86             39,797         100%   
                                                                                                                         
Kmart, Loves Park, IL                      Ground Lease (2026)      1971         12.50            106,084         100%   
Cinemark Theatre, Melrose Park, IL         Ground Lease (2048)      1998         10.90             66,747         100%   
Kmart, New Lenox, IL                              Fee               1977          8.72             88,580         100%   
Tinseltown 17, North Aurora, IL                   Fee               1998         11.36             65,416         100%   
Kmart, Rockford, IL                               Fee               1971         10.70            110,471         100%   
Sherwood Plaza, Springfield, IL                   Fee               1975         13.85            125,101          97%   
Woodriver Plaza, Woodriver, IL                    Fee               1987         19.40            147,470         100%   

INDIANA (9)                                                                                                              
Wal-Mart Plaza, Crawfordsville, IN                Fee               1996         11.32             25,750          80%   
Clifty Crossing, Columbus, IN                     Fee               1989         19.90            190,919          95%   
                                                                                                                         
Wal-Mart Plaza, Decatur, IN                       Fee               1997          5.80             36,300         100%   
Miller Mall, Gary, IN                      Ground Lease (2048)      1973         17.95            129,914           9%   
Wal-Mart Shops, Huntington, IN                    Fee               1995          1.00             12,485         100%   
Broadway Center, Merrillville, IN                 Fee               1974         19.89            177,692          93%   
Flatrock Village, Rushville, IN                   Fee               1988         14.00             73,608          98%   
Kmart, Valparaiso, IN                      Ground Lease (2050)      1974          9.61             93,592         100%   
Cherry Tree Plaza, Washington, IN                 Fee               1988         20.60            143,682          98%   
                                                                                                                         
<CAPTION>
                                              ANCHOR TENANTS                 
                                            (LEASE EXPIRATION/               
PROPERTY                                    OPTION EXPIRATION)               
--------------------------------------------------------------------------
CALIFORNIA (1)                                                               
<S>                                        <C>                               
Kmart, Colma, CA                                Kmart (2011/2061)                 
                                                                             
ILLINOIS (15)                                                                
Bricktown Square, Chicago, IL                Toys "R" Us (2013/2038)           
                                             Kids "R" Us (2014/2039)           
                                              Marshall's (2000/2015)            
                                              Sportmart (2003/2018)             
                                           Cineplex-Odeon (2008/2018)        
                                           Frank's Nursery (2009/2029)       
Wal-Mart Plaza, Champaign, IL                Wal-Mart (B)/Sam's Club (B)            
Kmart, Chicago, IL                              Kmart (2011/2061)                 
Kmart, Fairview Heights, IL                     Kmart (2001/2051)                 
Kmart, Franklin Park, IL                        Kmart (2011/2061)                 
Wal-Mart Plaza, Jacksonville, IL             Wal-Mart (B)/Country Mkt. (B)     
Kmart, Lansing, IL                              Kmart (2011/2061)                 
Lincoln, IL                                Stage Dept. Store (2009/2019)     
                                                Staples (2009)                   
Kmart, Loves Park, IL                           Kmart (2011/2026)                 
Cinemark Theatre, Melrose Park, IL         Cinemark USA (2019/2036) 
Kmart, New Lenox, IL                            Kmart (2011/2061)                 
Tinseltown 17, North Aurora, IL            Cinemark USA (2018/2033)          
Kmart, Rockford, IL                             Kmart (2011/2061)                 
Sherwood Plaza, Springfield, IL                 Kmart (2011/2061)                 
Woodriver Plaza, Woodriver, IL               Wal-Mart (2007/2037)              

INDIANA (9)                                                                  
Wal-Mart Plaza, Crawfordsville, IN               Wal-Mart (B)                      
Clifty Crossing, Columbus, IN                Wal-Mart (2009/2039)              
                                           Jay C Foods (2009/2034)           
Wal-Mart Plaza, Decatur, IN                      Wal-Mart (B)                      
Miller Mall, Gary, IN                       Wing Wah (2002/2007)              
Wal-Mart Shops, Huntington, IN                   Wal-Mart (B)                      
Broadway Center, Merrillville, IN               Kmart (2011/2061)                 
Flatrock Village, Rushville, IN              Wal-Mart (2008/2038)              
Kmart, Valparaiso, IN                           Kmart (2011/2050)                 
Cherry Tree Plaza, Washington, IN            Wal-Mart (2008/2038)              
                                           Jay C Foods (2008/2033)           
</TABLE>



                                                                               5
<PAGE>   6

<TABLE>
<CAPTION>
                                           OWNERSHIP              YEAR                           GROSS                      
                                           INTEREST            DEVELOPED                       LEASABLE       PERCENT       
                                          (EXPIRATION              OR         LAND AREA       AREA (GLA)      LEASED        
PROPERTY                                INCL. OPTIONS)         REDEVELOPED     (ACRES)       (SQ. FT.) (A)    OF GLA        
------------------------------------------------------------------------------------------------------------------------    
KANSAS (14)                                                                                                                 
<S>                                    <C>                         <C>          <C>              <C>             <C>        
Ace Hardware, Arkansas City, KS               Fee                  1976         4.41             39,797          56%        
Wal-Mart Plaza, Chanute, KS                   Fee                  1995         1.00             15,447          92%        
Wal-Mart Outparcel, El Dorado, KS             Fee                  1996         1.70             20,000          84%        
Big Lots, Emporia, KS                         Fee                  1976         6.55             39,797         100%        
Food Bonanza, Garden City, KS                 Fee                  1977         5.60             39,797         100%        
Great Bend, KS                                Fee                  1977         5.41             55,552                     
Orscheln Farm Supply, Hayes, KS               Fee                  1977         4.96             40,050         100%        
                                                                                                                            
Food 4 Less, Independence, KS                 Fee                  1976         4.12             39,797         100%        
Pine Ridge Plaza, Lawrence, KS                Fee                  1974        31.57            187,033         100%        
                                                                                                                            
Southwind Theater, Lawrence, KS               Fee                  1997         7.89             42,497         100%        
Standard Supply, Liberal, KS                  Fee                  1977         4.57             40,279         100%        
Kmart, Salina, KS                             Fee                  1978        16.00             87,406         100%        
Kmart, Topeka, KS                      Ground Lease (2049)         1974        13.93            108,960          77%        
South City Center, Wichita, KS                Fee                  1976        13.74            130,380         100%        
                                                                                                                            
MARYLAND (1)                                                                                                                
Kmart, Forestville, MD                        Fee                  1979         8.00             84,180         100%        
                                                                                                                            
MICHIGAN (7)                                                                                                                
Wal-Mart Outlot Shops,                        Fee                  1995         1.30             14,280         100%        
   Benton Harbor, MI                                                                                                        
Orchard-14, Farmington Hills, MI              Fee                  1973        11.49            139,670          98%        
Clinton Pointe Shopping Center,               Fee                  1992        11.72            135,330          92%        
   Clinton Township, MI                                                                                                     
                                                                                                                            
The Shops at Fairlane Meadows,                Fee                  1987        17.73            137,508         100%        
   Dearborn, MI                                                                                                             
                                                                                                                            
                                                                                                                            
Wal-Mart Plaza, Owosso, MI                    Fee                  1996        10.00             60,324         100%        
Wal-Mart Plaza, Sturgis, MI                   Fee                  1994         1.00             12,000         100%        
Westland Shopping Center,                     Fee                  1996         6.99             85,000         100%        
   Westland, MI                                                                                                             
MINNESOTA (1)                                                                                                               
Wal-Mart Plaza, Little Falls, MN              Fee                  1996         1.00             12,456         100%        
                                                                                                                            
MISSOURI (5)                                                                                                                
Kmart, Cape Girardeau, MO                     Fee                  1974         5.68             79,856         100%        
Kmart, Jefferson City, MO                     Fee                  1973         9.76            124,798         100%        
Prairie View Plaza, Kansas City, MO    Ground Lease (2050)         1975         3.24            104,490          96%         
Levitz Furniture, Manchester, MO              Fee                  1977        14.89            117,255          98%        
Kmart Plaza, Springfield, MO                  Fee                  1978         7.41             98,878         100%        

<CAPTION>
                                                                                                                            
                                          ANCHOR TENANTS                                                                    
                                        (LEASE EXPIRATION/                                                                  
PROPERTY                                OPTION EXPIRATION)                                                                  
----------------------------------------------------------------------                                                      
                                                                                                                            
KANSAS (14)                                                                                                                 
<S>                                    <C>                                                                                  
Ace Hardware, Arkansas City, KS        Westlake Hdwe. (2009/2019)                                                           
Wal-Mart Plaza, Chanute, KS                   Wal-Mart (B)                                                                  
Wal-Mart Outparcel, El Dorado, KS             Wal-Mart (B)                                                                  
Big Lots, Emporia, KS                     Big Lots (2002/2007)                                                              
Food Bonanza, Garden City, KS           Food Bonanza (2002/2029)                                                            
Great Bend, KS                                   (C)                                                                        
Orscheln Farm Supply, Hayes, KS          Orscheln Farm Supply                                                               
                                              (2004/2014)                                                                   
Food 4 Less, Independence, KS           Food 4 Less (2001/2026)                                                             
Pine Ridge Plaza, Lawrence, KS             Kmart (2011/2061)                                                                
                                            Kohl's (2019/2055)                                                              
Southwind Theater, Lawrence, KS        Hollywood Theaters (2017/2027)                                                       
Standard Supply, Liberal, KS             Standard Supply (2003/2013)                                                        
Kmart, Salina, KS                             Kmart (2011/2061)                                                             
Kmart, Topeka, KS                             Kmart (2011/2049)                                                             
South City Center, Wichita, KS                Kmart (2011/2061)                                                             
                                                                                                                            
MARYLAND (1)                                                                                                                
Kmart, Forestville, MD                        Kmart (2011/2061)                                                             
                                                                                                                            
MICHIGAN (7)                                                                                                                
Wal-Mart Outlot Shops,                     Wal-Mart (B)/Lowe's (B)                                                          
   Benton Harbor, MI                                                                                                        
Orchard-14, Farmington Hills, MI              Kmart (2011/2061)                                                             
Clinton Pointe Shopping Center,             OfficeMax (2007/2017)                                                           
   Clinton Township, MI                  Sports Authority (2017/2067)                                                       
                                                  Target (B)                                                                
The Shops at Fairlane Meadows,               Best Buy (2009/2024)                                                           
   Dearborn, MI                             Kids "R" Us (2003/2018)                                                         
                                                   Target (B)                                                               
                                                  Mervyn's (B)                                                              
Wal-Mart Plaza, Owosso, MI                        Wal-Mart (B)                                                              
Wal-Mart Plaza, Sturgis, MI                       Wal-Mart (B)                                                              
Westland Shopping Center,                Dick's Sporting Goods (2011)                                                       
   Westland, MI                                                                                                             
MINNESOTA (1)                                                                                                               
Wal-Mart Plaza, Little Falls, MN                  Wal-Mart (B)                                                              
                                                                                                                            
MISSOURI (5)                                                                                                                
Kmart, Cape Girardeau, MO                      Kmart (2011/2061)                                                            
Kmart, Jefferson City, MO                      Kmart (2011/2061)                                                            
Prairie View Plaza, Kansas City, MO            Kmart (2011/2050)                                                            
Levitz Furniture, Manchester, MO          Levitz Furniture (2004/2056)                                                      
Kmart Plaza, Springfield, MO                   Kmart (2011/2061)                                                            
</TABLE> 

6 
<PAGE>   7

<TABLE>
<CAPTION>
                                      OWNERSHIP          YEAR                          GROSS                                        
                                      INTEREST        DEVELOPED                      LEASABLE       PERCENT        ANCHOR TENANTS   
                                     (EXPIRATION          OR         LAND AREA      AREA (GLA)      LEASED       (LEASE EXPIRATION/ 
PROPERTY                           INCL. OPTIONS)     REDEVELOPED     (ACRES)      (SQ. FT.) (A)    OF GLA       OPTION EXPIRATION) 
------------------------------------------------------------------------------------------------------------------------------------
OHIO (2)                                                                                                                            
<S>                               <C>                    <C>          <C>           <C>               <C>       <C>                 
Wal-Mart Plaza, Mansfield, OH            Fee             1998         3.90             55,316          97%          Wal-Mart (B)    
Shannon Station, Van Wert, OH            Fee             1989        20.20            145,607          99%      Wal-Mart (2009/2039)
                                                                                                                Roundy's (2010/2030)
WISCONSIN (11)                                                                                                                      
Kmart Plaza, Ft. Atkinson, WI            Fee             1979         8.90             88,608         100%        Kmart (2004/2054) 
Kmart, Green Bay, WI                     Fee             1974        11.59            118,988         100%        Kmart (1999/2049) 
Country Fair Shopping Center,            Fee             1974        10.50            152,165          92%        Kmart (2011/2061) 
   Hales Corners, WI                                                                                      
Kmart, Janesville, WI                    Fee             1968        13.78            104,000         100%        Kmart (2003/2038) 
Kmart Plaza, Kenosha, WI                 Fee             1973         9.95            119,726         100%        Kmart (2011/2061) 
Westland Plaza, Madison, WI              Fee             1978        12.40            122,534          99%        Kmart (2002/2053) 
Kmart, Madison, WI                       Fee             1968        12.53            106,058         100%        Kmart (2002/2022) 
Northway Mall, Marshfield, WI     Ground Lease (2022)    1978        21.63            288,245          95%        Kmart (2011/2022) 
                                                                                                                JCPenney (1999/2019)
                                                                                                                Younkers (2004/2019)
Kmart, Milwaukee, WI                     Fee             1971        11.23            117,791         100%        Kmart (2011/2061) 
Kmart, Oshkosh, WI                       Fee             1968        10.00            104,000         100%        Kmart (2003/2038) 
Kmart, Stevens Point, WI                 Fee             1972         8.00            109,197         100%        Kmart (2011/2061) 
                                                                                    ---------        
   Total                                                                            6,208,785                                       
                                                                                    =========  
</TABLE>
                                     

(A) Includes only Company owned square footage.         
(B) These stores and the underlying pads are owned and managed by third parties
    not related to the Company. 
(C) The lease on this property was terminated effective November 1, 1995 as part
    of an agreement with Kmart and the property is currently vacant.

ITEM 3. LEGAL PROCEEDINGS

    In the ordinary course of business, the Company is involved in routine
litigation. However, there are no material legal proceedings presently pending
against the Company.

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

    None



                                                                               7


<PAGE>   8


                                     PART II

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

    The Company's common stock is listed on the New York Stock Exchange under
the symbol "MAL". As of February 26, 1999 the Company had approximately 223
stockholders of record. The following table sets forth, for the periods
indicated, the high and low sales price as reported on the New York Stock
Exchange, the dividends declared and paid by the Company per common share for
each such period, and the income tax treatment of such distributions:

<TABLE>
<CAPTION>
                                                                                       ORDINARY          RETURN
                                                                                       TAXABLE             OF
1997                               HIGH              LOW              DIVIDENDS        DIVIDEND          CAPITAL
--------------                 ------------      ------------      -------------      -----------        -------
<S>                            <C>               <C>               <C>                     <C>            <C>
First Quarter................  $      17.13      $      15.88      $      0.425             -%            100.0%
Second Quarter...............  $      18.38      $      16.38             0.425             -             100.0
Third Quarter................  $      18.00      $      16.88             0.425             -             100.0
Fourth Quarter...............  $      19.56      $      17.19             0.425             -             100.0
                                                                   ------------
                                                                   $      1.70  
                                                                   ============
1998          
--------------
First Quarter................  $      18.31      $      17.31      $      0.425            30.9%           69.1%
Second Quarter...............  $      18.13      $      17.13             0.425            30.9            69.1
Third Quarter................  $      17.75      $      16.25             0.425            30.9            69.1
Fourth Quarter...............  $      17.75      $      14.50             0.425            30.9            69.1
                                                                   ------------
                                                                   $      1.70  
                                                                   ============ 
</TABLE>

    The Company has paid regular quarterly distributions to its shareholders of
$.425 per share ($1.70 per share on an annualized basis) on the Common Stock
since the completion of the IPO. The Company intends to continue to declare
quarterly distributions to its shareholders. However, distributions by the
Company are determined by the Board of Directors and will depend on the
Company's actual results of operations, cash flows from operations, economic
conditions and other factors, such as debt service requirements, cash
requirements, including the repayment or refinancing of indebtedness, capital
expenditure requirements, including improvements to and expansions of existing
properties, the development of additional properties, and such other factors as
the Board of Directors deems relevant.

ITEM 6. SELECTED FINANCIAL DATA

    The following table sets forth selected financial data for the Company and
its predecessor, on a historical basis. Malan's predecessor is not a legal
entity but rather a combination of the principal real estate properties of a
partnership, Bricktown Square Associates ("BTS"), and the real estate management
operations of an affiliated S-Corporation, Malan Construction Company ("MCC"),
which managed the operations of BTS. Because of the commonality of ownership and
management, the financial results of operations of MCC and BTS are presented on
a combined basis. On June 24, 1994, MCC completed its IPO and began operating as
a real estate investment trust under the name of Malan Realty Investors, Inc.

    The selected financial data of the Company for the year ended December 31,
1994 consists of the operations of Malan's predecessor for the period beginning
January 1 through June 23, 1994 combined with the operations of Malan Realty
Investors, Inc. from June 24 through December 31, 1994. The selected financial
data after June 23, 1994 includes the effects of the IPO and related property
acquisitions. The following data should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in the
Form 10-K.




8


<PAGE>   9

                             SELECTED FINANCIAL DATA

                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,                   
                                                   ------------------------------------------------------------------
                                                      1998          1997         1996         1995           1994    
                                                   ----------   ----------   ----------     ----------    -----------
OPERATING DATA
Revenues
<S>                                                <C>          <C>          <C>            <C>           <C>       
   Rental income...............................    $   28,084   $   24,092   $  23,836      $   22,100    $   11,029
   Percentage and overage rents................         1,215        1,177       1,164             963           573
   Recoveries from tenants.....................         9,954        9,271       9,340           8,662         4,577
                                                   ----------   ----------   ---------      ----------    ----------
   Total rental revenues.......................        39,253       34,540      34,340          31,725        16,179
   Management and leasing fees.................            47           47          48              50           899
   Interest and other income...................           264          396         575             472           299
                                                   ----------   ----------   ---------      ----------    ----------
Total revenues.................................        39,564       34,983      34,963          32,247        17,377

Operating expenses
  Property operating and maintenance...........         2,876        2,867       2,769           1,961           823
  Other operating expenses.....................         1,615        1,493       1,481           1,216           841
  Real estate taxes............................         8,134        7,891       7,715           7,511         4,251
  General and administrative...................         2,068        1,545       1,664           1,463         1,488
  Depreciation and amortization................         5,633        5,068       4,920           4,597         2,125
  Impairment of real estate....................           431 
                                                   ----------   ----------   ---------      ----------    ----------
Total operating expenses.......................        20,757       18,864      18,549          16,748         9,528
                                                   ----------   ----------   ----------     ----------    ----------
Operating income...............................        18,807       16,119      16,414          15,499         7,849
Interest expense...............................        16,770       15,576      15,815          13,749         6,477
                                                   ----------   ----------   ---------      ----------    ----------
Income before minority interest and 
  extraordinary item...........................         2,037          543         599           1,750         1,372 
Minority interest in partnership...............                                                                  151
                                                   ----------   ----------   ---------      ----------    ----------
Income before extraordinary item...............         2,037          543         599           1,750         1,523
Extraordinary item:
  Loss on extinguishment of debt...............          (191)                                                                 
                                                   ----------   ----------   ---------      ----------    ----------
Net income.....................................    $    1,846   $      543   $     599      $    1,750    $    1,523
                                                   ==========   ==========   =========      ==========    ==========
Basic and diluted earnings per share...........    $     0.41   $     0.15   $    0.17      $     0.49    $     0.72
                                                   ==========   ==========   =========      ==========    ==========
Weighted-average basic shares..................         4,507        3,546       3,464           3,547         2,114
                                                   ==========   ==========   =========      ==========    ==========
Weighted-average diluted shares (1)............         4,524        3,591       3,475           3,547         2,114
                                                   ==========   ==========   =========      ==========    ==========
CASH FLOW DATA
Cash flows provided by operating activities....    $   10,069   $    5,149   $   7,117      $    8,541    $    9,369
Cash flows used for investing activities.......       (40,627)      (8,216)     (2,162)        (33,337)     (144,307)
Cash flows provided by (used for) 
  financing activities.........................        31,739       (2,182)     (7,084)         22,142       145,589
                                                   ----------   ----------   ---------      ----------    ----------
  Net Increase (decrease) in cash and cash 
    equivalents ...............................    $    1,181   $  (5,249)   $  (2,129)     $   (2,654)   $   10,651
                                                   ==========   ==========   =========      ==========    ==========
OTHER DATA
Funds from operations (2): 
Basic..........................................    $    8,094   $    5,581   $   5,467      $    6,310    $    3,567
                                                   ==========   ==========   =========      ==========    ==========
Diluted........................................    $   15,697   $   13,846   $  13,937      $   14,897    $    8,098
                                                   ==========   ==========   =========      ==========    ==========
Cash distributions declared per basic 
  common share.................................    $     1.70   $     1.70   $    1.70      $     1.70    $     0.85
                                                   ==========   ==========   =========      ==========    ==========
Total gross leasable area at period end........         6,209        5,653       5,707           5,695         5,407
                                                   ==========   ==========   =========      ==========    ==========
<CAPTION>

                                                                            DECEMBER 31,  
                                                   -----------------------------------------------------------------     
                                                      1998          1997         1996         1995           1994   
                                                   ----------   ----------   ---------      ----------    ----------
BALANCE SHEET DATA
<S>                                                <C>          <C>          <C>            <C>           <C>        
Real estate, before accumulated depreciation....   $  261,783   $  215,785   $ 207,590      $  206,085    $  174,173 
Total assets....................................      256,837      216,138     217,852         223,360       192,184 
Mortgage indebtedness...........................      122,279       88,585      83,643          83,734        43,123 
Convertible debentures..........................       44,925       56,680      61,285          61,285        63,795 
Convertible notes...............................       27,000       27,000      27,000          27,000        27,000 
Shareholders' equity............................       51,237       33,942      34,993          41,243        48,091
</TABLE>

(1) In accordance with Statement of Financial Accounting Standards, No. 128,
    "Earnings per Share", conversion of all of the debt securities would be
    antidilutive and as such are not included in the weighted-average diluted
    shares reported above.

(2) Management considers funds from operations ("FFO") to be an appropriate
    measure of performance of an equity real estate investment trust. The
    Company calculates FFO as net income or (loss) excluding gains and losses
    from sales of property, further adjusted for certain non-cash items
    including depreciation and amortization of real estate assets. It is the
    opinion of management that reduction for or inclusion of these items is not
    meaningful in evaluating income-producing real estate which, in general, has
    historically not depreciated. FFO does not represent cash generated from
    operating activities in accordance with generally accepted accounting
    principles and is not necessarily indicative of cash available to fund cash
    needs, including distributions. FFO should not be considered as an
    alternative to net income as an indicator of the Company's operating
    performance or as an alternative to cash flow as a measure of liquidity or
    the ability to pay distributions but rather as a supplemental tool to be
    used in conjunction with these factors in analyzing the Company's overall
    performance. See "Funds From Operations" in Item 7-"Management's Discussion
    and Analysis of Financial Condition and Results of Operations." Diluted FFO
    assumes the conversion of all debt securities.

                                                                               9
<PAGE>   10

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

OVERVIEW

    The following discussion should be read in conjunction with the "Selected
Financial Data" and the Company's consolidated financial statements and notes
thereto appearing elsewhere in this Form 10-K.

RESULTS OF OPERATIONS

Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997

    Total revenue increased approximately $4.581 million which is attributable
to increases in minimum rent and recoveries from tenants of approximately $3.992
million and $683,000, respectively resulting primarily from the Company's
acquisitions of properties. The acquisitions of a 12 shopping center portfolio
in May 1998, the Westland Shopping Center in February 1998, and the Southwind
Theater complex in Lawrence, Kansas in November 1997, accounted for
approximately $2.130 million, $852,000 and $630,000, respectively, of the
increase in revenues. Interest and other income decreased approximately $132,000
primarily due to nonrecurring lease termination income received in 1997 and
lower amounts of working capital available for investment in 1998 due to funding
of ongoing redevelopment projects.

    Total operating expenses increased approximately $1.893 million. Other
operating expenses and general and administrative expenses increased
approximately $122,000 and $523,000, respectively, primarily due to increased
compensation expense. Real estate taxes and depreciation and amortization
expense increased approximately $243,000 and $565,000, respectively, primarily
as a result of the acquisitions discussed above. A loss on impairment of real
estate of approximately $431,000 was recorded in 1998 due to the reduction of
the Company's carrying value in a shopping center in Gary, Indiana to its net
realizable value.

    As a result of a plan (the "Convertible Debenture Repurchase Plan") to
repurchase and retire up to $15 million aggregate principal of the Company's
9.5% Subordinated Convertible Debentures ("Debentures") due July 2004, the
Company incurred an extraordinary loss on extinguishment of debt of $191,000
primarily from the charge off of deferred financing costs associated with the
retired debt. The Company had repurchased $9.625 million principal of Debentures
through December 31, 1998.

    Interest expense (including related amortization of deferred financing
costs) increased approximately $1.194 million primarily due to increased debt
levels from borrowing on the Company's lines of credit, long-term financing
related to the acquisitions of properties and amortization of deferred financing
costs on such borrowings. Interest capitalized as part of the cost of
redevelopment projects totaled $447,000 in 1998 and 50,000 in 1997.

    Overall, net income increased approximately $1.303 million to $1.846 million
primarily as a result of an increase in operating income from acquisitions
offset by losses incurred from the write down of real estate assets and the
extinguishment of debt.

Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996

    Total revenue increased approximately $20,000 which is attributable to
increases in minimum and percentage rents of approximately $269,000 offset by
decreases in recoveries from tenants of approximately $69,000 and interest and
other income of $180,000. The increases in rents are primarily attributable to
additional revenues from the acquisition of the Southwind Theater in Lawrence,
Kansas and to the re-leasing and re-tenanting of two vacant former Kmart
buildings in late 1996 offset by revenues lost due to the termination of Kmart's
lease at North Aurora, Illinois. Increases in percentage rents of approximately
$13,000 are attributable to increases in sales for Kmart and Wal-Mart, the
Company's two largest tenants, offset by a decrease resulting from the loss of a
nonrecurring percentage rent of approximately $80,000 received from a tenant in
1996. The decrease in interest and other income resulted primarily from
brokerage commissions and lease termination income earned in 1996 as well as
decreased levels of cash available for investment resulting from the utilization
of $1.25 million of cash reserves to satisfy the repayment of the balance on a
mortgage collateralized by The Shops at Fairlane Meadows, ("Fairlane Meadows")
in Dearborn, Michigan. The resulting decrease in interest income is partially
offset by a decrease in interest expense on the mortgage.

    Total operating expenses increased approximately $315,000. Increases in
property operating and maintenance, real estate taxes and depreciation and
amortization were approximately $98,000, $176,000 and $148,000, respectively.
The increase in property operating and maintenance was primarily due to
increases in parking lot repairs and snowplowing. Real estate taxes increased
primarily due to increased assessments at Fairlane Meadows and other centers
offset by reductions obtained



10


<PAGE>   11



through successful appeals of tax assessments at certain centers. Depreciation
and amortization increased primarily due to depreciation on capitalized roof and
parking lot expenditures. General and administrative expenses decreased
approximately $119,000, primarily due to lower payroll costs of $48,000 and a
decrease in the cost of directors and officers insurance of $41,000.

    Interest expense, including related amortization of deferred financing
costs, decreased approximately $239,000. The decrease is due primarily to
conversions of $4.605 million aggregate principal amount of the Company's 9.5%
subordinated convertible debentures into shares of common stock during 1997. The
debenture conversions accounted for a net decrease in interest expense of
approximately $201,000. The refinancing of a $12.45 million mortgage utilized
for the acquisition of Fairlane Meadows with an $11.2 million loan with Daiwa
Finance Corporation accounted for a decrease in interest expense of
approximately $69,000. An increase in amortization of deferred financing costs
of approximately $40,000, related primarily to a $25 million line of credit
obtained from Greenwich Capital Markets, Inc. in November 1997, offset the
overall decrease from 1996.

    Overall, net income decreased $56,000 primarily as a result of increases in
non-cash expenses such as depreciation and amortization of approximately
$148,000 and amortization of deferred financing costs of $40,000 and operating
expenses which could not be recovered from tenants, offset by a decrease in
interest expense resulting from conversions of debentures into common stock.

Year 2000 Date Conversion

    Certain computer systems that have time-sensitive programs may not properly
recognize the year 2000 which could result in major system failures or
miscalculations. The Company has developed a high-level plan to address the
risks posed by the Year 2000 issue which includes the testing of internal
systems and inquiry of third parties with which the Company conducts business
including major tenants, vendors, contractors and creditors. The Company is in
the process of obtaining written confirmation of Year 2000 readiness from third
parties. Implementation and testing of Year 2000 remedies for all critical
systems have begun and are expected to be conducted throughout 1999 in
sufficient time to correct any additional Year 2000 issues that may be
identified.

    There are Year 2000 issues that will generally affect all businesses
including the Company, such as the Year 2000 compliance of public utility
companies and governmental agencies. If such issues occur, then there could be
an interruption in, or failure of, the Company's normal business activities,
that could have a material adverse effect on the Company's operations, liquidity
and financial condition. At this time, there is insufficient information to
evaluate the likelihood of such an occurrence.

    While the Company would generally expect to manage business interruptions
relating to Year 2000 issues in a manner similar to other potential interruption
issues encountered in the regular course of business, the Company is developing
certain contingency plans relating specifically to Year 2000 issues. For
example, the current contingency plan would allow the Company to operate for a
short period of time without the intervention of computers. The Company intends
to modify its contingency plans as necessary as it progresses with its Year 2000
project. However, the contingency plans are expected to provide relief only for
short periods, after which there could be an interruption in, or failure of, the
Company's normal business activities, that could have a material adverse effect
on the Company's operations, liquidity and financial condition. The Company does
not expect the costs to address the Year 2000 issue to be material.

Impact of Recently Adopted Accounting Principles

    In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. This Statement is
not expected to have a material impact on the Company's consolidated financial
statements. This Statement is effective for fiscal years beginning after June
15, 1999.

Funds From Operations

    Management considers Funds From Operations ("FFO") to be an appropriate
measure of performance of an equity real estate investment trust. Effective
beginning with the quarter ended June 30, 1998, the Company adopted the method
of calculating FFO as prescribed by the National Association of Real Estate
Investment Trusts (NAREIT) as further clarified in a 1995 opinion paper (the
"White Paper") which utilizes net income or loss excluding gains and losses from
sales of property and debt restructuring, further adjusted for certain non-cash
items including depreciation and amortization of real estate assets and other
nonrecurring items. It is the opinion of the management that reduction for, or
inclusion of these items, is


                                                                              11


<PAGE>   12


not meaningful in evaluating income-producing real estate which, in general, has
historically not depreciated. FFO does not represent cash generated from
operating activities in accordance with generally accepted accounting principles
and is not necessarily indicative of cash available to fund cash needs,
including distributions. FFO should not be considered as an alternative to net
income as an indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity or the ability to pay
distributions but rather, as a supplemental tool to be used in conjunction with
these factors in analyzing the Company's overall performance.

    The primary differences between the method in which the Company previously
computed FFO and the White Paper definition is in the treatment of amortization
of deferred financing costs and certain depreciation expense. Also effective
with the quarter ended June 30, 1998, the Company began reporting FFO on both a
basic and diluted basis. The diluted basis assumes the conversion of the
Company's convertible debentures and convertible notes into shares of common
stock as well as other common stock equivalents including those which are
antidilutive to earnings per share.

The following table shows the components that comprise the Company's FFO for
each of the three years ended December 31, 1998. Prior periods have been
restated to conform with the 1998 presentation (in thousands).

<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                          1998                   1997                    1996
                                                                      -----------             -----------             ----------
<S>                                                                   <C>                     <C>                     <C>       
Net income..........................................................  $     1,846             $       543             $      599
Depreciation and Amortization:
    Depreciation of buildings and improvements......................        5,399                   4,845                  4,766
    Amortization of tenant allowances and improvements..............          113                      97                     46
    Amortization of leasing costs...................................          114                      96                     56
Loss on impairment of real estate...................................          431
Loss on extinguishment of debt......................................          191
                                                                      -----------             -----------             ----------
Funds From Operations, Basic........................................        8,094                   5,581                  5,467

Interest expense on convertible securities..........................        7,287                   7,916                  8,117
Amortization of deferred financing costs on 
  convertible securities............................................          316                     349                    353
                                                                      -----------             -----------             ----------
Funds From Operations, Diluted......................................  $    15,697             $    13,846             $   13,937
                                                                      -----------             -----------             ----------
Weighted-average shares outstanding:
    Basic...........................................................        4,507                   3,546                  3,464
                                                                      -----------             -----------             ----------
    Diluted.........................................................        4,524                   3,591                  3,475
                                                                      -----------             -----------             ----------
    Diluted, assuming conversion of convertible securities..........        9,206                   8,704                  8,669
                                                                      -----------             -----------             ----------
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

    Cash flow from operations is the principal source of capital to fund the
Company's ongoing operations. Current efforts to increase cash flow have
centered on additional acquisitions of properties and redevelopment
opportunities at certain of the Company's existing properties

Acquisitions

    In February 1998, the Company acquired the Westland Shopping Center in
Westland, Michigan for $7.925 million. Terms of the agreement included
assumption of a $5.9 million, 8.02% mortgage with Wells Fargo Bank and a cash
payment of $2.025 million, which was funded out of proceeds from the Company's
line of credit with Greenwich Capital Markets, Inc. (the "Greenwich Capital
Line").

    In May 1998, the Company completed the acquisition of 12 community shopping
centers, each anchored by a Wal-Mart store and having approximately 329,000 feet
of gross leasable area ("GLA"). Total cost of the acquisition was approximately
$29.6 million which was funded out of proceeds of an $18 million, 15-year, 7.43%
fixed rate mortgage loan with Bloomfield Acceptance Company and funds from
existing lines of credit. The loan is collateralized by 12 cross-collateralized
and cross-defaulted mortgages or separate deeds of trust on the properties which
were acquired by a wholly owned subsidiary, Malan Midwest, LLC. As part of the
purchase agreement, the Company acquired an additional community shopping center
in Decatur, Illinois in January 1999. The 45,000 square foot center was acquired
for $4.68 million which was funded out of the Company's line of credit with NBD
First Chicago (the "NBD Line") and from available cash reserves.

Redevelopments

    In September 1998, construction was completed on a 61,000 square foot,
17-plex theater complex in North Aurora, Illinois to replace a freestanding
former Kmart building. In November 1998 the Company provided a construction
allowance of approximately $3.9 million to the theater operator, Cinemark USA
("Cinemark"). The property is being leased by Cinemark



12


<PAGE>   13


under a ground lease with a base term of twenty years. The total costs of the
development to the Company including capitalized interest, taxes and leasing
commissions were approximately $4.4 million and were funded out of proceeds from
the Greenwich Capital Line.

    The Company completed the redevelopment of a 40,000 square foot former Kmart
site in Lincoln, Illinois in September 1998. Stage Stores, Inc. is leasing
15,000 square feet of the building. Total cost of renovating the building
including a tenant building allowance was approximately $860,000 which was
funded from the Greenwich Capital Line. In January 1999, the Company entered
into a lease with Staples, Inc. for the balance of the building.

    In March 1999, construction was completed at the Company's property in
Melrose Park, Illinois on a 61,000, 10-plex theater complex under a separate
agreement with Cinemark to replace a freestanding former Builders Square
building which had been vacant since 1995.  The Company provided a construction
allowance to Cinemark of approximately $3.9 million which was funded out of
available cash reserves. Total costs of the development including capitalized
interest, taxes and leasing commissions are estimated to be approximately $4.6
million.

    Phase I of the Company's redevelopment of its existing retail center in
Lawrence, Kansas is completed. In October 1998, Kohl's Corporation ("Kohl's")
completed construction of an 80,000 square foot department store at the center.
The expansion and remodeling of the Kmart store at the center was completed in
December 1998. The Company also plans a second phase of redevelopment which
includes the construction of approximately 60,000 square feet of additional
retail space on the property in 1999. Total cost of the project, including
additional land acquired previously, is expected to be approximately $9.0
million of which $5.9 million has been incurred through December 31, 1998. The
balance of the cost is anticipated to be funded with proceeds from the Company's
lines of credit.

    Another former Kmart store in Arkansas City, Kansas is being subdivided and
redeveloped to accommodate a 24,000 square foot Ace Hardware store. Cost of the
redevelopment is estimated to be approximately $591,000 and is anticipated to be
funded from the Greenwich Capital Line. A Spring 1999 completion date is
anticipated.

Capital Expenditures

    The Company incurs capital expenditures in the ordinary course of business
in order to maintain its properties. Such capital expenditures typically include
roof, parking lot and other structural repairs, some of which are reimbursed by
tenants. In 1998, the Company incurred $745,000 for capital expenditures which
were funded primarily out of reserves required for the Company's collateralized
mortgages and partially from operating cash flows. Approximately $1.1 million is
anticipated to be incurred in 1999 for capital expenditures, also to be funded
from similar sources.

    The Company will occasionally provide inducements such as building
allowances or space improvements and/or pay leasing commissions to outside
brokers in order to procure new tenants or renegotiate expiring leases with
current tenants. The total cost of these expenditures in 1998 excluding costs
associated with the redevelopment projects discussed above was $324,000. These
expenditures are generally funded by operating cash flows and increased revenues
resulting from such expenditures. In 1999, the Company anticipates spending
approximately $333,000 on such expenditures.

Sources of Capital

    In June 1998, the Company issued 1.3 million shares of common stock at a
price of $17.75 per share. Net proceeds after underwriting discounts and
expenses totaled $21.5 million and were used to pay down the Company's lines of
credit and for general corporate purposes including working capital.

    In June 1998, Elias Brothers Restaurants, Inc., which was an outlot tenant
at the Company's community shopping center in Owosso, Michigan, exercised an
option to purchase its demised premises. Net proceeds from the sale of
approximately $240,000 were used to pay down a portion of the balance on the
existing mortgage and for working capital.

    The Company has entered into a letter of intent to sell its interest in the
Miller Mall, a 130,000 square foot shopping center in Gary, Indiana. The sale is
anticipated to close in March 1999. Net proceeds from a sale of approximately
$600,000 are anticipated to be used to pay down outstanding indebtedness.

    The Company has entered into an agreement to sell its property in Colma,
California for approximately $7.7 million. The property is currently included as
collateral for the Company's Securitized Mortgage Loan. Net proceeds from the
sale after payments required for release of the property from the collateral
pool and selling expenses are anticipated to be approximately $3.4 million and
are anticipated to be used for general corporate purposes including payment of
other debt and working capital. The sale is expected to be completed in March
1999. 



                                                                              13


<PAGE>   14
    The Company has outstanding as of December 31, 1998 and 1997 $44.925 million
and $56.680 million, respectively of, Debentures and $27 million of Convertible
Notes (the "Notes"), which are convertible into shares of Common Stock at a
price of $17.00 per share. The Debentures carry a rating of B3 from Moody's
Investors Services, Inc. During 1998, $2.142 million aggregate principal of
Debentures were converted into 125,286 shares of Common Stock. Through December
31, 1998, the Company had made repurchases under the Convertible Debentures
Repurchase Plan of $9.65 million principal of Debentures which were funded from
available working capital.

    The Company anticipates that its cash flow from operations will generally be
sufficient to fund its cash needs for payment of expenses, capital expenditures
(other than acquisitions and redevelopments) and to maintain the Company's
current distribution policy. The Company currently has two lines of credit
available for temporary working capital needs and intends to enter into other
secured and unsecured financing agreements in the future as the need arises.

    The NBD Line calls for monthly payments of interest at the rate of 200 basis
points over LIBOR, is collateralized by the Company's interest in Orchard-14
Shopping Center in Farmington Hills, Michigan and is due March 31, 1999. The
Greenwich Capital Line is a revolving line of credit which expires November 1999
and is collateralized by 16 properties owned by the Company's wholly owned
subsidiary, Malan Revolver, Inc. The Greenwich Capital Line requires monthly
payments of interest only at LIBOR plus 150 basis points. Amounts outstanding as
of February 26, 1999 under the Greenwich Capital Line and the NBD Line were 
$17.8 million and $4.5 million, respectively which was the total borrowing 
available under each line.

    The Company is in the process of renegotiating and extending the NBD Line
and is in discussions with several lenders to replace the Greenwich Capital Line
and obtain permanent financings on several of its unencumbered properties. The
Company intends to reduce its outstanding Debentures and related interest costs
by making repurchases of these securities in the open market and replacing them
with lower cost, fixed rate financings.

    The Company's major tenant, Kmart, accounted for approximately 35.6% of its
gross revenue and 35.5% of its base minimum rent in 1998. Since its IPO, the
Company has substantially reduced its exposure to Kmart through acquisitions and
redevelopments of properties, lease termination agreements with Kmart and the
assumption of certain Kmart sublease agreements. At the IPO, Kmart accounted for
approximately 60.1% of the Company's annualized base minimum rents.

    Each of the above statements regarding future revenues or expenses may be a
"forward-looking statement" within the meaning of the Securities Exchange Act of
1934. Such statements are subject to important factors that could cause actual
results to differ materially from those in the forward-looking statement,
including the factors set forth in the Management's Discussion and Analysis of
Financial Condition and Results of Operations.

INFLATION

    The Company's long-term leases contain provisions to mitigate the adverse
impact of inflation on its results from operations. Such provisions include
clauses entitling the Company to receive (i) scheduled base rent increases and
(ii) percentage rents based upon tenants' gross sales, which generally increase
as prices rise. In addition, many of the Company's non-anchor leases are for
terms of less than ten years, which permits the Company to seek increases in
rents upon re-rental at then current market rates if rents provided in the
expiring leases are below then existing market rates. Most of the Company's
leases require tenants to pay a share of operating expenses, including common
area maintenance, real estate taxes, insurance and utilities, thereby reducing
the Company's exposure to increases in costs and operating expenses resulting
from inflation.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

    The Company has exposure to interest rate risk on its debt obligations and
interest rate instruments. Based on the Company's outstanding variable rate debt
at December 31, 1998, a one percent increase or decrease in interest rates would
decrease or increase, respectively, the Company's earnings and cash flows by
approximately $223,000 on an annualized basis.

    Based on the Company's consolidated debt and interest rates in effect at
December 31, 1998, a one percent increase or decrease in interest rates would
decrease or increase the fair value of debt by approximately $2.5 million.




14


<PAGE>   15


ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                                         PAGE
                                                                                                                        NUMBER
                                                                                                                        ------
<S>                                                                                                                        <C>
Independent Auditors' Report.............................................................................................  16
Consolidated Balance Sheets as of December 31, 1998 and 1997.............................................................  17
Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 1998..................  18
Consolidated Statements of Shareholders' Equity for Each of the Three Years in the Period Ended December 31, 1998........  19
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1998..................  20
Notes to Consolidated Financial Statements...............................................................................  21
Consolidated Financial Statement Schedule III--Real Estate and Accumulated Depreciation..................................  30
</TABLE>

    Schedules other than the one above are omitted because they are not
applicable, not required, or the information required to be set forth therein is
included in the consolidated financial statements or the notes thereto.









                                                                              15


<PAGE>   16


                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Malan Realty Investors, Inc.

    We have audited the consolidated financial statements and the consolidated
financial statement schedule listed at Item 8 of Malan Realty Investors, Inc.
and Subsidiaries (the "Company"). These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
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
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also in our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.




/s/DELOITTE & TOUCHE LLP
Detroit, Michigan
January 28, 1999





16


<PAGE>   17




                  MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                      1998                 1997
                                                                                    ---------           --------
<S>                                                                                 <C>                 <C>     
ASSETS
     Real Estate (Notes 2 and 9):
         Land....................................................................   $  28,178           $ 22,302
         Buildings and improvements..............................................     233,605            193,483
                                                                                    ---------           --------
            Total................................................................     261,783            215,785
            Less: accumulated depreciation.......................................     (21,286)           (15,817)
                                                                                    ---------           --------
            Total................................................................     240,497            199,968
     Other Assets:                             
         Accounts receivable (net of allowance of $140 and $78 at
           December 31, 1998 and 1997)...........................................       1,662              1,608
         Deferred financing and other............................................       9,450             10,705
         Cash and cash equivalents...............................................       2,898              1,717
         Escrow deposits (Note 2)................................................       2,330              2,140
                                                                                    ---------           --------
            TOTAL ASSETS.........................................................   $ 256,837           $216,138
                                                                                    =========           ========
LIABILITIES
     Mortgages (Note 2)..........................................................   $ 122,279           $ 88,585
     Convertible debentures (Note 2).............................................      44,925             56,680
     Convertible notes (Note 2)..................................................      27,000             27,000
     Deferred income.............................................................       1,160              2,102
     Accrued distributions payable...............................................       2,200              1,620
     Accounts payable and other..................................................       2,871                845
     Accrued property taxes......................................................       1,265              1,184
     Accrued interest payable....................................................       3,900              4,180
                                                                                    ---------           --------
            Total liabilities....................................................     205,600            182,196
                                                                                    =========           ========
COMMITMENTS AND CONTINGENCIES (NOTE 4)

SHAREHOLDERS' EQUITY (NOTES 3, 7 AND 8)
     Common stock ($.01 par value, 30 million shares authorized, 5,168,742 
         and 3,737,936 shares issued and outstanding as of 
         December 31, 1998 and 1997).............................................          52                 37
     Additional paid in capital..................................................      74,117             50,485
     Accumulated distributions in excess of net income...........................     (22,932)           (16,580)
                                                                                    ---------           --------
            Total shareholders' equity...........................................      51,237             33,942
                                                                                    ---------           --------
         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..............................   $ 256,837           $216,138
                                                                                    =========           ========
</TABLE>



                 See Notes to Consolidated Financial Statements

                                                                              17


<PAGE>   18



                  MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                 1998              1997              1996
                                                                              ---------          ---------         --------
<S>                                                                           <C>                <C>               <C>     
REVENUES
  Minimum rent (Note 4)...................................................    $  28,084          $  24,092         $ 23,836
  Percentage and overage rents............................................        1,215              1,177            1,164
  Recoveries from tenants.................................................        9,954              9,271            9,340
  Interest and other income...............................................          311                443              623
                                                                              ---------          ---------         --------
     (Total Revenues).....................................................       39,564             34,983           34,963
                                                                              ---------          ---------         --------
EXPENSES
  Property operating and maintenance......................................        2,876              2,867            2,769
  Other operating expenses................................................        1,615              1,493            1,481
  Real estate taxes.......................................................        8,134              7,891            7,715
  General and administrative..............................................        2,068              1,545            1,664
  Depreciation and amortization...........................................        5,633              5,068            4,920
  Impairment of real estate...............................................          431
                                                                              ---------          ---------         --------
     (Total Operating Expenses)...........................................       20,757             18,864           18,549
                                                                              ---------          ---------         --------
OPERATING INCOME..........................................................       18,807             16,119           16,414
INTEREST EXPENSE..........................................................       16,770             15,576           15,815
                                                                              ---------          ---------         --------
Income before extraordinary item..........................................        2,037                543              599
Extraordinary Item
   Loss on extinguishment of debt (Note 2)................................         (191)
                                                                              ---------          ---------         --------
NET INCOME................................................................    $   1,846          $     543         $    599
                                                                              =========          =========         ========
BASIC AND DILUTED EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM (NOTE 12)..    $    0.45          $    0.15         $   0.17
                                                                              =========          =========         ========
BASIC AND DILUTED EARNINGS PER SHARE (NOTE 12)............................    $    0.41          $    0.15         $   0.17
                                                                              =========          =========         ========
</TABLE>





                 See Notes to Consolidated Financial Statements



                                                                              18


<PAGE>   19


                  MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                       ACCUMULATED        DEFERRED                 
                                                                                    DISTRIBUTIONS IN    COMPENSATION     TOTAL     
                                                           PAR      ADDITIONAL         EXCESS OF          INCENTIVE   SHAREHOLDERS'
                                                          VALUE    PAID-IN CAPITAL     NET INCOME          SHARES       EQUITY     
                                                          ------   ---------------  ----------------    ------------  -------------
<S>                                                       <C>          <C>             <C>                 <C>         <C>         
BALANCE, JANUARY 1, 1996..............................    $   36       $46,984         $ (5,717)           $ (60)      $ 41,243    
     Amortization of deferred                                                                                                      
       compensation-incentive shares..................                                                        60             60
     Common shares repurchased........................        (1)       (1,096)                                          (1,097)   
     Directors compensation paid in stock.............                      48                                               48    
     Stock options exercised..........................                      24                                               24    
     Distributions--$1.70 per share...................                                   (5,884)                         (5,884)   
     Net income.......................................                                      599                             599
                                                          ------       -------         --------            -----       --------    
BALANCE, DECEMBER 31, 1996............................        35        45,960          (11,002)                         34,993    
     Conversion of debentures.........................         2         4,469                                            4,471    
     Directors compensation paid in stock.............                      48                                               48    
     Stock options exercised..........................                       8                                                8    
     Distributions--$1.70 per share...................                                   (6,121)                         (6,121)   
     Net income.......................................                                      543                             543    
                                                          ------       -------         --------            -----       --------    
BALANCE, DECEMBER 31, 1997............................        37        50,485          (16,580)                         33,942    
     Conversion of debentures.........................         2         2,080                                            2,082    
     Secondary sale of 1,300 common shares of                                                                                  
         Malan Realty Investors, Inc., net of costs...        13        21,466                                           21,479    
     Directors compensation paid in stock.............                      48                                               48    
     Stock options exercised..........................                      38                                               38    
     Distributions--$1.70 per share...................                                   (8,198)                         (8,198)   
     Net income.......................................                                    1,846                           1,846    
                                                          ------       -------         --------            -----       --------    
BALANCE, DECEMBER 31, 1998............................    $   52       $74,117         $(22,932)                       $ 51,237    
                                                          ======       =======         ========            =====       ========
</TABLE>
                                                          




                 See Notes to Consolidated Financial Statements



                                                                              19


<PAGE>   20




                  MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                 YEARS ENDED DECEMBER 31,
                                                                                              1998           1997         1996
                                                                                             -------      --------      -------
<S>                                                                                          <C>          <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 NET INCOME...............................................................................   $ 1,846      $    543      $   599
                                                                                             -------      --------      -------
 Adjustments to reconcile net income to net cash flows provided by operating activities:
    Depreciation and amortization.........................................................     5,633         5,068        4,920
    Amortization of deferred financing costs..............................................     1,929         1,620        1,581
    Amortization of deferred compensation expense.........................................                                   60
    Directors compensation issued in stock................................................        48            48           48
    Loss on impairment of real estate.....................................................       431
    Loss on extinguishment of debt........................................................       191
    Change in operating assets and liabilities that provided (used) cash:
         Accounts receivable and other....................................................      (907)         (982)        (961)
         Accounts payable, deferred income and other accrued liabilities..................       898        (1,148)         870
                                                                                             -------      --------      -------
      Total adjustments...................................................................     8,223         4,606        6,518
                                                                                             -------      --------      -------
      NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES.....................................    10,069         5,149        7,117
                                                                                             -------      --------      -------
CASH FLOWS FROM INVESTING ACTIVITIES
 Real estate developed, acquired or improved, net of mortgage assumed.....................   (40,677)       (8,195)      (1,505)
 Deposits to escrow.......................................................................   (19,149)      (17,274)     (17,642)
 Disbursements from escrow................................................................    18,959        17,253       16,985
 Proceeds from sale of land...............................................................       240
                                                                                             -------      --------      -------
    NET CASH FLOWS USED FOR INVESTING ACTIVITIES..........................................   (40,627)       (8,216)      (2,162)
                                                                                             -------      --------      -------    
CASH FLOWS FROM FINANCING ACTIVITIES                                    
 Draws on lines of credit.................................................................    29,350         6,200
 Repayment of lines of credit.............................................................   (19,050)       (1,500)
 Net proceeds from secondary equity offering..............................................    21,479
 Principal repayments on mortgages........................................................      (494)       (1,428)         (91)
 Net proceeds from mortgages..............................................................    18,000         1,670
 Distributions to shareholders............................................................    (7,621)       (5,973)      (5,921)
 Debt issuance costs......................................................................      (338)       (1,159)
 Proceeds from stock options exercised....................................................        38             8           24
 Repurchase of debentures.................................................................    (9,625)
 Repurchases of common stock..............................................................                               (1,096)
                                                                                             -------      --------      -------
    NET CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES............................    31,739        (2,182)      (7,084)
                                                                                             -------      --------      -------    
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................................     1,181        (5,249)      (2,129)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................................     1,717         6,966        9,095
                                                                                             -------      --------      -------
CASH AND CASH EQUIVALENTS AT END OF YEAR..................................................   $ 2,898      $  1,717      $ 6,966
                                                                                             =======      ========      =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--
 CASH PAID FOR INTEREST DURING THE YEAR...................................................   $15,457      $ 14,058      $14,139
                                                                                             =======      ========      =======
</TABLE>

                 See Notes to Consolidated Financial Statements




20


<PAGE>   21


                  MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    General--The Company is engaged in the ownership, management, leasing,
acquisition, development and redevelopment of shopping centers and entertainment
facilities and leases space to tenants pursuant to lease agreements. The lease
agreements provide for terms ranging from one to 25 years and, in some cases,
for annual rentals which are subject to upward adjustment based on operating
expense levels and sales volume.

    Basis of Combination and Principles of Consolidation--The accompanying
consolidated financial statements include the activity of the Company and its
wholly owned subsidiaries, Malan Mortgagor, Inc., Malan Meadows, Inc., Malan
Revolver, Inc. and Malan Midwest, LLC. All significant inter-company balances
and transactions have been eliminated.

    Reclassifications--Certain reclassifications have been made to prior years
financial statements in order to conform with the current year presentation.

    Real Estate is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight line
basis over the estimated useful lives of the assets as follows:

          Buildings..................................    40 Years
          Land and Building Improvements............. 10-40 Years

    Maintenance and repairs are charged to expense as incurred. Renovations
which improve or extend the life of the asset are capitalized.

    Deferred Financing and Other consists primarily of deferred financing costs
and lease procurement costs. Deferred financing costs at December 31, 1998 and
1997 of $12,634,000 and $12,764,000, respectively, are amortized on a straight
line basis over the terms of the applicable debt agreements. Accumulated
amortization of deferred financing costs at December 31, 1998 and 1997 was
$5,902,000 and $4,147,000, respectively, and amortization expense for 1998, 1997
and 1996 was $1,929,000, $1,620,000 and $1,581,000, respectively, and are
included in interest expense in the Consolidated Statement of Operations.

    Lease procurement costs of $2,291,000 and $1,605,000 at December 31, 1998
and 1997, respectively, consist of direct leasing costs, tenant allowances and
tenant improvements and are amortized on a straight line basis over the terms of
the applicable tenant lease. Accumulated amortization of lease procurement costs
at December 31, 1998 and 1997 was $529,000 and $273,000, respectively, and
amortization expense for 1998, 1997 and 1996 was $227,000, $193,000, and
$102,000, respectively.

    Revenue Recognition--Minimum rents are recognized on a basis which
approximates the straight line method over the terms of the leases. Percentage
rent is accrued when lessees' specified sales targets have been met or
achievement of the sales targets is probable. Had the Company utilized the
method of recognizing percentage rent only after specified sales targets have
been achieved, net income for 1998 would have been reduced by approximately
$406,000.

    Income received on lease terminations is amortized over the expected period
of tenant vacancy. Revenue recognized under arrangements of this nature was
approximately $1,015,000, $577,000 and $428,000 for the years ended December 31,
1998, 1997 and 1996, respectively.

         Income Taxes--The Company has elected to be taxed as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). As a REIT, the Company generally will not be subject to federal
income taxation at the corporate level to the extent it distributes annually at
least 95% of its real estate investment trust taxable income, as defined in the
Code, to its shareholders and satisfies certain other requirements. Accordingly,
no provision has been made for federal income taxes in the accompanying
financial statements.

    Earnings per common share--Earnings per share ("EPS") are computed on both a
basic and diluted basis. Basic EPS excludes potential share dilution and is
computed by dividing earnings available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings
but does not include shares issuable upon conversion of securities that would
have an antidilutive effect on earnings per share.

    Distributions of $1.70 per common share were declared for each of the years
ended December 31, 1998, 1997 and 1996 of which $1.17, $1.70 and $1.34,
respectively, represent a return of capital for federal income tax purposes.





                                                                              21


<PAGE>   22
    Cash and cash equivalents consist of deposits in banks and certificates of
deposit with maturities of three months or less at the date of purchase.

    Long-lived assets and long-lived assets to be disposed of--The Company's
long-lived assets are periodically reviewed throughout the year for impairments
in value. The review is based principally on the projected, undiscounted cash
flow from the related asset. In 1998, the Company reduced the carrying value of
its interest in a shopping center in Gary, Indiana to its net realizable value
and recorded a loss on impairment of real estate of approximately $431,000.

    Management 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.

    Segment Information--The Company's operating units are comprised of
approximately 66 commercial retail properties. All financial results are
aggregated into one operating segment since the properties have similar economic
characteristics.

    Impact of Recently Adopted Accounting Principles--In June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement requires
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivatives
and whether it qualifies for hedge accounting. This Statement is not expected to
have a material impact on the Company's consolidated financial statements. This
Statement is effective for fiscal years beginning after June 15, 1999.

2. MORTGAGES, DEBENTURES AND NOTES

    The following table sets forth certain information regarding the Company's
debt:

<TABLE>
<CAPTION>
                                                                                                                         
                                                                               INTEREST                     MATURITY     
                                                  COLLATERAL                     RATE                         DATE       
Mortgages                               ------------------------------   ------------------------        --------------  
<S>                                     <C>                              <C>                             <C>             
Greenwich Capital Line of Credit.....        16 Retail Properties        LIBOR + 150 Basis Points        November 1999   
UDAG Loan............................          Bricktown Square            5% increasing to 9%             March 2023    
Securitized Mortgage Loan............        25 Retail Properties                7.57% (1)                 August 2002   
Daiwa Finance Corp...................   The Shops at Fairlane Meadows            8.18%                    February 2007  
Bloomfield Acceptance Company........        12 Retail Properties                7.43%                      May 2013     
Wells Fargo Bank.....................      Westland Shopping Center              8.02%                    November 2007  
First Chicago NBD Line of Credit.....     Orchard 14 Shopping Center     LIBOR + 200 Basis Points           March 1999     
                                                                                                                         
Total Mortgages......................                                                                                    
                                                                                                                         
Convertible Debenture................              Unsecured                     9.5%                       July 2004    
                                                                                                                         
Convertible Notes....................           Bricktown Square                 8.5%                       July 2003    
                                                                                                                         
</TABLE>


<TABLE>
<CAPTION>
                                                  BALANCE            
                                                DECEMBER 31,      
                                           1998             1997  
Mortgages                               --------          -------
                                              (in thousands)
<S>                                     <C>               <C>
Greenwich Capital Line of Credit.....   $ 15,000          $ 4,700  
UDAG Loan............................      8,006            8,097 
Securitized Mortgage Loan............     63,000           63,000  
Daiwa Finance Corp...................     12,676           12,788    
Bloomfield Acceptance Company........     17,755                -    
Wells Fargo Bank.....................      5,842                -    
First Chicago NBD Line of Credit.....          -                -
                                        --------          -------
Total Mortgages......................   $122,279          $88,585    
                                        ========          =======
Convertible Debenture................   $ 44,925          $56,680    
                                        ========          =======
Convertible Notes....................   $ 27,000          $27,000    
                                        ========          =======
</TABLE>                                                        

(1) Overall blended rate. The interest rate on four different tranches are
    either fixed or capped through the use of an interest rate cap and floor
    agreement. The effective interest rate is fixed at 7.57% through February
    10, 2002; thereafter, the interest rate on $42 million of the mortgage loans
    converts to a variable rate based on certain requirements. Net settlement
    costs paid under interest rate cap agreements are recorded on an accrual
    basis and recognized as an adjustment to interest expense.

    The Greenwich Capital Line of Credit is a revolving line of credit provided
by Greenwich Capital Markets, Inc., a division of National Westminister Bank,
Plc. for up to $25 million which can be expanded up to $50 million for
additional acquisitions. Due to certain financial covenants, $17.8 million was
the maximum allowable borrowing under the facility at December 31, 1998 of which
$15.0 million was outstanding.






22
<PAGE>   23
    The line of credit with First Chicago NBD is a revolving line of credit
which allows for borrowings up to $4.5 million. As of December 31, 1998 there
were no outstanding borrowings on the line.

    The Company has Convertible Debentures (the "Debentures") and Convertible
Notes (the "Notes"), which are convertible into shares of Common Stock at a
price of $17 per share. The debentures are 10-year unsecured general obligations
of the Company and carry a rating of B3 from Moody's Investors Services, Inc.
The Notes are nine-year general obligations due July 15, 2003 secured by a first
mortgage on Bricktown Square in Chicago, Illinois. The Debentures are redeemable
by the Company at par beginning July 15, 2001. During 1998, $2.142 million
aggregate principal of Debentures were converted into 125,286 shares of Common
Stock.

    In September 1998, the Company's Board of Directors approved a plan to
repurchase and retire up to $15 million aggregate principal of Debentures.
Through December 31, 1998, the Company had repurchased $9.625 million principal
of Debentures. The repurchases were funded from the Company's available working
capital. As a result of the repurchases, the Company incurred an extraordinary
loss in 1998 of approximately $191,000 primarily from the charge off of
deferred financing costs associated with the retired debt.

    Interest capitalized as part of the cost of redevelopment projects totaled 
$447,000 in 1998 and $50,000 in 1997.

    Several of the above debt agreements contain various financial covenants,
all of which the Company was in compliance with as of December 31, 1998.

    Approximate scheduled principal payments for the years subsequent to
December 31, 1998 are as follows (in thousands):

<TABLE>
         <S>                                        <C>
         1999...................................    $   15,401
         2000...................................           442
         2001...................................           479
         2002...................................        63,515
         2003...................................        27,547
         2004 and thereafter....................        86,820
                                                    ----------   
            Total...............................    $  194,204
                                                    ==========
</TABLE>

3. WARRANTS AND STOCK OPTION AND COMPENSATION PLANS

    Warrants--In connection with its initial public offering, the Company issued
warrants to National Westminister Bank Plc, New York branch, an affiliate of one
of the underwriters, for the purchase of 353,000 shares of common stock. The
warrants are exercisable through June 17, 1999 at a price of $20.40 per share.
No warrants have been exercised.

    Employee Option Plan--The Company has a stock option plan (the "Employee
Option Plan") to enable its employees to participate in the ownership of the
Company. Under the Employee Option Plan, executive officers and employees of the
Company may be granted options to acquire shares of Common Stock of the Company
("Options"). The Employee Option Plan is administered by the compensation
committee of the Board of Directors (the "Board"), which is authorized to select
the executive officers and other employees to whom Options are to be granted. No
member of the compensation committee is eligible to participate in the Employee
Option Plan. The aggregate number of shares of Common Stock that may be issued
upon the exercise of all Options is 400,000 shares.

    The exercise price of each Option granted is equal to the fair market value
of the underlying shares on the date of grant. With the exception of those
granted on the date of the Company's initial public offering, which vested over
a three-year period at the rate of 33 1/3% per year, Options vest over a
five-year period at the rate of 20% per year, beginning on the first anniversary
of the date of grant and are exercisable until the tenth anniversary of the date
of grant. 

    Directors Option Plan--The Company has a stock option plan for non-employee
directors (the "Directors Option Plan"). Under the Directors Option Plan,
following each Annual Meeting of the Board, each non-employee Director is
automatically granted an option to purchase 1,000 shares of Common Stock.

    All Options granted under the Directors Option Plan will have an exercise
price equal to the fair market value of the underlying shares on the date of the
grant. Each Option granted will vest immediately upon grant but will not become
exercisable by the Director until six months following the date of grant.
Options granted to a Director will remain exercisable until the tenth
anniversary of the date of grant or, if earlier, until one year after the
Director ceases to be a member of the Board for any reason. The aggregate number
of shares that may be issued under the Directors Option Plan is 80,000 shares.






                                                                              23
<PAGE>   24
The following table summarizes the activity for the Company's Stock Option
Plans:
<TABLE>
<CAPTION>
                                                       EMPLOYEE OPTION PLAN               
                                          ----------------------------------------------
                                           SHARES         EXERCISE          WEIGHTED-   
                                           SUBJECT         PRICE             AVERAGE    
                                          TO OPTION      PER SHARE        EXERCISE PRICE
                                          --------- --------------------  --------------
<S>                                        <C>          <C>                <C>          
Balance, January 1, 1996................   250,000       $13.375-17.00     $   15.528

Options Granted 1996....................    54,000       $14.375-15.375    $   14.449
Options Exercised 1996..................
                                           -------
Balance, December 31, 1996..............   304,000       $13.375-17.00     $   15.383

Options Granted 1997....................
Options Exercised 1997..................      (634)      $13.375           $   13.375
                                           -------
Balance, December 31, 1997..............   303,366       $13.375-17.00     $   15.383

Options Granted 1998....................    21,000       $16.580           $   16.580
Options Exercised 1998..................      (150)      $13.375           $   13.375
                                           -------
Balance, December 31, 1998..............   324,216       $13.375-17.00     $   15.422
                                           =======                                      
Options Exercisable                                                                     
     at December 31, 1998...............   251,300                             15.609   
                                           =======                         ==========   
<CAPTION>
                                                     DIRECTORS OPTION PLAN                
                                          --------------------------------------------  
                                           SHARES     EXERCISE            WEIGHTED-    
                                           SUBJECT     PRICE               AVERAGE      
                                          TO OPTION   PER SHARE         EXERCISE PRICE  
                                          ---------   ---------         --------------  
<S>                                       <C>         <C>               <C>            
Balance, January 1, 1996................    6,000       $14.50           $   14.50
Options Granted 1996....................    4,000       $14.375          $   14.375
Options Exercised 1996..................   (1,708)      $14.375          $   14.375
                                           ------

Balance, December 31, 1996..............    8,292       $14.375-14.50    $   14.465
Options Granted 1997....................    4,000       $17.125          $   17.125
Options Exercised 1997..................
                                           ------

Balance, December 31, 1997..............   12,292       $14.375-17.125   $   15.331
Options Granted 1998....................    4,000       $17.688          $   17.688
Options Exercised 1998..................    (2500)      $14.375-14.50    $   14.45
                                           ------
Balance, December 31, 1998..............   13,792       $14.375-17.688   $   16.174
                                           ======
Options Exercisable                                                               
     at December 31, 1998...............   13,792                        $   16.174     
                                           ======                        ==========  
</TABLE>

    The Company has elected to report compensation by applying the requirements
of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and therefore has recorded no charge to income for stock options.
There would have been no effect on the Company's net income and earnings per
share for 1998,1997 and 1996 had the Company recognized compensation expense
using the Black-Scholes option pricing model utilizing the following values and
weighted-average assumptions:
<TABLE>
<CAPTION>
                                                1998                1997                1996
                                            ------------        -------------       ------------
         <S>                                <C>                 <C>                 <C>         
         Option value....................   $        .05        $        0.54       $       0.03
         Dividend yield..................           10.1%                 9.9%              11.8%
         Expected volatility.............              8%                  17%                10%
         Risk-free interest rate.........              6%                   6%                 6%
         Expected lives (in years).......             10                   10                 10
</TABLE>

    The outstanding stock options at December 31, 1998 have a weighted-average
contractual life of 6.3 years. 

    Stock Compensation Plan--In order to provide an opportunity for them to
increase their ownership, the Company has a stock compensation plan for
non-employee directors (the "Stock Compensation Plan"). Under the Stock
Compensation Plan, each non-employee Director may make an election by June 30 of
each year to receive all or a portion of the Director's compensation for the
following calendar year in the form of Common Stock of the Company in lieu of
cash. Once made, the election is irrevocable for the following year's
compensation.

    The number of shares of Common Stock to be paid to a Director instead of
cash compensation will be determined based on the closing price of the Common
Stock on the New York Stock Exchange on the day before the compensation is
earned by the Director (i.e., the day before a Board meeting). A maximum of
100,000 shares may be issued under the Stock Compensation Plan. During 1998,
1997 and 1996, a total of 2,870, 2,740 and 3,272 shares, respectively, were
issued under the plan reflecting compensation of $48,000 in each year. 

    401(k) Plan - In 1997, the Company implemented a 401(k) retirement plan 
(the "401(k) Plan") covering substantially all of its employees. Under the
401(k) Plan, participants are able to defer, until termination of employment
with the Company, up to 20% of their annual compensation. The Company intends to
match a portion of the participants contributions in an amount to be determined
each year by the Board. Compensation expense in connection with the 401(k) Plan
for 1998 and 1997 was $32,000 and $24,000, respectively.

24
<PAGE>   25
4. COMMITMENTS AND CONTINGENCIES

    Revenues derived from the Company's major tenant, Kmart, amounted to 35.6%,
39.0% and 38.2% of consolidated revenues arising from lease agreements for the
years ended December 31, 1998, 1997 and 1996, respectively. Amounts billed and
owing from the major tenant were $ 75,000 and $56,000 at December 31, 1998 and
1997, respectively.

    Approximate future minimum rent under operating leases for the years
subsequent to December 31, 1998, assuming no new or renegotiated leases or
option extensions, are as follows (in thousands):

<TABLE>

         <S>                                   <C>         
         1999................................. $     29,664
         2000.................................       27,669
         2001.................................       25,539
         2002.................................       22,861
         2003.................................       20,163
         2004 and thereafter..................      137,476
                                               ------------
            Total............................. $    263,372
                                               ============
</TABLE>


    Approximate future minimum rental payments under the terms of all
non-cancelable operating leases in which the Company is the lessee, principally
for ground leases and office rent, subsequent to December 31, 1998, are as
follows (in thousands):

<TABLE>

         <S>                                   <C>         
         1999................................. $        460
         2000.................................          442
         2001.................................          403
         2002.................................          295
         2003.................................          270
         2004 and thereafter..................        7,864
                                               ------------
            Total............................. $      9,734
                                               ============
</TABLE>


    Rent expense for operating leases for the years ended December 31, 1998,
1997 and 1996 was $491,000, $498,000 and $457,000, respectively.

    The Company has entered into the following commitments as of December 31,
1998 (in thousands):

<TABLE>
<CAPTION>

                                                                                            APPROXIMATE       
                                                                                               AMOUNT         
                                                                                            -----------
<S>                                                                                          <C>       
Construction contract for redevelopment of existing retail property--Arkansas City, KS....   $      595 
Payment of tenant construction allowance on 10-plex theater complex--Melrose Park, IL.....        3,773 
                                                                                             ----------
Total.....................................................................................   $    4,368 
                                                                                             ==========


<CAPTION>
                                                                                                  ANTICIPATED             
                                                                                                   FUNDING                 
                                                                                                     DATE                  
                                                                                            ------------------------
<S>                                                                                         <C> 
Construction contract for redevelopment of existing retail property--Arkansas City, KS....  February 1999--April 1999 
Payment of tenant construction allowance on 10-plex theater complex--Melrose Park, IL.....       March 1999          
Total.....................................................................................  February 1999--April 1999 
</TABLE>


    The Company, as an owner of real estate, is subject to various environmental
laws. Compliance by the Company with existing laws has not had a material
adverse financial effect during the three-year period ended December 31, 1998,
nor does management believe it will have a material impact in the future.
However, management cannot predict the impact of new or changed laws or
regulations on its current properties or properties that it may acquire.





                                                                              25
<PAGE>   26
5. FAIR VALUE OF FINANCIAL INSTRUMENTS

    The following disclosure of estimated fair value was determined using
available market information and appropriate valuation methodologies.

    Cash and Cash Equivalents--The carrying amount for cash and cash equivalents
approximates fair value due to the short maturity of these instruments.

    Interest Rate Hedging Instruments--The Company entered into interest rate
agreements to reduce its exposure to changes in the cost of the floating rate
portion of its Securitized Mortgage Loan.

    As of December 31, 1998, the following interest rate cap agreements were
outstanding (in thousands):

<TABLE>
<CAPTION>
                                     FREQUENCY                        
      NOTIONAL        LIBOR           OF RATE                         
       AMOUNT        CAP RATE         RESETS              TERM        
      ---------     ---------        ---------         -----------
      <S>           <C>              <C>        <C> 
      $  42,000       6.67%           Monthly    July 1995 - February 2002  
         42,000       8.75%           Monthly   February 2002 - August 2002
</TABLE>
                                                         
    The Company is exposed to credit risk in the event of nonperformance by the
counterparties to its interest rate cap agreements, but has no off-balance sheet
risk of loss. The Company anticipates that its counterparties will fully perform
their obligations under the agreements.

    The carrying value of the interest rate caps as of December 31, 1998 and
1997 was $1,024,000 and $1,310,000, respectively, and the fair value was
$2,004,000 and $890,000, respectively.


    Mortgages--The fair value of the mortgages is based on the present value of
contractual cash flows and is as follows at December 31 (in thousands):

<TABLE>
<CAPTION>
                                                            1998                           1997
                                              ---------------------------------  -----------------------------
                                                CARRYING         ESTIMATED FAIR   CARRYING      ESTIMATED FAIR
                                                 AMOUNT               VALUE         AMOUNT           VALUE
                                              ------------       --------------  ----------     --------------
<S>                                           <C>                <C>             <C>            <C>           
Greenwich Capital Line of Credit............  $     15,000       $       15,000  $    4,700     $        4,700
UDAG Loan...................................         8,006                4,589       8,097              4,529
Securitized Mortgage Loan...................        63,000               63,000      63,000             63,000
Daiwa Finance Corp..........................        12,676               12,676      12,788             12,788
Bloomfield Acceptance Company...............        17,755               17,755           -                  -
Wells Fargo Bank............................         5,842                5,842           -                  -
                                              ------------       --------------  ----------     --------------
Total.......................................  $    122,279       $      118,862  $   88,585     $       85,017
                                              ============       ==============  ==========     ==============
</TABLE>
                                                        
    Convertible Debentures and Convertible Notes--The fair value of the
Convertible Debentures is based on the traded value at the close of business at
year end. The carrying value of the Convertible Debentures as of December 31,
1998 and 1997 is $44.925 million and $56.680 million, respectively. The 
estimated fair value based upon the traded value at the close of business on
December 31, 1998 and 1997 was $43.128 million and $60.081 million,
respectively. Management believes that the carrying value of the Convertible
Notes as of December 31, 1998 and 1997 approximates the fair value.

    The fair value estimates presented herein are based on information available
to management as of December 31, 1998 and 1997. Although management is not aware
of any factors that would significantly affect the estimated fair value amounts,
such financial instruments have not been comprehensively revalued for purposes
of these financial statements since that date, and current estimates of fair
value may differ significantly from the amounts presented herein.

6. SIGNIFICANT NONCASH TRANSACTIONS 

Significant noncash transactions for the three years ended
December 31, 1998 are as follows:

<TABLE>
<CAPTION>
                                                                                              Years Ended December 31,
                                                                                    1998              1997             1996
                                                                                -------------    --------------    -------------
                                                                                                 (in thousands)                 
<S>                                                                             <C>              <C>               <C>
Conversion of debentures into 125,286 in 1998 and 270,878 in 1997 shares
  of common stock, net of unamortized costs...................................  $       2,082    $        4,471
Distributions declared not yet paid...........................................  $       2,200    $        1,620    $       1,472
</TABLE>

26
<PAGE>   27

7. STOCK REPURCHASE PLAN

    In January 1995, the Company's Board of Directors approved a plan to
repurchase up to 755,000 shares of the Company's Common Stock. During 1996, the
Company repurchased 91,500 shares at an average cost of $11.98. No shares were
repurchased during the years ended December 31, 1998 and 1997.


8. SECONDARY STOCK OFFERING 

    In June 1998, the Company issued 1.3 million common shares at a price of
$17.75 per share (the "Secondary Offering"). Net proceeds of approximately $21.5
million after underwriting discounts and expenses were used to pay down the
Company's lines of credit and for general corporate purposes including working
capital.

9. PROPERTY ACQUISITIONS 

    During the three years ended December 31, 1998, the Company acquired the
following properties (in thousands):

<TABLE>
<CAPTION>
                                                                                               GROSS
        ACQUISITION                                                                           LEASABLE             CAPITALIZED
           DATE                   PROPERTY                         LOCATION                 AREA (SQ.FT.)              COSTS
        -----------        ------------------------           ------------------            -------------         --------------
         <S>               <C>                                <C>                                <C>              <C>           
         11/24/97          Southwind Theater                  Lawrence, KS                       42               $        4,207
         2/23/98           Westland Shopping Center           Westland, MI                       85                        7,925

MIDWEST ACQUISITION
         5/29/98           Wal-Mart Plaza                     Champaign, IL                      11                        1,110
         5/29/98           Wal-Mart Plaza                     Jacksonville, IL                   53                        4,907
         5/29/98           Wal-Mart Plaza                     Crawfordsville, IN                 26                        2,019
         5/29/98           Wal-Mart Plaza                     Decatur, IN                        36                        2,995
         5/29/98           Wal-Mart Shops                     Huntington, IN                     13                        1,171
         5/29/98           Wal-Mart Plaza                     Chanute, KS                        16                        1,257
         5/29/98           Wal-Mart Outparcel                 El Dorado, KS                      20                        1,546
         5/29/98           Wal-Mart Outlet Shops              Benton Harbor, MI                  14                        1,460
         5/29/98           Wal-Mart Plaza                     Owosso, MI                         60                        5,127
         5/29/98           Wal-Mart Plaza                     Sturgis, MI                        12                        1,241
         5/29/98           Wal-Mart Plaza                     Little Falls, MN                   13                          972
         5/29/98           Wal-Mart Plaza                     Mansfield, OH                      55                        5,830
                                                                                            -------------         --------------
                           Totals                                                               456               $       41,767
                                                                                            =============         ==============
</TABLE>

    In January 1999, the Company acquired the 45,000 square foot Wal-Mart Plaza
in Decatur, IL for approximately $4.68 million.

10. SUMMARIZED PRO FORMA INFORMATION 

    The following unaudited pro forma information is presented as if the
Secondary Offering, the acquisition of the Westland Shopping Center and the
Midwest Acquisition had occurred on January 1, 1997. In management's opinion,
all adjustments necessary to reflect these transactions have been recorded. The
pro forma information is not necessarily indicative of what the actual results
of operations of the Company would have been had such transactions actually
occurred as of January 1, 1997, nor do they purport to represent the results of
the operations of the Company for future periods (in thousands except per share
amounts).

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                       1998                      1997  
                                                   ------------              ------------
         <S>                                       <C>                       <C>         
         Total revenues..........................  $     41,296              $     39,160
         Net income..............................  $      2,626              $      1,672 
         Net income per share:                                                              
         Basic...................................  $        .51              $        .35   
         Diluted.................................  $        .51              $        .34 
</TABLE>
  



                                                                              27
<PAGE>   28




11. QUARTERLY FINANCIAL DATA (UNAUDITED)

    Summarized quarterly financial data for the periods indicated are as follows
(in thousands except per share amounts):

<TABLE>
<CAPTION>
                                                                                BASIC AND                          BASIC AND
                                                           NET INCOME       DILUTED EARNINGS                        DILUTED
                                                         (LOSS) BEFORE      PER SHARE BEFORE         NET           EARNINGS
1998                                   REVENUES        EXTRAORDINARY ITEM  EXTRAORDINARY ITEM   INCOME (LOSS)      PER SHARE
---------------                     --------------     ------------------  ------------------   -------------    -------------
<S>                                 <C>                   <C>                  <C>              <C>              <C>
March 31..........................  $        9,054        $        299         $    0.08        $        299     $        0.08
June 30...........................           9,312                 403              0.10                 403              0.10
September 30 (1)(2)...............          10,211                 220              0.04                  64              0.01
December 31 (1)...................          10,987               1,115              0.22               1,080              0.21
                                    --------------        ------------                          ------------                  
Total.............................  $       39,564        $      2,037                          $      1,846                  
                                    ==============        ============                          ============                  
1997
---------------                   
March 31..........................  $        8,887        $         (7)        $       -        $         (7)    $           -
June 30...........................           8,528                  71              0.02                  71              0.02
September 30......................           8,787                 213              0.06                 213              0.06
December 31.......................           8,781                 266              0.07                 266              0.07
                                    --------------        ------------                          ------------                  
Total.............................  $       34,983        $        543                          $        543                  
                                    ==============        ============                          ============                  
</TABLE>


(1)  Third quarter 1998 results are reduced by approximately $280,000 due to
     the adoption of an Emerging Issues Task Force ("EITF") consensus on Issue
     98-9, relating to the recognition of percentage rent. This consensus was
     withdrawn during the fourth quarter 1998, allowing for the Company to
     revert to the practice of accruing percentage rent based on a probability
     model.

(2)  An extraordinary loss on extinguishment of debt of $156,000 and an
     impairment of real estate of $431,000 were incurred in the third quarter
     1998. 

12. EARNINGS PER SHARE 

Earnings per share ("EPS") data were computed as follows (in thousands except
per share amounts):

<TABLE>
<CAPTION>
                                                                            YEARS ENDED DECEMBER 31,
                                                                   1998             1997               1996
                                                              --------------    -----------        ------------

<S>                                                           <C>               <C>                <C>         
Net Income before extraordinary item........................  $        2,037    $       543        $        599
                                                              ==============    ===========        ============
Net Income..................................................  $        1,846    $       543        $        599
                                                              ==============    ===========        ============
Basic EPS:
Weighted-average shares outstanding.........................           4,507          3,546               3,464
                                                              ==============    ===========        ============
Basic earnings per share before extraordinary item..........  $         0.45    $      0.15        $       0.17
                                                              ==============    ===========        ============
Basic earnings per share....................................  $         0.41    $      0.15        $       0.17
                                                              ==============    ===========        ============
Diluted EPS:
Weighted-average shares outstanding.........................           4,507          3,546               3,464
Shares issued upon exercise of dilutive options.............             160            312                 160
Shares purchased with proceeds of options...................           ( 143)          (267)               (149)
                                                              --------------    -----------        ------------
Shares applicable to diluted earnings.......................           4,524          3,591               3,475
                                                              ==============    ===========        ============
Diluted earnings per share before extraordinary item........  $         0.45    $      0.15        $       0.17
                                                              ==============    ===========        ============
Diluted earnings per share..................................  $         0.41    $      0.15        $       0.17
                                                              ==============    ===========        ============
</TABLE>

    Diluted EPS reflects the potential dilution of securities that could share
in the earnings but does not include shares issuable upon conversion of
securities that would have an antidilutive effect on earnings per share.





28















<PAGE>   29





13. SUBSEQUENT EVENTS


    Shareholder Rights Plan--In January 1999, the Board of Directors of the
Company (the "Board") adopted a Rights Agreement. In connection with the Rights
Agreement, the Board declared a dividend of one preferred share purchase right
(a "Right") for each outstanding share of the Company's Common Stock. Upon the
occurrence of a Distribution Date, as described below, each Right entitles a
shareholder to purchase 1/1000th of a newly issued share of Series A Junior
Participating Preferred Stock of the Company at an exercise price of $42,
subject to adjustment. The Rights will become exercisable only if a person or
group (i) acquires beneficial ownership of 15% or more of the Company's
outstanding common stock; (ii) announces a tender or exchange offer, the
consummation of which would result in the acquiring person or group owning 15%
or more of the Company's outstanding common stock. The date on which either
event described in (i) or (ii) occurs is a Distribution Date. Until the Rights
become exercisable, the Rights will be evidenced by certificates for common
stock and will be transferred only with such certificates.

    If any person or group intentionally acquires 15% or more of the Company's
outstanding common stock, then each Right (except for those held by the
acquiring person) "flips in" and entitles the holder to purchase for the
exercise price, shares of the Company's common stock having a market value of
twice the then current exercise price (a "flip-in" event). 

    In addition, in the event that, after a person or group has intentionally
acquired 15% or more of the Company's outstanding common stock, the Company was
acquired in a merger or other business combination transaction or more than 50%
of its assets or earnings power were sold, each Right will entitle its holder to
purchase, at the Right's then current exercise price, shares of common stock of
such other person having a market value of twice the then current exercise price
(a "flip-over" event).

    The Company may redeem the Rights for $.001 per Right at any time prior to
the earlier of a flip-in event or the expiration of the Rights. The Rights
expire on January 15, 2009 unless the Rights are earlier redeemed by the
Company. The Company has authorized 20,000 shares of Series A Junior
Participating Preferred Stock.

    Sale of Property--The Company has entered into an agreement to sell its
property in Colma, California for approximately $7.7 million. The property is
currently included as collateral for the Company's Securitized Mortgage Loan.
Net proceeds from the sale after payments required for release of the property
from the collateral pool and selling expenses are anticipated to be
approximately $3.4 million. The sale is expected to be completed in March 1999.





                                                                              29




<PAGE>   30
                          MALAN REALTY INVESTORS, INC.
              SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1998

                                 (in thousands)

<TABLE>
<CAPTION>
                                                         
                                                                                                    COST CAPITALIZED (SOLD)
                                                                                                          SUBSEQUENT TO
                                                                       INITIAL COST TO COMPANY             ACQUISITION
                                                                      --------------------------    ---------------------------
                                                                                     BUILDINGS &                BUILDINGS &
STATE/TYPE (# OF PROPERTIES)                       ENCUMBRANCES        LAND         IMPROVEMENTS      LAND      IMPROVEMENTS
----------------------------                       ------------       -------       ------------    ---------  ----------------
<S>                                               <C>               <C>              <C>                <C>         <C>         
CALIFORNIA                                                                                                                  
         Freestanding Retail Properties (1)               *         $     634        $    5,704                             
                                                                                                                            
ILLINOIS                                                                                                                    
         Community Shopping Centers (5)           $  35,006             4,858            41,886                     $  1,199
         Freestanding Retail Properties (8)               *             1,612            18,623         $    (14)      1,097
         Entertainment Facilities (2)                                     159             6,071                        4,366
INDIANA                                                                                                                     
         Community Shopping Centers (8)                   *             3,447            25,741                        1,639
         Freestanding Retail Properties (1)               *                               2,241                           19
KANSAS                                                                                                                      
         Community Shopping Centers (5)                   *               942            11,135            2,902       3,483
         Freestanding Retail Properties (8)               *               691             6,578                          258
         Entertainment Facility (1)                                     1,118             3,090                             
MARYLAND                                                                                                                    
         Freestanding Retail Properties (1)               *               282             2,534                          177
MICHIGAN                                                                                                                    
         Community Shopping Centers (7)              18,518             6,384            44,619             (240)        253
MINNESOTA                                                                                                                   
         Community Shopping Centers (1)                                   125               847                             
MISSOURI                                                                                                                    
         Community Shopping Centers (4)                   *               969            11,764                7         515
         Freestanding Retail Properties (1)               *                85               768                             
OHIO                                                                                                                        
         Community Shopping Centers (2)                   *             1,645            11,118                           30
WISCONSIN                                                                                                                   
         Community Shopping Centers (7)                   *             2,045            21,535                          834
         Freestanding Retail Properties (4)               *               543             4,885              (16)        596
                                                  ---------         ---------        ----------         --------    --------
                                                  $  53,524         $  25,539        $  219,139         $  2,639    $ 14,466
                                                  =========         =========        ==========         ========    ========
</TABLE>                                          

*   Certain properties are included as collateral for securitized mortgages

    The changes in total real estate for the three years ended December 31, are
as follows:

<TABLE>
<CAPTION>

                                           1998             1997            1996
                                      ----------       ------------    -----------
<S>                                   <C>              <C>             <C>        
Balance at Beginning of Year .....    $  215,785       $    207,590    $   206,085
  Acquisitions ...................        41,767              7,110
  Improvements ...................         4,918              1,099          1,505
  Dispositions ...................          (256)               (14)
  Impairment of real estate                 (431)
                                      ----------       ------------    -----------
Balance at End of Year ...........    $  261,783       $    215,785    $   207,590
                                      ==========       ============    ===========  
</TABLE>

    The changes in accumulated depreciation for the three years ended December
31, are as follows:


<TABLE>
<CAPTION>
                                           1998               1997          1996
                                      ----------       ------------    -----------                 
<S>                                   <C>              <C>             <C>        
Balance at Beginning of Year .....    $   15,817       $     10,907    $     6,114
  Depreciation for year ..........         5,469              4,910          4,793
                                      ----------       ------------    -----------  
Balance at End of Year ...........    $   21,286       $     15,817    $    10,907
                                      ==========       ============    ===========  
</TABLE>






30
<PAGE>   31
<TABLE>
<CAPTION>
                                                               GROSS AMOUNT AT WHICH
                                                             CARRIED AT CLOSE OF PERIOD                                          
                                                       --------------------------------------                                    
                                                                  BUILDINGS &                      ACCUMULATED      DATE OF      
STATE/TYPE (# OF PROPERTIES)                             LAND     IMPROVEMENTS        TOTAL        DEPRECIATION   CONSTRUCTION   
----------------------------                           --------   ------------       --------      ------------   ------------   
<S>                                                    <C>        <C>                <C>           <C>            <C>            
CALIFORNIA
         Freestanding Retail Properties (1)            $    634     $  5,704         $  6,338         $  643           1980      
ILLINOIS
         Community Shopping Centers (5)                   4,858       43,085           47,943          4,299        1975-1995    
         Freestanding Retail Properties (8)               1,598       19,720           21,318          2,185        1967-1977    
         Entertainment Facilities (2)                       159       10,437           10,596            576           1998      
INDIANA
         Community Shopping Centers (8)                   3,447       27,380           30,827          2,487        1973-1997    
         Freestanding Retail Properties (1)                            2,260            2,260            261           1974      
KANSAS
         Community Shopping Centers (5)                   3,844       14,618           18,462          1,051        1974-1996    
         Freestanding Retail Properties (8)                 691        6,836            7,527            802        1976-1978    
         Entertainment Facility (1)                       1,118        3,090            4,208             77           1997      
                                           
MARYLAND
         Freestanding Retail Properties (1)                 282        2,711            2,993            310           1979      
MICHIGAN
         Community Shopping Centers (7)                   6,144       44,872           51,016          3,140        1970-1996    
MINNESOTA
         Community Shopping Centers (1)                     125          847              972             12           1996      
                                            
MISSOURI
         Community Shopping Centers (4)                     976       12,279           13,255          1,420        1973-1978    
         Freestanding Retail Properties (1)                  85          768              853             87           1974      
OHIO
         Community Shopping Centers (2)                   1,645       11,148           12,793            717        1989-1998    
                                           
WISCONSIN
         Community Shopping Centers (7)                   2,045       22,369           24,414          2,569        1960-1979    
         Freestanding Retail Properties (4)                 527        5,481            6,008            650        1968-1976    
                                                       --------     --------         --------       --------
                                                       $ 28,178     $233,605         $261,783       $ 21,286
                                                       ========     ========         ========       ========

<CAPTION>

                                                                  LIFE ON WHICH
                                                                 DEPRECIATION IN
                                                       DATE      INCOME STATEMENT
STATE/TYPE (# OF PROPERTIES)                         ACQUIRED      IS COMPUTED
----------------------------                         --------    ----------------
<S>                                                  <C>         <C>
CALIFORNIA
         Freestanding Retail Properties (1)             6/94         40 Years
ILLINOIS
         Community Shopping Centers (5)              6/94-5/98       40 Years
         Freestanding Retail Properties (8)             6/94         40 Years
         Entertainment Facilities (2)                   6/94
INDIANA
         Community Shopping Centers (8)              6/94-5/98       40 Years
         Freestanding Retail Properties (1)             6/94         40 Years
KANSAS
         Community Shopping Centers (5)              6/94-5/98       40 Years
         Freestanding Retail Properties (8)             6/94         40 Years
         Entertainment Facility (1)                    11/97         40 Years

MARYLAND
         Freestanding Retail Properties (1)             6/94         40 Years
MICHIGAN
         Community Shopping Centers (7)              6/94-5/98       40 Years
MINNESOTA
         Community Shopping Centers (1)                 5/98         40 Years

MISSOURI
         Community Shopping Centers (4)                 6/94         40 Years
         Freestanding Retail Properties (1)             6/94         40 Years
OHIO
         Community Shopping Centers (2)              11/94-5/98      40 Years

WISCONSIN
         Community Shopping Centers (7)                 6/94         40 Years
         Freestanding Retail Properties (4)             6/94         40 Years

</TABLE>



                                                                              31
<PAGE>   32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
        FINANCIAL DISCLOSURE

    None

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information called for by this Item 10 is incorporated herein by
reference to the information included under the captions "Election of Directors"
and "Management" in the Company's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders (the "Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

    The information called for by this Item 11 is incorporated herein by
reference to the information included in the Proxy Statement under the caption
"Executive Compensation" and "Management--Compensation of Directors".

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information called for by this Item 12 is incorporated herein by
reference to the information included under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 

    None


32





<PAGE>   33
                                    PART IV

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

A.  The following documents are filed as part of this report:

    (a)(1)   Consolidated Financial Statements:

             See Index to Consolidated Financial Statements and Supplementary 
             Data on page 15 of this Annual Report on Form 10-K.

    (a)(2)   Consolidated Financial Statement Schedule:

             See Index to Consolidated Financial Statements and Supplementary 
             Data on page 15 of this Annual Report on Form 10-K.

    (a)(3)   Exhibits:

             The following exhibits listed on the attached Exhibit Index
             are included as part of this Annual Report on Form 10-K as 
             required by Item 601 of Regulation S-K:

    (b)      Reports on Form 8-K:

             During the three-month period ending December 31, 1998, there
             were no reports on Form 8-K filed.








                                                                              33
<PAGE>   34


                                   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.

MALAN REALTY INVESTORS, INC.

By:/s/ Anthony S. Gramer
-------------------------------------
Anthony S. Gramer                            Date: March 17, 1999

Chief Executive Officer and President

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

<TABLE>
<CAPTION>

         Signature                                 Title                        Date
-------------------------------------        -------------------------     --------------

<S>                                          <C>                           <C> 
/s/Anthony S. Gramer                         Chief Executive Officer,      March 17, 1999
-------------------------------------        President and Director
Anthony S. Gramer 


/s/Elliott J. Broderick                      Chief Accounting Officer      March 17, 1999
-------------------------------------        
Elliott J. Broderick


*                                            Director                      March 17, 1999
-------------------------------------
Robert D. Kemp, Jr.


*                                            Director                      March 17, 1999
-------------------------------------        
William McBride III

*                                            Director                      March 17, 1999
William F. Pickard
-------------------------------------

*                                            Director                      March 17, 1999
-------------------------------------
Richard T. Walsh


*by:/s/Anthony S. Gramer
-------------------------------------
Anthony S. Gramer, as attorney-in-fact
</TABLE>





34


<PAGE>   35
                          MALAN REALTY INVESTORS, INC.
                            FORM 10-K EXHIBIT INDEX

EXHIBIT
NUMBER
------

    3(a)--Amended and Restated Articles of Incorporation of Malan Realty
          Investors, Inc. filed with this document.

    3(b)--By-Laws of Malan Realty Investors, Inc. (incorporated herein by
          reference to Exhibit 3(b) filed with the 1994 Second Quarter Form
          10-Q).
       
    3(c)--Certificate of Designations, Preferences and Rights of Series A Junior
          Participating Preferred Stock of Malan Realty Investors, Inc. filed
          with this document.

    4(a)--Indenture, dated as of June 24, 1994, between Malan Realty Investors,
          Inc. and The Bank of New York, as Trustee, with respect to the 9 1/2%
          Convertible Subordinated Debentures due 2004 (incorporated herein by
          reference to Exhibit 4(a) filed with the 1994 Second Quarter Form
          10-Q).

    4(b)--Indenture, dated as of June 24, 1994, between Malan Realty Investors,
          Inc. and IBJ Schroeder, as Trustee, with respect to the 8 1/2% Secured
          Convertible Notes due 2003 (incorporated herein by reference to
          Exhibit 4(b) filed with the 1994 Second Quarter Form 10-Q).

    4(c)--Rights Agreement, dated as of January 15, 1999, between Malan Realty
          Investors, Inc. and The Bank of New York which includes the
          Certificate of Designations, Preferences and Rights of Series A Junior
          Participating Preferred Stock of Malan Realty Investors, Inc. as
          Exhibit A. Incorporated by reference to the Company's Registration
          Statement on Form 8-A filed with the Commission on February 3, 1999
          (File No. 1-13092).

   10(a)--The Malan Realty Investors, Inc. 1994 Stock Option Plan (incorporated
          herein by reference to Exhibit 10(a) filed with the 1994 Second
          Quarter Form 10-Q).

  *10(b)--Employment Agreement, dated as of June 25, 1994, between the Company
          and Anthony S. Gramer (incorporated herein by reference to Exhibit
          10(b) filed with the 1994 Second Quarter Form 10-Q).

   10(c)--Note Purchase Agreement, dated as of June 24, 1994, between Malan
          Realty Investors, Inc. and Merrill Lynch Global Allocation Fund, Inc.
          (incorporated herein by reference to Exhibit 10(e) filed with the 1994
          Second Quarter Form 10-Q).

   10(d)--Warrant Agreement, dated as of June 17, 1994, between Malan Realty
          Investors, Inc. and National Westminster Bank Plc, New York Branch
          (incorporated herein by reference to Exhibit 10(f) filed with the 1994
          Second Quarter Form 10-Q).

   10(e)--Mortgage, Security Agreement, Assignment of Rents and Financing
          Statement, dated as of June 24, 1994, made by Malan Realty Investors,
          Inc. to IBJ Schroeder Bank & Trust Company, as modified by First
          Modification of Mortgage, Security Agreement, Assignment of Rents and
          Financing Statement, dated as of August 1, 1994 (incorporated herein
          by reference to Exhibit 10(g) filed with the 1994 Second Quarter Form
          10-Q).

   10(f)--Registration Rights Agreement, dated as of June 24, 1994, between the
          Company and Merrill Lynch Global Allocation Fund, Inc. (incorporated
          herein by reference to Exhibit 10(h) filed with the 1994 Second
          Quarter Form 10-Q).

  *10(g)--Malan Realty Investors, Inc. 1995 Stock Option Plan for Non-Employee
          Directors (incorporated herein by reference to Exhibit 10(p) filed
          with the 1994 Form 10-K).

  *10(h)--Malan Realty Investors, Inc. 1995 Stock Compensation Plan for
          Non-Employee Directors (incorporated herein by reference to Exhibit
          10(q) filed with the 1994 Form 10-K).

   10(i)--Purchase and Sale Agreement, dated as of April 13, 1995, between the
          Company and Clinton Pointe Joint Venture (incorporated herein by
          reference to Exhibit 10(s) filed with the 1995 First Quarter Form
          10-Q).

   10(j)--Agreement of Sale and Purchase, dated as of July 18, 1995, among
          TG-Ford Associates and Ford Motor Land Development Corporation,
          collectively, and Malan Realty Investors, Inc. (incorporated herein by
          reference to Exhibit 10(x) filed with the 1995 Second Quarter Form
          10-Q).

   10(k)--$63,000,000 Amended and Restated Credit Agreement, dated as of August
          16, 1995, between Malan Realty Investors, Inc. and National
          Westminster Bank Plc, New York Branch (incorporated herein by
          reference to Exhibit 10(y) filed with the Company's Amended Quarterly
          Report on Form 10-Q/A for the quarter ended September 30, 1995 (the
          "1995 Third Quarter Form 10-Q/A").

                                                                              35
<PAGE>   36





   10(l)--$63,000,000 Malan Mortgage Securities Trust 1995-A, Trust and
          Servicing Agreement, dated as of August 16, 1995, by and among Malan
          Depositor, Inc., as Depositor, Banker's Trust Company, as Servicer,
          and Marine Midland Bank, as Trustee (incorporated herein by reference
          to Exhibit 10(z) filed with the 1995 Third Quarter Form 10-Q/A).

  *10(m)--First Amendment to Employment Agreement, dated as of August 15, 1997
          between the Company and Anthony S. Gramer.

  *10(n)--Change in Control Agreement, dated as of August 15, 1997 between the
          Company and Michael K. Kaline.

  *10(o)--Change in Control Agreement, dated as of August 15, 1997 between the
          Company and Elliott Broderick.

   10(p)--Revolving Loan Agreement among Malan Revolver, Inc., as Company, Malan
          Realty Investors, Inc. As Parent and Greenwich Capital Markets, Inc.
          As Lender dated as of November 24, 1997 (incorporated herein by
          reference to exhibit 10(p) filed with the 1997 Form 10-K).

   10(q)--Agreement For Purchase of Real Estate between Brandon Associates
          Westland, L.L.C., "Seller" and Malan Realty Investors, Inc., "Buyer"
          dated as of January 29, 1998 (incorporated herein by reference to 
          exhibit 10(q) filed with the 1997 Form 10-K).

   10(r)--Agreement of Sale and Purchase between Sandor Development Company, as
          agent for sellers, and Malan Realty Investors, Inc. as buyer dated as
          of May 6, 1998. (incorporated herein by reference to exhibit 10(r)
          filed with the June 1, 1998 Amendment No. 1 to Form S-2).

   10(s)--Loan Agreement among Malan Midwest LLC., and Bloomfield Acceptance
          Company, LLC., dated as of May 29, 1998 (incorporated herein by
          reference to exhibit 10(s) filed with the June 1, 1998 Amendment No. 1
          Form S-2).

      21--Subsidiaries

   23(A)--Consent of Deloitte & Touche LLP

      24--Powers of Attorney

      27--Financial Data Schedule

       *  A management contract or compensatory plan or arrangement required to
          be filed pursuant to Item 14(c) of Form 10-K (incorporated herein by 
          reference to exhibits 10(m), 10(n) and 10(o) filed with the 1997 Form 
          10-K).





36