<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 [FEE REQUIRED]

For the quarterly period ended DECEMBER 31, 1997


                                       or

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

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

Commission file number                    0-11948
                      ---------------------------------------------

                        CORPORATE PROPERTY ASSOCIATES 5
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          CALIFORNIA                                          13-3164925
          ----------                                          ----------
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                             Identification No.)


50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK                          10020
----------------------------------------                          -----
(Address of principal executive offices)                        (Zip Code)

Registrant's telephone number, including area code (212) 492-1100
                                                   --------------

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

      Title of each class             Name of each exchange on which registered

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

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

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

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

--------------------------------------------------------------------------------
                                (Title of Class)

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
                                                      /X/  Yes    / / No

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

    Aggregate market value of the voting stock held by non-affiliates of
Registrant: There is no active market for Subsidiary Partnership Units.
<PAGE>   2
                                     PART I

Item 1.  Business.


                  Registrant is engaged in the business of investing in
commercial and industrial real estate properties which are net leased to
commercial and industrial entities. Registrant was organized as a California
limited partnership on April 12, 1983. Effective January 1, 1998, the General
Partner of Registrant is Carey Diversified LLC ("Carey Diversified"). W. P.
Carey & Co., Inc. and William P. Carey were formerly Corporate General Partner
and Individual General Partner, respectively. Carey Diversified is also the
General Partner of Corporate Property Associates ("CPA(R):1"), Corporate
Property Associates 2 ("CPA(R):2"), Corporate Property Associates 3
("CPA(R):3"), Corporate Property Associates 4, a California limited partnership
("CPA(R):4"), Corporate Property Associates 6 - a California limited partnership
("CPA(R):6"), Corporate Property Associates 7 - a California limited partnership
("CPA(R):7"), Corporate Property Associates 8, L.P., a Delaware limited
partnership ("CPA(R):8") and Corporate Property Associates 9, L.P., a Delaware
limited partnership ("CPA(R):9"). Registrant has entered into an agreement with
Carey Management LLC ("Carey Management") pursuant to which Carey Management
performs a variety of management services for Registrant.

                  Registrant has two industry segments consisting of the
investment in and the leasing of industrial and commercial real estate and the
operation of a hotel business at two properties. See Selected Financial Data in
Item 6 and Management's Discussion and Analysis in Item 7 for a summary of
Registrant's operations. By assuming the operation of the hotel businesses from
former tenants, Management intends to preserve the value of the underlying
investment while generating a contribution to Registrant's operating cash flow.
Also see the material contained in the Prospectus under the heading INVESTMENT
OBJECTIVES AND POLICIES.

                  The properties owned by Registrant are described in Item 2.
Registrant's entire net proceeds from the public offering, less a working
capital reserve have been fully invested in net leased commercial and industrial
real estate since March 17, 1988, the date of Registrant's final real estate
acquisition.

                  Except for the two hotel properties, Registrant's properties
are leased to corporate tenants under net leases. A net lease generally requires
tenants to pay all operating expenses relating to the leased properties
including maintenance, real estate taxes, insurance and utilities which under
other forms of leases are often paid by the lessor. Lessees are required to
include Registrant as an additional insured party on all insurance policies
relating to the leased properties. In addition, substantially all of the net
leases include indemnification provisions which require the lessees to indemnify
Registrant and the General Partners for liabilities on all matters related to
the leased properties. Registrant believes that the insurance and indemnity
provided on its behalf by its lessees provides adequate coverage for property
damage and any liability claims which may arise against Registrant's ownership
interests. In addition to the insurance and indemnification provisions of the
leases, Registrant has contingent property and liability insurance on its leased
properties and primary property and liability coverages on its two hotel
properties. Management believes that its insurance is adequate. To the extent
that any lessees are not financially able to satisfy indemnification obligations
which exceed insurance reimbursements, Registrant may incur the costs necessary
to repair property and settle liabilities.

                  As described above, lessees generally retain the obligation
for the operating expenses of their leased properties so that, other than rental
income, there are no significant operating data reportable on Registrant's
leased properties. Current rental income is reported in Note 9 to the Financial
Statements in Item 8. As discussed in Item 7, Management's Discussion and
Analysis, Registrant's leases generally provide for periodic rent increases
which are either fixed or based on formulas indexed to increases in the Consumer
Price Index. The lease with Penn Virginia Corporation ("Penn Virginia") expires
in 1999, however, Penn Virginia may elect a ten-year renewal option in the event
it does not exercise its purchase option. Penn Virginia's purchase option is
exercisable between August 1998 and August 1999. The purchase option provides
for an exercise price based on the greater of fair market value, as defined in
the lease, or $3,700,000.


                                     - 1 -
<PAGE>   3
                  Since Registrant's objective has been to invest in properties
which are occupied by a single corporate tenant and subject to long-term net
leases backed by the credit of the corporate lessee, Registrant's properties are
not generally subject to the competitive conditions of local and regional real
estate markets. In selecting its real estate investments, Registrant's strategy
was to identify properties of material importance to the lessee so that the
lessee would be more likely to extend its lease beyond the initial term or
exercise a purchase option if such option was provided for in the lease
agreement. Registrant is more likely to be affected by the financial condition
of its lessees rather than the competitive conditions of the real estate
marketplace. Registrant's strategy has been to diversify its investments among
tenants, property types and industries with geographical diversification being
only a secondary objective. The Alpena, and Petoskey businesses are seasonal in
nature with occupancy rates for the year ended December 31, 1997 of 57% and 53%,
respectively. The occupancy rates decreased by 2% for Alpena and increased by 3%
for Petoskey from that of the prior year.

                  As discussed in Note 10 to the financial statements in Item 8,
on November 12, 1997, Registrant and Gould entered into an agreement to
terminate their lease effective October 1, 1997 with a remaining obligation on
the part of Gould to perform certain repairs to the building. In consideration
for the termination of the lease, Gould paid a termination fee of $1,837,500 in
January 1998. On October 1, 1997, Registrant entered into a lease with Lockheed
Martin Corporation ("Lockheed") for approximately 48% of the leasable space.
The Lockheed lease provides for an initial term through August 31, 2000 with
options for two one-year renewal terms. Annual rent is $360,000 increasing to
$475,000 in December 1999.

                  In May 1997, the lender on the limited recourse mortgage loan
collateralized by the Arley Merchandise Corporation ("Arley") properties made a
demand for payment for the entire outstanding principal balance of the loan of
$4,754,940. In June 1997, the lender initiated a lawsuit for the purpose of
foreclosing on the Arley properties. Registrant did not contest the lender's
actions, and on November 17, 1997, the ownership of the Arley properties was
transferred to the lender and the loan obligation was canceled.

                  For the year ended December 31, 1997, revenues from properties
occupied by lease obligors which accounted for 10% or more of the revenues of
the industrial and commercial real estate segment of Registrant were as follows:
Gould 19%; Duff-Norton Company, Inc., 17%; DeVlieg Bullard, Inc., 16% and Exide
Electronics Corporation, 10%. No other property owned by Registrant accounted
for 10% or more of its total real estate operating revenue during 1997. Revenues
from the industrial and commercial real estate segment represent approximately
62% of total revenues. See Note 9 to the Financial Statements in Item 8.

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

                  On October 16, 1997, Registrant distributed a Consent
Solicitation Statement/Prospectus to the Limited Partners that described a
proposal to consolidate Registrant with the other CPA(R) Partnerships. Proposals
that each of the nine CPA(R) limited partnerships be merged with a corresponding
subsidiary partnership of Carey Diversified, of which Carey Diversified is the
general partner, were approved by the Limited Partners of all nine of the CPA(R)
limited partnerships. Each limited partner had the option of either exchanging
his or her limited partnership interest for an interest in Carey Diversified
("Listed Shares") or to retain a limited partnership interest in the subsidiary
partnership ("Subsidiary Partnership Units"). On January 1, 1998, 3,494 holders
representing 111,658 of the 113,200 limited partnership units exchanged such
units for 2,051,157 Listed Shares with 48 holders of the remaining 1,542 limited
partnership units exchanging such units for Subsidiary Partnership Units.


                                     - 2 -
<PAGE>   4
                  The Listed Shares are listed on the New York Stock Exchange.
The Subsidiary Partnership Units provide substantially the same economic
interest and legal rights as those of a limited partnership unit in Registrant
prior to the consolidation, but are not listed on a securities exchange. A
liquidating distribution to holders of Subsidiary Partnership Units will be made
after an appraisal of Registrant's properties. The date of such an appraisal is
to be no later than December 31, 2001.

                  Registrant does not have any employees. Carey Management, an
affiliate of the General Partner of Registrant, performs accounting, secretarial
and transfer services for Registrant. Chase Mellon Shareholder Services, Inc.
performs certain transfer services for Registrant and The Chase Manhattan Bank
performs certain banking services for Registrant. In addition, Registrant has
entered into an agreement with Carey Management pursuant to which Carey
Management provides certain management services for Registrant.

                  Registrant's management company has responsibility for
maintaining Registrant's books and records. An affiliate of the management
company services the computer systems used in maintaining such books and
records. In its preliminary assessment of Year 2000 issues, the affiliate
believes that such issues will not have a material effect on Registrant's
operations; however, such assessment has not been completed. Registrant relies
on its bank and transfer agent for certain computer related services and has
initiated discussions to determine whether they are addressing Year 2000 issues
that might affect Registrant.



Item 2.  Properties.

<TABLE>
<CAPTION>
   LEASE                                                                                           TYPE OF OWNERSHIP
  OBLIGOR                         TYPE OF PROPERTY                     LOCATION                        INTEREST
-----------                       ----------------                     --------                    -----------------
<S>                               <C>                                  <C>                         <C>
DUFF-NORTON                       Manufacturing and                    Forrest City,               Ownership of land
COMPANY, INC.                     Office Facility                      Arkansas                    and building

ROCHESTER BUTTON                  Manufacturing                        Kenbridge,                  Ownership of land
COMPANY                           Facilities -                         South Boston,               and buildings (2)
                                  2 locations                          Virginia

PENN VIRGINIA                     Office and                           Duffield,                   Ownership of land
CORPORATION                       Manufacturing                        Virginia                    and building (3)
                                  Facilities -                         Cuyahoga Falls,
                                  3 locations                          Ohio and
                                                                       Broomall,
                                                                       Pennsylvania

(4)                               Hotels                               Petoskey and                Ownership of 65%
                                                                       Alpena,                     interest in land
                                                                       Michigan                    and buildings (1)

EXIDE ELECTRONICS                 Office and                           Raleigh,                    Ownership of land
CORPORATION                       Research Facility                    North Carolina              and building

HARCOURT GENERAL                  Movie Theater                        Canton,                     Ownership of land
CORPORATION                                                            Michigan                    and building (3)
</TABLE>


                                     - 3 -
<PAGE>   5
<TABLE>
<CAPTION>
   LEASE                                                                                           TYPE OF OWNERSHIP
  OBLIGOR                         TYPE OF PROPERTY                     LOCATION                        INTEREST
-----------                       ----------------                     --------                    -----------------
<S>                               <C>                                  <C>                         <C>
INNO TECH                         Office, and Manufac-                 Elyria,                     Ownership of land
INDUSTRIES, INC.                  turing Facility                      Ohio                        and buildings

LOCKHEED MARTIN                   Manufacturing and                    Oxnard,                     Ownership of land
CORPORATION                       Research Facility                    California                  and building

DEVLIEG BULLARD, INC.             Manufacturing                        Frankenmuth,                Ownership of land
                                  Facilities -                         Michigan                    and buildings (3)
                                  2 locations                          McMinnville,
                                                                       Tennessee

PENBERTHY                         Manufacturing                        Prophetstown,               Ownership of land
PRODUCTS, INC.                    Facility                             Illinois                    and building (3)

DS GROUP LIMITED                  Manufacturing                        Goshen,                     Ownership of land
(formerly STOODY                  Facility                             Indiana                     and building
DELORO STELLITE, INC.)            

WINN-DIXIE                        Supermarket                          Montgomery,                 Ownership of land
STORES, INC.                                                           Alabama                     and buildings (3)


SUNDS DEFIBRATOR                  Manufacturing                        Carthage,                   Ownership of land
WOODHANDLING, INC.                Facility                             New York                    and buildings
</TABLE>



(1)   These properties are encumbered by mortgage notes payable.

(2)   These properties are subject to a mortgage as collateral for loans issued
      by unaffiliated parties to the lessee.

(3)   These properties are encumbered by mortgages and/or lease assignments in
      connection with mortgage notes payable on other of Registrant's
      properties.

(4)   Registrant operates a hotel business at these properties.


                                     - 4 -
<PAGE>   6
                  The material terms of Registrant's leases with its significant
tenants are summarized in the following table:

<TABLE>
<CAPTION>
                Registrant's
                    Share                     Current       Lease
Lease            of Current      Square      Rent Per     Expiration       Renewal      Ownership           Terms of
Obligor         Annual Rents     Footage      Sq.Ft.       (Mo/Year)        Terms       Interest          Purchase Option
-------         ------------     -------      ------       ---------        -----       --------          ---------------
<S>             <C>              <C>         <C>          <C>              <C>          <C>               <C>
Duff-Norton     $1,020,717       265,000      $ 3.85        12/12             YES          100%           The greater of
Company,                                                                                                  fair market value
Inc.                                                                                                      or $5,500,000.

DeVlieg            953,803       409,391        2.33        04/06             YES          100            The greater of
Bullard,                                                                                                  fair market value
Inc.                                                                                                      or the sum of the
                                                                                                          purchase price, of
                                                                                                          $5,075,000, and any
                                                                                                          mortgage prepayment
                                                                                                          premium.

Penn Virginia      498,750       116,059        4.30        08/99             YES          100            The greater of
Corporation                                                                                               fair market value
                                                                                                          or $3,700,000.

Exide              572,130        27,770       20.60        07/06             YES          100            The greater of
Electronics                                                                                              fair market value
Corporation                                                                                               or $3,200,000.
</TABLE>


                                     - 5 -
<PAGE>   7
Item 3.  Legal Proceedings.

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


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

                  Information with respect to matters submitted to a vote of
security holders during the fourth quarter of the year ended December 31, 1997
is hereby incorporated by reference to page 28 of Registrant's Annual Report
contained in Appendix A.


                                     PART II


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


                  Information with respect to Registrant's common equity is
hereby incorporated by reference to page 28 of Registrant's Annual Report
contained in Appendix A.


Item 6.  Selected Financial Data.

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


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


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


Item 8.  Financial Statements and Supplementary Data.

                  The following financial statements and supplementary data are
hereby incorporated by reference to pages 5 to 21 of Registrant's Annual Report
contained in Appendix A:

  (i) Report of Independent Accountants.

 (ii) Balance Sheets as of December 31, 1996 and 1997.

(iii) Statements of Income for the years ended December 31, 1995, 1996 and 1997.

 (iv) Statements of Partners' Capital for the years ended December 31, 1995,
      1996 and 1997.

  (v) Statements of Cash Flows for the years ended December 31, 1995, 1996
      and 1997.

 (vi) Notes to Financial Statements.

Item 9.  Disagreements on Accounting and Financial Disclosure.

                  NONE


                                     - 6 -
<PAGE>   8
                                    PART III


Item 10. Directors and Executive Officers of the Registrant.

                  Registrant has no officers or directors. The directors and
executive officers of the General Partner, Carey Diversified LLC, are as
follows:

<TABLE>
<CAPTION>
                                                                                                     Has Served as a
                                                                                                     Director and/or
         Name                         Age       Positions Held                                      Officer Since (1)
         ----                         ---       --------------                                      -----------------
<S>                                  <C>    <C>                                                     <C>
Francis J. Carey                      72    Chairman of the Board                                           1/98
                                            Chief Executive Officer
                                            Director

William Polk Carey                    67    Chairman of the Executive Committee                             1/98
                                            Director

Steven M. Berzin                      47    Vice Chairman                                                   1/98
                                            Chief Legal Officer
                                            Director

Gordon F. DuGan                       31    President                                                       1/98
                                            Chief Acquisitions Officer
                                            Director

Donald E. Nickelson                   64    Chairman of the Audit Committee                                 1/98
                                            Director

Eberhard Faber, IV                    61    Director                                                        1/98

Barclay G. Jones III                  37    Director                                                        1/98

Lawrence R. Klein                     77    Director                                                        1/98

Charles C. Townsend, Jr.              69    Director                                                        1/98

Reginald Winssinger                   55    Director                                                        1/98

Claude Fernandez                      45    Executive Vice President                                        1/98
                                            - Financial Operations

John J. Park                          33    Executive Vice President                                        1/98
                                            Chief Financial Officer
                                            Treasurer

H. Augustus Carey                     40    Senior Vice President                                           1/98
                                            Secretary

Samantha K. Garbus                    29    Vice President - Asset Management                               1/98

Susan C. Hyde                         29    Vice President - Shareholder Services                           1/98

Robert C. Kehoe                       37    Vice President - Accounting                                     1/98

Edward V. LaPuma                      24    Vice President - Acquisitions                                   1/98
</TABLE>


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


                                     - 7 -
<PAGE>   9
                  A description of the business experience of each officer and
director of the Corporate General Partner is set forth below:

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

                  Gordon F. DuGan, President, Chief Acquisitions Officer and
Director, was elected Executive Vice President and a Managing Director of W.P.
Carey in June 1997. Mr. Dugan rejoined W.P. Carey as Deputy Head of Acquisitions
in February 1997. Mr. Dugan was until September 1995 a Senior Vice President in
the Acquisitions Department of W.P. Carey. Mr. Dugan joined W.P. Carey as
Assistant to the Chairman in May 1988, after graduating from the Wharton School
at the University of Pennsylvania where he concentrated in Finance. From October
1995 until February 1997, Mr. Dugan was Chief Financial Officer of
Superconducting Core Technologies, Inc., a Colorado-based wireless
communications equipment manufacturer.

                  Steven M. Berzin, Vice Chairman, Chief Legal Officer and
Director, was elected Executive Vice President, Chief Financial Officer, Chief
Legal Officer and a Managing Director of W.P. Carey in July 1997. From 1993 to
1997, Mr. Berzin was Vice President - Business Development of General Electric
Capital Corporation in the office of the Executive Vice President and, more
recently, in the office of the President, where he was responsible for business
development activities and acquisitions. From 1985 to 1992, Mr. Berzin held
various positions with Financial Guaranty Insurance Company, the last two being
Managing Director, Corporate Development and Senior Vice President and Chief
Financial Officer. Mr. Berzin associated with the law firm of Cravath, Swaine &
Moore from 1978 to 1985 and from 1976 to 1977, he served as law clerk to the
Honorable Anthony M. Kennedy, then a United States Circuit Judge. Mr. Berzin
received a B.A. and M.A. in Applied Mathematics from Harvard University, a B.A.
in Jurisprudence and an M.A. from Oxford University and a J.D. from Harvard Law
School. 

                  Donald E. Nickelson, Chairman of the Audit Committee and
Director, serves as Chairman of the Board and a Director of Greenfield
Industries, Inc. and a Director of Allied Healthcare Products, Inc. Mr.
Nickelson is Vice-Chairman and a Director of the Harbor Group, a leverage
buy-out firm. He is also a Director of Sugen Corporation and D.T.I. Industries,
Inc. and a Trustee of mainstay Mutual Fund Group. From 1986 to 1988, Mr.
Nickelson was President of PaineWebber Incorporated; from 1988 to 1990, he was
President of the PaineWebber Group; and from 1980 to 1993 a Director. Prior to
1986, Mr. Nickelson served in various capacities with affiliates of PaineWebber
Incorporated and its predecessor firm. From 1988 to 1989, Mr. Nickelson was a
Director of a diverse group of corporations in the manufacturing, service and
retail sectors, including Wyndham Baking Co., Inc., Hoover Group, Inc., Peebles,
Inc. and Motor Wheel Corporation. He is a former Chairman of National Car
Rentals, inc. Mr. Nickelson is also a former Director of the Chicago Board
Options Exchange and is the former Chairman of the Pacific Stock Exchange.

                  William Polk Carey, Chairman of the Executive Committee and
Director, has been active in lease financing since 1959 and a specialist in net
leasing of corporate real estate property since 1964. Before founding W.P. Carey
in 1973, he served as Chairman of the Executive Committee of Hubbard, Westervelt
& Mottelay (now Merrill Lynch Hubbard), head of Real Estate and Equipment
Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real Estate and
Private Placements, Director of Corporate Finance and Vice Chairman of the
Investment Banking Board of duPont Glore Forgan Inc. A graduate of the
University of Pennsylvania's Wharton School of Finance and Commerce, Mr. Carey
is a Governor of the National Association of Real Estate Investment Trusts
(NAREIT). He also serves on the boards of The Johns Hopkins University, The
James A. Baker III Institute for Public Policy at Rice University, Templeton
College of


                                     - 8 -
<PAGE>   10
Oxford University and other educational and philanthropic institutions. He
founded the Visiting Committee to the Economics Department of the University of
Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research
Institute at that University. Mr. Carey is also a Director of CPA(R):10, CIP(TM)
and CPA(R):12.

                  Eberhard Faber IV, is currently a Director of PNC Bank, N.A.,
Chairman of the Board and Director of the newspaper Citizens Voice, a Director
of Ertley's Motorworld, Inc., Vice-Chairman of the Board of King's College and a
Director of Geisinger Wyoming Valley Hospital. Mr. Faber served as Chairman and
Chief Executive Officer of Eberhard Faber, Inc., from 1973 to 1987. Mr. Faber
also served as the Director of the Philadelphia Federal Reserve Bank, including
service as the Chairman of its Budget and Operations Committee from 1980 to
1986. Mr. Faber has served on the boards of several companies, including First
Eastern bank from 1980 to 1993.

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

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

                  Charles C. Townsend, Jr., Director, currently is an Advisory
Director of Morgan Stanley & Co., having held such position since 1979. Mr.
Townsend was a Partner and a Managing Director of Morgan Stanley & Co. from 1963
to 1978 and served as Chairman of Morgan Stanley Realty Corporation from 1977 to
1982. Mr. Townsend holds a B.S.E.E. from Princeton University and an M.B.A. from
Harvard University. Mr. Townsend serves as Director of CIP(TM) and CPA(R)14.

                  Reginald Winssinger, Director, is currently Chairman of the
Board and Director of Horizon Real Estate Group, Inc. Mr. Winssinger has managed
portfolios of diversified real estate assets exceeding $500 million throughout
the United States for more than 20 years. Mr. Winssinger is active in the
planning and development of major land parcels and has developed 20 commercial
properties. Mr. Winssinger is a native of Belgium with more than 25 years of
real estate practice, including 10 years based in Brussels, overseeing
appraisals, construction and management. Mr. Winssinger holds a B.S. in
Geography from the University of California at berkeley and received a degree in
Appraisal and Survey in Belgium. Mr. Winssinger presently serves as Honorary
Belgium Consul to the State of Arizona, a position he has held since 1991.

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

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

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


                                     - 9 -
<PAGE>   11
                  Samantha K Garbus, Vice President - Director of Asset
Management, became a Second Vice President of W.P. Carey in April 1995 and a
Vice President in April 1997. Ms. Garbus joined W. P. Carey as a Property
Management Associate in January 1992. Ms. Garbus received a B.A. in History from
Brown University in May 1990 and an M.B.A. from the Stern School of New York
University in January 1997.

                  Susan C. Hyde, Vice President - Director of Shareholder
Services, joined W. P. Carey in 1990, became a Second Vice President in April
1995 and a Vice President in April 1997. Ms. Hyde graduated from Villanova
University in 1990 where she received a B.S. in Business Administration with a
concentration in Marketing and a B.A. in English.

                  Robert C. Kehoe, Vice President - Accounting, joined W.P.
Carey as a Senior Accountant in 1987. Mr. Kehoe became a Second Vice President
of W. P. Carey in April 1992 and a Vice President in July 1997. Prior to joining
the company, Mr. Kehoe was associated with Deloitte, Haskins & Sells for three
years and was Manager of Financial Controls at CBS Educational and Professional
Publishing for two years. Mr. Kehoe received a B.S. in Accounting from Manhattan
College in 1982 and an M.B.A. in Finance from Pace University in 1993.

                  Edward V. LaPuma, Vice President - Acquisitions, joined W. P.
Carey as an Assistant to the Chairman in July 1995, became a Second Vice
President in July 1996 and a Vice President in April 1997. A graduate of the
University of Pennsylvania, Mr. LaPuma received a B.A. in Global Economic
Strategies from The College of Arts and Sciences and a B.S. in Economics with a
Concentration in Finance from the Wharton School.

Item 11. Executive Compensation.

                  Until January 1, 1998, under the Amended Agreement of Limited
Partnership of Registrant (the "Agreement"), 5% of Distributable Cash From
Operations was payable to the former Corporate General Partner and 1% of
Distributable Cash From Operations was payable to the former Individual General
Partner. The former Corporate General Partner and the former Individual General
Partner received $201,531 and $40,307, respectively, from Registrant as their
share of Distributable Cash From Operations during the year ended December 31,
1997. As owner of 200 Limited Partnership Units, the former Corporate General
Partner received cash distributions of $10,116g the year ended December 31,
1997. See Item 6 for the net income allocated to the General Partners under the
Agreement. Registrant is not required to pay, and has not paid, any remuneration
to the officers or directors of the former Corporate General Partner, W.P. Carey
or any other affiliate of Registrant during the year ended December 31, 1997.

                  In the future, a special limited partner, Carey Management
LLC, will receive 5% of Distributable Cash From Operations, and William Polk
Carey, the former Individual General Partner will receive, as a special limited
partner, 1% of Distributable Cash From Operations and each will be allocated the
same percentage of the profits and losses of Registrant.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

                  As of December 31, 1997, no person owned of record, or was
known by Registrant to own beneficially more than 5% of the Registrant.


                                     - 10 -
<PAGE>   12
                  The following table sets forth as of March 20, 1998 certain
information as to the ownership by directors and executive officers of
securities of the General Partner of Registrant:

<TABLE>
<CAPTION>
                                                                    Number of Listed
                                     Name of                      Shares and Nature of                          Percent
Title of Class                  Beneficial Owner                  Beneficial Ownership                          of Class
--------------                  ----------------                  --------------------                          --------
<S>                             <C>                               <C>                                           <C>
Listed Shares                   William Polk Carey
                                Francis J. Carey
                                Steven M. Berzin
                                Gordon F. DuGan
                                Donald E. Nickelson
                                Eberhard Faber IV
                                Barclay G. Jones III
                                Lawrence R. Klein
                                Charles C. Townsend, Jr.
                                Reginald Winssinger
                                John J. Park
                                Claude Fernandez
                                H. Augustus Carey
                                Samantha K. Garbus
                                Susan C. Hyde
                                Robert C. Kehoe
                                Edward V. LaPuma

All executive officers
and directors as a
group (17 persons)
</TABLE>


                  In connection with Consolidation of Registrant into Carey
Diversified LLC, effective January 1, 1998, no officer or director, other than
William Polk Carey, owns a direct interest in Registrant. William Polk Carey
owns a 1% interest in Registrant as a special limited partner and has a
controlling interest in Carey Management LLC which owns a 5% interest in
Registrant as a special limited partner. Effective January 1, 1998, Carey
Diversified owns an approximate 93% interest in Registrant.


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


Item 13. Certain Relationships and Related Transactions.

                  For a description of transactions and business relationships
between Registrant and its affiliates and their directors and officers, see
Notes 2 and 3 to the Financial Statements in Item 8. Michael B. Pollack and
Senior Vice President, is a partner of Reed Smith Shaw & McClay which is engaged
to perform legal services for Registrant. Mr. Pollack was the Secretary, until
July 1997, of the former Corporate General Partner.


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


                                     - 11 -
<PAGE>   13
                                     PART IV


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


    (a)           1.       Financial Statements:

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

    Report of Independent Accountants.

    Balance Sheets as of December 31, 1996 and 1997.

    Statements of Income for the years ended December 31, 1995, 1996 and 1997.

    Statements of Partners' Capital for the years ended December 31, 1995, 1996
    and 1997.

    Statements of Cash Flows for the years ended December 31, 1995, 1996 and
    1997.

    Notes to Financial Statements.

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



    (a)           2.       Financial Statement Schedule:

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

    Schedule III - Real Estate and Accumulated Depreciation as of December 31,
    1997.

    Notes to Schedule III.


    Schedule III and notes thereto are hereby incorporated by reference to pages
    22 to 25 of Registrant's Annual Report contained in Appendix A.





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


                                     - 12 -
<PAGE>   14
    (a)    3.     Exhibits:

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

<TABLE>
<CAPTION>
    Exhibit                                                                                  Method of
      No.          Description                                                                 Filing
    -------        -----------                                                               ----------
<S>            <C>                                                                      <C>
     3.1       Amended Agreement of Limited Partnership of                              Exhibit 3(B) to Amendment
               Registrant dated as of June 1, 1983.                                     No. 2 to Registration
                                                                                        Statement (Form S-11)
                                                                                        No. 2-83092

     4.4       $4,500,000 Mortgage Note dated January 2,                                Exhibit 4.6 to Form 10-K
               1984 from Registrant to Empire of America                                filed April 10, 1984
               FSA ("Empire").

     4.5       Deed of Trust, Mortgage, Deed to Secure                                  Exhibit 4.7 to Form 10-K
               Debt, Security Agreement and Assignment                                  filed April 10, 1984
               dated January 2, 1984 from Registrant
               to Empire.

     4.6       Assignment of Rents and Lessor's Interest                                Exhibit 4.8 to Form 10-K
               in Lease dated January 2, 1984 from                                      filed April 10, 1984
               Registrant to Empire.

     4.7       $2,400,000 Deed of Trust Note dated                                      Filed as Exhibit 4.7 to
               April 11, 1984 from Registrant to Mellon                                 Registrant's Report on
               Bank, N.A.                                                               Form 8-K dated April 25,
                                                                                        1984

     4.8       Deed of Trust and Security Agreement dated                               Filed as Exhibit 4.8 to
               April 11, 1984 from Registrant to                                        Registrant's Report on
               Robert A. Johnson and John L. Ostby, as                                  Form 8-K dated April 25,
               trustees for Mellon Bank, N.A., and                                      1984
               Mellon Bank.

     4.9       Assignment of Rentals and Leases dated                                   Filed as Exhibit 4.9 to
               April 11, 1984 from Registrant, as assignor,                             Registrant's Report on
               to Mellon Bank, N.A., as assignee.                                       Form 8-K dated April 25,
                                                                                        1984

     4.10      $3,000,000 Promissory Note dated June 29,                                Filed as Exhibit 4.1 to
               1984 from Registrant to TRW Inc.                                         Registrant's Report on
                                                                                        Form 8-K dated July 26,
                                                                                        1984

     4.11      $5,000,000 Promissory Note dated July 13,                                Filed as Exhibit 4.2 to
               1984 from Registrant to FCA American                                     Registrant's Report on
               Mortgage Corporation ("FCA").                                            Form 8-K dated July 26,
                                                                                        1984

     4.16      Mortgage, Security Agreement and                                         Filed as Exhibit 4.7 to
               Assignment of Leases and Rents dated                                     Registrant's Report on
               July 13, 1984 by Registrant to FCA.                                      Form 8-K dated July 26,
                                                                                        1984
</TABLE>


                                     - 13 -
<PAGE>   15
<TABLE>
<CAPTION>
    Exhibit                                                                                  Method of
      No.          Description                                                                 Filing
    -------        -----------                                                               ----------
<S>            <C>                                                                      <C>
     4.17      $3,000,000 Promissory Note dated                                         Filed as Exhibit 4.17 to
               April 30, 1984 from Registrant to FCA.                                   Registrant's Annual Report
                                                                                        on Form 10-K dated
                                                                                        March 29, 1985

     4.18      Mortgage and Security Agreement dated                                    Filed as Exhibit 4.18 to
               April 30, 1984 by Registrant to FCA.                                     Registrant's Annual Report
                                                                                        on Form 10-K dated
                                                                                        March 29, 1985

     4.19      Collateral Assignment of Leases and Rents                                Filed as Exhibit 4.19 to
               dated April 30, 1984 from Registrant                                     Registrant's Annual Report
               to FCA.                                                                  on Form 10-K dated
                                                                                        March 29, 1985

     4.45      Agreement to Assign Contract of Sale                                     Filed as Exhibit 4.1 to
               dated July 2, 1985 between American                                      Registrant's Form 10-Q
               Industrial Warehouses, Inc. ("AIW")                                      dated August 15, 1985
               and Registrant.

     4.46      Assignment of Rights in Contract of                                      Filed as Exhibit 4.2 to
               Sale dated July 16, 1985 between AIW                                     Registrant's Form 10-Q
               and Registrant.                                                          dated August 15, 1985

     4.47      $4,600,000 Promissory Note dated                                         Filed as Exhibit 4.1 to
               August 30, 1985 from Registrant to                                       Registrant's Report on
               Mellon Bank, N.A. ("Mellon").                                            Form 8-K dated
                                                                                        September 12, 1985

     4.56      Seller's/Lessee's Certificate dated                                      Filed as Exhibit 4.1 to
               November 25, 1985 from Gould Inc. to                                     Registrant's Report on
               Registrant.                                                              Form 8-K dated
                                                                                        December 9, 1985

     4.57      Assignment of Rights in Purchase                                         Filed as Exhibit 4.2 to
               Agreement dated November 21, 1985                                        Registrant's Report on
               between JB Properties, as Assignor,                                      Form 8-K dated
               and Registrant as Assignee.                                              December 9, 1985

     4.60      Mortgage, Assignment of Leases and                                       Filed as Exhibit 4.2 to
               Security Agreement dated January 30,                                     Registrant's Report on
               1986 between Registrant, as                                              Form 8-K dated
               Mortgagor, and Lloyds and Texas                                          March 4, 1986
               Commerce, collectively as Mortgagee,
               on Broomall, PA property.
</TABLE>


                                     - 14 -
<PAGE>   16
<TABLE>
<CAPTION>
    Exhibit                                                                                  Method of
      No.          Description                                                                 Filing
    -------        -----------                                                               ----------
<S>            <C>                                                                      <C>
     4.61      Modification Agreement dated March 1,                                    Exhibit 4.61 to Form 10-K
               1986 in connection with the Mortgage,                                    Filed April 18, 1986
               Assignment of Leases and Security Agreement
               dated January 30, 1986 on Broomall, PA property.

     4.62      Mortgage, Assignment of Leases and                                       Filed as Exhibit 4.3 to
               Security Agreement dated January 30,                                     Registrant's Report on
               1986 between Registrant, as                                              Form 8-K dated
               Mortgagor, and Lloyds and Texas                                          March 4, 1986
               Commerce, collectively as Mortgagee,
               on Cuyahoga Falls, OH property.

     4.63      Modification Agreement dated March 1,                                    Exhibit 4.63 to Form 10-K
               1986 in connection with the Mortgage,                                    Filed April 18, 1986
               Assignment of Leases and Security Agreement
               dated January 30, 1986 on Cuyahoga Falls,
               OH property.

     4.64      Deed of Trust, Assignment of Leases                                      Filed as Exhibit 4.4 to
               and Security Agreement dated January                                     Registrant's Report on
               30, 1986, between Registrant, as                                         Form 8-K dated
               Grantor, and Lawyers Title Insurance,                                    March 4, 1986
               as Trustee on Duffield, VA property.

     4.65      Deed of Trust Modification Agreement                                     Exhibit 4.65 to Form 10-K
               dated March 1, 1986 in connection                                        Filed April 18, 1986
               with the Deed of Trust, Assignment of
               Leases and Security Agreement dated
               January 30, 1986 on Duffield, VA
               property.

     4.66      Trust Indenture dated as of January                                      Filed as Exhibit 4.5 to
               1, 1986 between Michigan Strategic                                       Registrant's Report on
               Fund ("MSF") and Texas Commerce.                                         Form 8-K dated March
                                                                                        4, 1986

     4.74      $3,700,000 Promissory Note dated                                         Filed as Exhibit 4.9 to
               January 30, 1986 from CPA(R):5, as                                       Registrant's Report on
               Payee, to Registrant and CPA(R):6,                                       Form 8-K dated March
               collectively as Payor.                                                   4, 1986

     4.75      Deed of Trust, Assignment of Rents,                                      Filed as Exhibit 4.10 to
               dated February 14, 1986 from                                             Form 8-K dated March
               Registrant, as Trustor, to Chicago                                       4, 1986
               Title Insurance Company, as Trustee,
               for the benefit of New York Life
               Insurance Company ("New York Life"),
               as Beneficiary.

     4.76      $7,000,000 Promissory Note Secured by                                    Filed as Exhibit 4.11 to
               Deed of Trust, dated February 18,                                        Registrant's Report on
               1986 from Registrant to New York Life.                                   Form 8-K dated March
                                                                                        4, 1986
</TABLE>


                                     - 15 -
<PAGE>   17
<TABLE>
<CAPTION>
    Exhibit                                                                                  Method of
      No.          Description                                                                 Filing
    -------        -----------                                                               ----------
<S>            <C>                                                                      <C>
     4.77      Assignment of Lessor's Interest in                                       Filed as Exhibit 4.12 to
               Lease with Assignment of Rents,                                          Registrant's Report on
               Income and Cash Collateral, dated                                        Form 8-K dated March
               February 14, 1986, from Registrant to                                    4, 1986
               New York Life.

     4.78      $1,500,000 Promissory Note from                                          Exhibit 4.78 to Form 10-K
               Registrant to First Southern Federal                                     Filed April 18, 1986
               Savings and Loan Association ("First
               Southern") dated March 10, 1986.

     4.79      Deed of Trust, Assignment of Rents                                       Exhibit 4.79 to Form 10-K
               and Security Agreement between                                           Filed April 18, 1986
               Registrant, William A. Mann, Trustee
               and for the benefit of First Southern
               dated March 10, 1986.

     4.80      Estoppel Certificate and                                                 Exhibit 4.80 to Form 10-K
               Subordination Attornment and                                             Filed April 18, 1986
               Recognition Agreement between First
               Southern and Exide dated March 10, 1986.

     4.92      $1,500,000 First Mortgage Note dated                                     Filed as Exhibit 4.1 to
               December 22, 1986 from the Registrant, as                                Registrant's Report on
               Borrower, to 1st Source Bank ("1st Source"),                             Form 8-K dated
               as Lender.                                                               January 7, 1987

     4.93      Mortgage and Security Agreement dated                                    Filed as Exhibit 4.2 to
               December 22, 1986 between the Registrant,                                Registrant's Report on
               as Borrower, and 1st Source, as Lender                                   Form 8-K dated
               and Secured Party.                                                       January 7, 1987

     4.94      $5,000,000 Promissory Note dated December 14,                            Filed as Exhibit 4.1 to
               1987, from Registrant, as Borrower, to                                   Registrant's Report on
               Prudential, as Lender.                                                   Form 8-K dated
                                                                                        December 28, 1987

     4.95      Unconditional Guaranty of Payment and                                    Filed as Exhibit 4.2 to
               Performance dated December 14, 1987 from                                 Registrant's Report on
               Arley, as Guarantor, to Prudential, as                                   Form 8-K dated
               Lender.                                                                  December 28, 1987

     4.96      Mortgage and Security Agreement dated                                    Filed as Exhibit 4.3 to
               December 14, 1987 between Registrant, as                                 Registrant's Report on
               Mortgagor, and Prudential, as Mortgagee.                                 Form 8-K dated
                                                                                        December 28, 1987

     4.97      Assignment of Leases, Rents, Issues,                                     Filed as Exhibit 4.4 to
               Income and Profits dated December 14, 1987                               Registrant's Report on
               from Registrant, as Assignor, to                                         Form 8-K dated
               Prudential, as Assignee.                                                 December 28, 1987

    10.1       Agreement of Sale dated December 30, 1983                                Exhibit 10.1 to Form 10-K
               between Eaton Corporation and Registrant.                                filed April 10, 1984
</TABLE>


                                     - 16 -
<PAGE>   18
<TABLE>
<CAPTION>
    Exhibit                                                                                  Method of
      No.          Description                                                                 Filing
    -------        -----------                                                               ----------
<S>            <C>                                                                      <C>
    10.2       Lease Agreement dated December 30, 1983                                  Exhibit 10.2 to Form 10-K
               between Registrant, as landlord, and Yale                                filed April 10, 1984
               Industrial Products, Inc. ("Yale"), as
               tenant.

    10.6       Management Agreement between Registrant and                              Exhibit 10(B) to Amendment
               Carey Corporate Property Management, Inc.                                No. 2 to Registration
                                                                                        Statement (Form S-11)
                                                                                        No. 2-83092

    10.7       Support Agreement among Registrant,                                      Exhibit 10(C) to Amendment
               Fifth Carey Corporate Property, Inc.                                     No. 2 to Registration
               and W.P. Carey & Co., Inc.                                               Statement (Form S-11)
                                                                                        No. 2-83092

    10.8       Lease Agreement dated April 11, 1984                                     Filed as Exhibit 10.5
               between Registrant, as Landlord, and                                     to Registrant's Report
               Rochester Button Company, Inc.,                                          on Form 8-K dated
               ("Rochester") as Tenant.                                                 April 25, 1984

    10.13      Agreement Concerning Lease dated July 13,                                Filed as Exhibit 10.4 to
               1984 by Shapiro & Son Bedspread Corp. as                                 to Registrant's Report
               Tenant, Registrant as Borrower and FCA                                   on Form 8-K dated
               as Lender.                                                               July 26, 1984

    10.14      Guaranty dated July 13, 1984 from                                        Filed as Exhibit 10.5
               Hampshire Textile Corp. to Registrant.                                   to Registrant's Report
                                                                                        on Form 8-K dated
                                                                                        July 26, 1984

    10.15      Agreement Concerning Guaranty dated                                      Filed as Exhibit 10.6
               July 13, 1984 by Hampshire Textile                                       to Registrant's Report
               Corp. as Guarantor, Registrant as                                        on Form 8-K dated
               Borrower and FCA as Lender.                                              July 26, 1984

    10.16      Agreement Amending Lease Agreement                                       Filed as Exhibit 10.16
               dated April 30, 1984 between Registrant                                  to Registrant's Annual
               and Yale.                                                                Report on Form 10-K dated
                                                                                        March 29, 1985

    10.17      Subordination, Non-Disturbance and                                       Filed as Exhibit 10.17
               Attornment Agreement dated April 30,                                     to Registrant's Annual
               1984 among FCA, Registrant and Yale.                                     Report on Form 10-K dated
                                                                                        March 29, 1985

    10.18      Lease Agreement dated August 7, 1984                                     Filed as Exhibit 10.18
               between Registrant, as Landlord and                                      to Registrant's Annual
               Penn Virginia Resources Corporation                                      Report on Form 10-K dated
               ("Resources") and Pennsylvania Crusher                                   March 29, 1985
               Corporation ("Crusher"), as Tenants.

    10.19      Memorandum of Lease dated August 7,                                      Filed as Exhibit 10.19
               1984 between Registrant and Crusher                                      to Registrant's Annual
               recorded in Summit County, Ohio.                                         Report on Form 10-K dated
                                                                                        March 29, 1985
</TABLE>


                                     - 17 -
<PAGE>   19
<TABLE>
<CAPTION>
    Exhibit                                                                                  Method of
      No.          Description                                                                 Filing
    -------        -----------                                                               ----------
<S>            <C>                                                                      <C>
    10.20      Memorandum of Lease dated August 7,                                      Filed as Exhibit 10.20
               1984 between Registrant and Crusher                                      to Registrant's Annual
               recorded in Delaware County,                                             Report on Form 10-K dated
               Pennsylvania.                                                            March 29, 1985

    10.21      Memorandum of Lease dated August 7,                                      Filed as Exhibit 10.21
               1984 between Registrant and Resources                                    to Registrant's Annual
               recorded in Scott County, Virginia.                                      Report on Form 10-K dated
                                                                                        March 29, 1985

    10.22      Lease Guaranty dated August 7, 1984                                      Filed as Exhibit 10.22
               by Penn Virginia Corporation ("Penn                                      to Registrant's Annual
               Virginia") to Registrant.                                                Report on Form 10-K dated
                                                                                        March 29, 1985

    10.27      Lease Agreement between                                                  Filed as Exhibit 10.1 to
               Registrant as Landlord and                                               Registrant's Report on
               Exide Electronics Corporation                                            Form 8 K dated July 2,
               ("Exide") as Tenant dated June                                           1985
               20, 1985.

    10.28      Memorandum of Lease between                                              Filed as Exhibit 10.2 to
               Registrant and Exide dated                                               Registrant's Report on
               June 20, 1985.                                                           Form 8-K dated July 2,
                                                                                        1985

    10.29      Guaranty from Exide Electronics                                          Filed as Exhibit 10.3 to
               Group, Inc. ("Exide                                                      Registrant's Report on
               Electronics") to Registrant                                              Form 8-K dated July 2,
               dated June 20, 1985.                                                     1985

    10.33      Lease Agreement dated July 11,                                           Filed as Exhibit 10.1 to
               1985 between Registrant as                                               Registrant's Form
               landlord and General Cinema                                              10-Q dated August
               Corp. ("GCC") as tenant.                                                 15, 1985

    10.34      Lease Guaranty dated July 16,                                            Filed as Exhibit 10.2 to
               1985 between Registrant and GCC.                                         Registrant's Form
                                                                                        10-Q dated August
                                                                                        15, 1985

    10.35      Memorandum of Lease dated                                                Filed as Exhibit 10.3 to
               July 11, 1985 between                                                    Registrant's Form
               Registrant and GCC.                                                      10-Q dated August
                                                                                        15, 1985

    10.40      Lease Agreement dated November                                           Filed as Exhibit 10.1 to
               25, 1985 between Registrant, as                                          Registrant's Report on
               Lessor, and Gould Inc., as                                               Form 8-K dated December 9,
               Lessee.                                                                  1985
</TABLE>


                                     - 18 -
<PAGE>   20
<TABLE>
<CAPTION>
    Exhibit                                                                                  Method of
      No.          Description                                                                 Filing
    -------        -----------                                                               ----------
<S>            <C>                                                                      <C>
    10.41      Memorandum of Lease dated                                                Filed as Exhibit 10.2 to
               November 21, 1985, between                                               Registrant's Report on
               Registrant, as Landlord, and                                             Form 8-K dated December 9,
               Gould Inc., as Tenant.                                                   1985

    10.42      Joint Venture Agreement dated                                            Filed as Exhibit 10.1 to
               January 30, 1986 between                                                 Registrant's Report on
               Registrant and CPA(R):6.                                                 Form 8-K dated March 4,
                                                                                        1986

    10.43      Lease Agreement dated as of                                              Filed as Exhibit 10.2 to
               January 30, 1986 by and between                                          Registrant's Report on
               Registrant and CPA(R):6,                                                 Form 8-K dated March 4,
               collectively as Landlord, and                                            1986
               Great Lakes Hotel Corporation
               ("Great Lakes"), as Tenant.

    10.44      Lease Agreement as of March 6,                                           Exhibit 10.44 to Form 10-K
               1986 by and between Registrant                                           filed April 18, 1984
               and CPA(R):6, collectively as
               Landlord, and Northwoods Hotel
               Corporation ("Northwoods"), as Tenant.

    10.45      Memorandum of Lease dated                                                Filed as Exhibit 10.3 to
               January 30, 1986 between                                                 Registrant's Report on
               Registrant and CPA(R):6, as                                              Form 8-K dated March 4,
               Landlord, and Northwoods, as Tenant.                                     1986

    10.46      Memorandum of Lease dated March                                          Exhibit 10.46 to Form 10-K
               6, 1986 between Registrant and CPA(R):6,                                 filed April 18, 1984
               as Landlord, and Northwoods, as Tenant.

    10.47      Lease Guaranty dated January                                             Filed as Exhibit 10.4 to
               30, 1986 from Landmark Hotel                                             Registrant's Report on
               Corporation ("Landmark"), as                                             Form 8-K dated March 4,
               Guarantor, to Registrant and                                             1986
               CPA(R):6, collectively, as Landlord.

    10.48      Lease Guaranty dated March 6,                                            Exhibit 10.48 to Form 10-K
               1986 from Landmark, as                                                   filed April 18, 1984
               Guarantor, to Registrant and
               CPA(R):6, collectively as Landlord.

    10.49      Lease Agreement dated April 3, 1987                                      Filed as Exhibit 10.5 to
               by and between Registrant, as Landlord,                                  Registrant's Report on
               and Stanwich, as Tenant.                                                 Form 8-K dated April 17,
                                                                                        1986
</TABLE>


                                     - 19 -
<PAGE>   21
<TABLE>
<CAPTION>
    Exhibit                                                                                  Method of
      No.          Description                                                                 Filing
    -------        -----------                                                               ----------
<S>            <C>                                                                      <C>
    10.50      Memorandum of Lease dated April 3,                                       Filed as Exhibit 10.6 to
               1986 between Registrant, as Landlord,                                    Registrant's Report on
               and Stanwich, as Tenant.                                                 Form 8-K dated April 17,
                                                                                        1986

    10.53      Lease Agreement dated December 22, 1987                                  Filed as Exhibit 10.1 to
               by and between Registrant, as Landlord,                                  Registrant's Report on
               and Stoody, as Tenant.                                                   Form 8-K dated
                                                                                        January 7, 1987

    10.54      First Amendment to Lease dated December 14,                              Filed as Exhibit 10.1 to
               1987 by and between Registrant, as Landlord,                             Registrant's Report on
               and Arley, as Tenant.                                                    Form 8-K dated
                                                                                        December 28, 1987

    10.55      Lease Subordination Agreement dated December                             Filed as Exhibit 10.2 to
               14, 1987 by and among Registrant, as Landlord,                           Registrant's Report on
               Arley, as Tenant, and Prudential, as Lender.                             Form 8-K dated
                                                                                        December 28, 1987

    10.56      Lease Agreement dated March 10, 1988 by                                  Filed as Exhibit 10.56 to
               and between Registrant, as Landlord,                                     Form 10-K dated
               and Winn-Dixie, as Tenant.                                               April 15, 1988

    10.57      Lease Guaranty dated March 10, 1988 from                                 Filed as Exhibit 10.57 to
               Winn-Dixie Stores, as Guarantor, to                                      Form 10-K dated
               Registrant, as Lessor.                                                   April 15, 1988

    10.58      Lease dated September 13, 1995 between G.I. Pastek                       Filed as Exhibit 10.1 to
               Limited Partnership, as Tenant, and G.I. Plastek Industrial              Registrant's Form 8-K
               Properties Limited Partnership, as Landlord.                             dated September 29, 1995

    10.59      Purchase Agreement dated March 28, 1996 between                          Filed as Exhibit 10.1 to
               Corporate Property Associates 5, the seller, CenterPoint                 Registrant's Form 8-K
               Properties Corporation as purchaser.                                     dated April 9, 1996

    10.60      Amendment to Purchase Agreement dated April 3, 1996                      Filed as Exhibit 10.2 to
               between Corporate Property Associates 5, the seller,                     Registrant's Form 8-K
               CenterPoint Properties Corporation as purchaser.                         dated April 9, 1996

    28.1       General Warranty Deed dated December 28,                                 Filed as Exhibit 28.1
               1983 from Eaton Corporation to                                           to Registrant's Report
               Registrant.                                                              on Form 8-K dated
                                                                                        April 25, 1984

    28.2       Quitclaim Deed dated January 31, 1984                                    Filed as Exhibit 28.2
               from Eaton Corporation to Registrant.                                    to Registrant's Report
                                                                                        on Form 8-K dated
                                                                                        April 25, 1984

    28.5       General Warranty Deeds dated April 11,                                   Filed as Exhibit 28.5
               from Rochester to Registrant.                                            to Registrant's Report
                                                                                        on Form 8-K dated
                                                                                        April 25, 1984

    28.6       Bill of Sale dated April 11, 1984                                        Filed as Exhibit 28.6
               from Rochester to Registrant.                                            to Registrant's Report
                                                                                        on Form 8-K dated
                                                                                        April 25, 1984
</TABLE>


                                     - 20 -
<PAGE>   22
<TABLE>
<CAPTION>
    Exhibit                                                                                  Method of
      No.          Description                                                                 Filing
    -------        -----------                                                               ----------
<S>            <C>                                                                      <C>
    28.10      Deed dated July 13, 1984 from Shapson                                    Filed as Exhibit 28.4
               Realty Corp. to Registrant.                                              to Registrant's Report
                                                                                        on Form 8-K dated
                                                                                        July 26, 1984

    28.11      Deed dated July 13, 1984 from Shapson                                    Filed as Exhibit 28.5
               Realty Corp. to Registrant.                                              to Registrant's Report
                                                                                        on Form 8-K dated
                                                                                        July 26, 1984

    28.12      Bill of Sale dated July 13, 1984                                         Filed as Exhibit 28.6
               from Shapson Realty Corp. to Registrant.                                 to Registrant's Report
                                                                                        on Form 8-K dated
                                                                                        July 26, 1984

    28.13      Deed dated August 7, 1984 from                                           Filed as Exhibit 28.13
               Resources to Registrant.                                                 to Registrant's Annual
                                                                                        Report on Form 10-K dated
                                                                                        March 29, 1985

    28.14      General Warranty deed dated August 7,                                    Filed as Exhibit 28.14
               1984 from Crusher to Registrant.                                         to Registrant's Annual
                                                                                        Report on Form 10-K dated
                                                                                        March 29, 1985

    28.15      Deed dated August 7, 1984 from Crusher                                   Filed as Exhibit 28.15
               to Registrant.                                                           to Registrant's Annual
                                                                                        Report on Form 10-K dated
                                                                                        March 29, 1985

    28.16      Warranty Deed dated April 24, 1985                                       Filed as Exhibit 28.4 to
               between Adventure Restaurant Corp.                                       Registrant's Report on
               ("Adventure") and Registrant.                                            Form 8-K dated May 8, 1985

    28.17      Bill of Sale dated April 24, 1985                                        Filed as Exhibit 28.5 to
               from Adventure to Registrant.                                            Registrant's Report on
                                                                                        Form 8-K dated May 8, 1985

    28.27      Warranty Deed dated July 11, 1985                                        Filed as Exhibit 28.1 to
               from GCC to Registrant.                                                  Registrant's Form 10-Q
                                                                                        dated August 15, 1985

    28.28      Bill of Sale dated July 16, 1985                                         Filed as Exhibit 28.2 to
               from GCC as seller to Registrant as                                      Registrant's Form 10-Q
               buyer.                                                                   dated August 15, 1985

    28.43      Deed dated November 25, 1985 from                                        Filed as Exhibit 28.1 to
               Gould Inc. to Registrant.                                                Registrant's Report on
                                                                                        Form 8-K dated
                                                                                        December 9, 1985

    28.44      Bill of Sale dated November 25,                                          Filed as Exhibit 28.2 to
               1985 from Gould Inc. to Registrant.                                      Registrant's Report on
                                                                                        Form 8-K dated
                                                                                        December 9, 1985
</TABLE>


                                     - 21 -
<PAGE>   23
<TABLE>
<CAPTION>
    Exhibit                                                                                  Method of
      No.          Description                                                                 Filing
    -------        -----------                                                               ----------
<S>            <C>                                                                      <C>
    28.45      Purchase Agreement dated July 25,                                        Filed as Exhibit 28.3 to
               1985 by Gould Inc., as Seller, with                                      Registrant's Report on
               JB Properties, as Buyer.                                                 Form 8-K dated December
                                                                                        9, 1985

    28.46      Warranty Deed dated January 30, 1986                                     Filed as Exhibit 28.1 to
               among Adventure Restaurant Corporation                                   Registrant's Report on
               ("Adventure"), Registrant and CPA(R):6.                                  Form 8-K dated March 4,
                                                                                        1986

    28.47      Warranty Deed dated March 6, 1987                                        Exhibit 28.47 to Form 10-K
               among Adventure, Registrant and CPA(R):6.                                Filed April 17, 1986

    28.48      Bill of Sale dated January 30, 1987                                      Filed as Exhibit 28.2 to
               from Adventure to Registrant and CPA(R):6.                               Registrant's Report on
                                                                                        Form 8-K dated March
                                                                                        4, 1986

    28.49      Bill of Sale dated March 6, 1987                                         Exhibit 28.49 to Form 10-K
               from Adventure to Registrant and CPA(R):6.                               Filed April 17, 1986

    28.50      Bill of Sale dated April 3, 1986 from                                    Filed as Exhibit 28.3 to
               Stanwich to Registrant.                                                  Registrant's Report on
                                                                                        Form 8-K dated April 17,
                                                                                        1986

    28.51      Warranty Deed dated April 3, 1986 from                                   Filed as Exhibit 28.4 to
               Stanwich to Registrant (Frankenmuth,                                     Registrant's Report on
               MI property).                                                            Form 8-K dated April 17,
                                                                                        1986

    28.52      Warranty Deed dated April 3, 1986 from                                   Filed as Exhibit 28.5 to
               Stanwich to Registrant (Prophetstown,                                    Registrant's Report on
               IL property).                                                            Form 8-K dated April 17,
                                                                                        1986

    28.53      Warranty Deed dated April 3, 1986 from                                   Filed as Exhibit 28.6 to
               Stanwich to Registrant (McMinnville,                                     Registrant's Report on
               TN property).                                                            Form 8-K dated April 17,
                                                                                        1986

    28.54      Seller/Lessee's Certificate dated                                        Filed as Exhibit 28.7 to
               April 3, 1986 from Stanwich, as Seller,                                  Registrant's Report on
               to Registrant, as Purchaser, and                                         Form 8-K dated April 17,
               Security Pacific, as Lender.                                             1986

    28.58      Bill of Sale dated December 22, 1987                                     Filed as Exhibit 28.1 to
               from Stoody to Registrant.                                               Registrant's Report on
                                                                                        Form 8-K dated
                                                                                        January 7, 1987

    28.59      Corporate Warranty Deed made as of December                              Filed as Exhibit 28.2 to
               22, 1986 by Stoody, as Grantor, and                                      Registrant's Report on
               Registrant, as Grantee.                                                  Form 8-K dated
                                                                                        January 7, 1987
</TABLE>


                                     - 22 -
<PAGE>   24
<TABLE>
<CAPTION>
    Exhibit                                                                                  Method of
      No.          Description                                                                 Filing
    -------        -----------                                                               ----------
<S>            <C>                                                                      <C>
    28.60      Seller/Lessee's Certificate dated                                        Filed as Exhibit 28.3 to
               December 22, 1986 from Stoody, as Seller,                                Registrant's Report on
               to Registrant, as Purchaser.                                             Form 8-K dated
                                                                                        January 7, 1987

    28.61      Indemnification Agreement by and between                                 Filed as Exhibit 28.4 to
               the Registrant, as Borrower, 1st Source,                                 Registrant's Report on
               as Lender, and Stoody, as Tenant.                                        Form 8-K dated
                                                                                        January 7, 1987

    28.62      Agreement of Sale dated December 1, 1987 by                              Filed as Exhibit 28.1 to
               and between Registrant, as Seller, and                                   Registrant's Report on
               Brondy, as Buyer.                                                        Form 8-K dated
                                                                                        January 14, 1988

    28.63      First Amendment to Agreement of Sale dated                               Filed as Exhibit 28.2 to
               December 1, 1987 by and between Registrant,                              Registrant's Report on
               as Seller, and Brondy, as Buyer.                                         Form 8-K dated
                                                                                        January 14, 1988

    28.64      Bill of Sale dated December 31, 1992 from                                Filed as Exhibit 28.3 to
               Registrant to Brondy.                                                    Registrant's Report on
                                                                                        Form 8-K dated
                                                                                        January 14, 1988

    28.65      Bargain and Sale Deed dated December 30, 1987                            Filed as Exhibit 28.4 to
               from Registrant, as party of the first part,                             Registrant's Report on
               to Brondy, as party of the second part.                                  Form 8-K dated
                                                                                        January 14, 1988

    28.66      Warranty Deed dated March 10, 1988 between                               Filed as Exhibit 28.66
               Winn-Dixie, as Grantor, and Registrant,                                  Form 10-K dated
               as Grantee.                                                              April 15, 1988

    28.67      Bill of Sale dated March 10, 1988 from                                   Filed as Exhibit 28.67
               Winn-Dixie, as Seller, to Registrant,                                    Form 10-K dated
               as Purchaser.                                                            April 15, 1988

    28.68      Seller's Certificate dated March 10, 1988                                Filed as Exhibit 28.68
               from Winn-Dixie, as Seller, to Registrant,                               Form 10-K dated
               as Purchaser.                                                            April 15, 1988

    28.69      Prospectus of Registrant                                                 Filed as Exhibit 28.69
               dated August 2, 1983.                                                    to Form 10K/A dated
                                                                                        September 24, 1993

    28.70      Supplement dated September 29, 1983                                      Filed as Exhibit 28.70
               to Prospectus dated August 2, 1983.                                      to Form 10K/A dated
                                                                                        September 24, 1993

    28.71      Press release dated June 30, 1993                                        Exhibit 28.1 to Form 8-K
               announcing the suspension of secondary                                   dated July 12, 1993
               market sales of Limited Partnership Units.
</TABLE>


                                     - 23 -
<PAGE>   25
<TABLE>
<CAPTION>
    Exhibit                                                                                  Method of
      No.          Description                                                                 Filing
    -------        -----------                                                               ----------
<S>            <C>                                                                      <C>
    28.72      Agreement of Limited Partnership of G.I. Plastek                         Filed as Exhibit 28.1 to
               Limited Partnership dated September 8, 1995.                             Registrant's Form 8-K
                                                                                        dated September 29, 1995
</TABLE>


    (b)    Reports on Form 8-K

                  The Registrant filed a report on Form 8-K dated January 1,
1998 pursuant to Item 5 - Other Events (EX-99.1 Press Release From W.P. Carey &
Co., Inc. (December 17, 1997)).


                                     - 24 -
<PAGE>   26
                                   SIGNATURES

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

                                    CORPORATE PROPERTY ASSOCIATES 5
                                    (a California limited partnership)
                                    BY:     CAREY DIVERSIFIED LLC

     03/24/98                       BY:      /s/ John J. Park
     --------                                ----------------------------------
     Date                                   John J. Park
                                            Executive Vice President, Chief
                                            Financial Officer and Treasurer
                                            (Principal Financial Officer)

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

                                    BY:     CAREY DIVERSIFIED LLC

     03/24/98                       BY:      /s/ Francis J. Carey
     --------                                ----------------------------------
     Date                                   Francis J. Carey
                                            Chairman of the Board, Chief
                                            Executive Officer and Director
                                            (Principal Executive Officer)

     03/24/98                       BY:      /s/ William P. Carey
     --------                                ----------------------------------
     Date                                   William P. Carey
                                            Chairman of the Executive
                                            Committee and Director

     03/24/98                       BY:      /s/ Steven M. Berzin
     --------                                ----------------------------------
     Date                                   Steven M. Berzin
                                            Vice Chairman, Chief Legal Officer
                                            and Director

     03/24/98                       BY:      /s/ Gordon F. DuGan
     --------                                ----------------------------------
      Date                                  Gordon F. DuGan
                                            President, Chief Acquisitions
                                            Officer and Director

     03/24/98                       BY:      /s/ Donald E. Nickelson
     --------                                ----------------------------------
     Date                                   Donald E. Nickelson
                                            Chairman of the Audit Committee
                                            and Director

     03/24/98                       BY:      /s/ Eberhard Faber IV
     --------                                ----------------------------------
     Date                                   Eberhard Faber IV
                                            Director

     03/24/98                       BY:      /s/ Barclay G. Jones, III
     --------                                ----------------------------------
      Date                                  Barclay G. Jones, III
                                            Director

     03/24/98                       BY:      /s/ Dr. Lawrence R. Klein
     --------                                ----------------------------------
     Date                                   Dr. Lawrence R. Klein
                                            Director

     03/24/98                       BY:      /s/ Charles C. Townsend, Jr.
     --------                                ----------------------------------
     Date                                   Charles C. Townsend, Jr.
                                            Director

     03/24/98                       BY:      /s/ Reginald Winssinger
     --------                                ----------------------------------
     Date                                   Reginald Winssinger
                                            Director

     03/24/98                       BY:      /s/ John J. Park
     --------                                ----------------------------------
     Date                                   John J. Park
                                            Executive Vice President, Chief
                                            Financial Officer and Treasurer
                                            (Principal Financial Officer)

     03/24/98                       BY:      /s/ Claude Fernandez
     --------                                ----------------------------------
     Date                                   Claude Fernandez
                                            Executive Vice President -
                                            Financial Operations
                                            (Principal Accounting Officer)


                                     - 25 -
<PAGE>   27
                                                         APPENDIX A TO FORM 10-K


                         CORPORATE PROPERTY ASSOCIATES 5
                       (A CALIFORNIA LIMITED PARTNERSHIP)


                                                              1997 ANNUAL REPORT

<PAGE>   28
SELECTED FINANCIAL DATA


(In thousands except per unit amounts)

<TABLE>
<CAPTION>
                                           1993            1994            1995               1996            1997
                                          -------         -------         -------            -------         -------
<S>                                       <C>             <C>             <C>                <C>             <C>
OPERATING DATA:

  Revenues                                $18,261         $18,125         $15,768            $13,205         $ 9,750

  Net income                                4,496           5,557           1,913              7,776           2,685

    Net income allocated:
      To General Partners                     270           1,011             201                463             180
      To Limited Partners                   4,226           4,546           1,712              7,314           2,505
      Per unit                              37.34           40.16           15.12              64.61           22.13

  Distributions attributable (1):
      To General Partners                     350             352             365                244             254
      To Limited Partners                   5,489           5,516           7,635              3,816           4,769
      Per unit                              48.49           48.73           67.45(2)           33.71           42.13(2)

  Payment of mortgage
      principal(3)                            826             725             463                365             234


BALANCE SHEET DATA:

  Total assets                             93,950          92,366          72,268             52,652          44,265

  Long-term
    obligations (4)                        34,949          31,310          24,505             10,446          10,193
</TABLE>


(1)   Includes distributions attributable to the fourth quarter of each fiscal
      year payable in the following fiscal year less distributions in the first
      fiscal quarter attributable to the prior year. The distribution
      attributable to the fourth quarter of 1997 was paid to Limited Partners in
      December 1997.

(2)   1995 and 1997 distributions include special distributions of $20 and $7,
      respectively, per Limited Partnership Unit.

(3)   Represents scheduled mortgage amortization paid.

(4)   Represents mortgage and note payable obligations due after more than one
      year.


                                     - 1 -
<PAGE>   29
MANAGEMENT'S DISCUSSION AND ANALYSIS

                  Results of Operations

                  Net income for the year ended December 31, 1997 decreased by
$5,091,000 to $2,685,000 as compared with the year ended December 31, 1996.
Excluding the effect of gains on the disposition of properties in 1996 and 1997,
income decreased by $764,000. The decrease, as adjusted, was primarily due to
decreases in lease revenues (rental income and interest income from direct
financing leases) and hotel operating income and an increase in general and
administrative expenses. The effect of these items was partially offset by a
decrease in interest expense.

                  The decrease in lease revenues was due to the sale in 1996 of
a property leased to GATX Logistics, Inc., the termination of the Arley
Merchandise Corporation lease in July 1997 and the December 1996 modification of
the Rochester Button Company lease. The decrease in hotel earnings was solely
due to the sale of the Rapid City hotel property in October 1996. The increase
in general and administrative costs was due to costs incurred in connection with
the structuring of the exchange transaction described below. The decrease in
interest expense was due to the prepayment of several mortgage loans in 1996. As
of December 31, 1997, the Partnership's remaining debt consists of the mortgage
loans on the two hotel properties in Alpena and Petoskey, Michigan and a note
payable to an affiliate.

                  Net income for the year ended December 31, 1996 increased by
$5,864,000 as compared with the year ended December 31, 1995. Such increase was
primarily due to gains realized on the sale of Partnership properties. Income
before gains, and excluding (i) the effects of noncash charges for writedowns of
assets to their estimated net realizable values in both 1996 and 1995 and (ii)
nonrecurring items in 1995 included in other income in the accompanying
financial statements, would have reflected an increase of $683,000.

                  The increase in income, as adjusted for 1996, was due to
decreases in interest, depreciation, general and administrative and property
expenses and was partially offset by a decrease in lease revenues. The decrease
in interest expense resulted from the combination of (i) satisfying mortgage
loans in connection with property dispositions, and (ii) using proceeds from
those property sales to pay off mortgage debt on other Partnership properties
that are still subject to leases. The decrease in depreciation expense was
solely due to the disposition of properties resulting in a reduction in the
balances of assets subject to depreciation. The decrease in general and
administrative expense reflected lower state tax and office occupancy expenses
in 1996. Prior to selling the Helena, Montana office building in January 1996,
the Partnership absorbed a portion of the operating expenses for that property.
In 1995, such costs, net of tenant reimbursements, were approximately $82,000.
Accordingly, property expense decreased due to the sale of the Helena property
and because of legal costs incurred in 1995 in connection with a dispute
regarding the final determination for the sales price of a property. The
decrease in lease revenues is entirely due to the sale of properties in 1995 and
1996. The 1996 gain on the sale of properties resulted from the sales of the
office building in Helena, Montana, a warehouse facility in Hodgkins, Illinois
leased to GATX Logistics and the Holiday Inn in Rapid City, South Dakota which
had been operated by the Partnership

                  Earnings for the hotel operation decreased in 1997 as a result
the sale of the Rapid City hotel in October 1996. Management had decided to sell
the Rapid City hotel, having concluded that the cost of upgrading the Rapid City
hotel to meet the core modernization plan of Holiday Inn and retain the Holiday
Inn affiliation would not provide an adequate return on the additional
investment. Revenues and profitability of the Rapid City operation were expected
to decrease from any change in hotel chain affiliation. For the year ended
December 31, 1997, earnings from the Alpena and Petoskey hotels increased by
18%, to $705,000. The occupancy rate of the Petoskey hotel increased by 3% to
53%, and the average room rate increased by 4%, resulting in revenue growth of
8%. The Petoskey hotel had also realized an increase in its occupancy rate in
1996. The occupancy rate of the Alpena hotel decreased by 2% to 57%; however,
the average room rate increased by 7% so that revenue was stable for the
comparable years. The Alpena hotel realized increases in average room and
occupancy rates in 1996. Operating expenses at the two hotels were stable for
the comparable years.


                                     - 2 -
<PAGE>   30
                  Cash flow from the Partnership's leases will decrease as a
result of the termination of the Gould, Inc. lease for its property in Oxnard,
California. The Partnership received a lump sum payment in January 1998 in
consideration for agreeing to the termination. The lump sum of $1,837,500
represented a significant portion of the remaining lease rentals that would have
been received over the remaining initial term of the Gould lease. Concurrent
with the lease termination, the Partnership entered into a lease with Lockheed
Martin Corporation for a portion of the Oxnard property. Cash flow will benefit
further if Lockheed Martin elects to exercise its option to lease such remaining
space or if the remaining space is leased to others.

                  Because of the net and long-term nature of most of the
Partnership's leases, inflation and changing prices have not unfavorably
affected the Partnership's revenues and net income. Except for the Penn Virginia
Corporation lease, all of the Partnership's leases have provisions providing for
rent increases based on formulas indexed to increases in the Consumer Price
Index and may include caps on such CPI increases, sales overrides or scheduled
mandatory increases which could increase operating revenues in the future. As
the rate of inflation has been moderate in recent years, the Partnership
believes that hotel operations may not be significantly impacted by changing
prices. Management believes that reasonable increases in costs may be partially
or entirely passed through by increases in room rates. Over the past several
years, increases in the average room rate have generally been in excess of the
rate of inflation.


                  Financial Condition

                  The Partnership's cash balances of $3,047,000 as of December
31, 1997 decreased by $2,191,000 from the previous year. Cash flow from
operations of $4,394,000 was sufficient to pay four quarterly distributions of
approximately $4,031,000 and scheduled debt service of $234,000. In addition to
such distributions, the Partnership used its cash reserves to pay a special
distribution of $7.00 per Limited Partnership Unit ($792,000) in the first
quarter of 1997 representing proceeds from 1996 asset sales. The Partnership
also paid a distribution in December 1997 of $10.11 per Limited Partnership Unit
($1,144,000).

                  The distribution paid in December 1997 reflected an exchange
transaction which occurred on January 1, 1998. The majority of the Partnership's
Limited Partners and its General Partners approved a consolidation by merger of
the Partnership with a subsidiary limited partnership of Carey Diversified LLC,
as proposed in the Consent Solicitation Statement/Prospectus of Carey
Diversified dated October 16, 1997. In connection with the merger, 3,494 Limited
Partnership Unitholders representing 111,658 Limited Partnership Units elected
to exchange their limited partnership units for interests in Carey Diversified.
The December 1997 distribution was intended to (a) distribute funds in order to
adjust the net assets of the Partnership with the estimate of Total Exchange
Value, as defined in the Consent Solicitation Statement/Prospectus, of those
assets and (b) pay the January distribution.

                  Limited Partners owning 1,542 Limited Partnership Units who
did not elect to receive interests in Carey Diversified have elected to retain a
limited partnership interest in the Partnership as Subsidiary Partnership
Unitholders. Subsidiary Partnership Units have economic interests and legal
rights in the Partnership that are substantially similar to those of Limited
Partnership Units and represent a direct ownership interest in the Partnership.
The holders of Subsidiary Partnership Units will be paid a pro rata share of any
distribution paid by the Partnership to Carey Diversified. The Partnership will
continue to pay distributions on a quarterly basis until liquidating
distributions are made, as described in the Consent Solicitation
Statement/Prospectus. The objective with respect to Subsidiary Partnership Units
will be to pay distributions as if the Consolidation never had occurred based
upon the net cash flows generated by the Partnership.

                  The Partnership's investing activities during 1997 included
$383,000 of costs incurred in connection with the completion of renovations
necessary to bring the Alpena and Petoskey hotels in compliance with the Holiday
Inn hotel modernization plan and replacement of furniture, fixture and equipment
at the hotels. Alpena and Petoskey maintain a reserve of $95,000 for on-going
replacement purchases.


                                     - 3 -
<PAGE>   31
                  DS Group Limited has an option to purchase its leased property
in December 1998 at a purchase price of the greater of $3,000,000 or fair market
value. The DS Group property is not encumbered by mortgage debt and provides for
annual rent of $393,000. If DS Group does not exercise its option, the lease
term will continue until 2010. Penn Virginia Corporation may exercise an option
to purchase its leased properties at any time between August 1998 and August
1999 at a purchase price of the greater of $3,700,000 or fair market value. The
Penn Virginia property is not encumbered by mortgage debt and provides an annual
rent of $499,000. Neither DS Group nor Penn Virginia has indicated whether it
intends to exercise its option. The Penn Virginia lease term expires in 1999.
Penn Virginia also may elect a ten-year renewal option in the event that it does
not exercise its purchase option.

                  All of the Partnership's properties are subject to
environmental statutes and regulations regarding the discharge of hazardous
materials and any related remediation obligations. Except for the two hotel
properties, all of the properties are currently net leased to corporate tenants.
The Partnership normally structures its leases to require tenants to comply with
all laws. In addition, substantially all of the Partnership's net leases include
indemnification provisions that require tenants to indemnify the Partnership
from all liabilities and losses related to their operations at the leased
properties. If the Partnership undertakes to clean up or remediate any of its
leased properties, the General Partner believes that in most cases the
Partnership will be entitled to full reimbursement from tenants for such costs.
In the event that the Partnership absorbs a portion of such costs, the General
Partner believes that such expenditures will not have a material adverse effect
on the Partnership's financial condition, liquidity or results of operations.

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

                  In June 1997, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in full set
general purpose financial statements. SFAS No. 131 establishes accounting
standards for the way that public business enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 130 and SFAS No. 131 are required to be adopted by 1998.
The Partnership is currently evaluating the impact, if any, of SFAS No. 130 and
SFAS 131.

                  The Partnership's management company has responsibility for
maintaining the Partnership's books and records and servicing the computer
systems used in maintaining such books and records. In its preliminary
assessment of Year 2000 issues, the management company believes that such issues
will not have a material effect on the Partnership's operations; however such
assessment has not been completed. The Partnership relies on its bank and
transfer agent for certain computer-related services and has initiated
discussions to determine whether they are addressing Year 2000 issues that might
affect the Partnership.


                                     - 4 -
<PAGE>   32
                        REPORT of INDEPENDENT ACCOUNTANTS



To the Partners of
  Corporate Property Associates 5:



                  We have audited the accompanying balance sheets of Corporate
Property Associates 5 (a California limited partnership) as of December 31, 1996
and 1997, and the related statements of income, partners' capital and cash flows
for each of the three years in the period ended December 31, 1997. We have also
audited the financial statement schedule included on pages 22 to 25 of this
Annual Report. These financial statements and financial statement schedule are
the responsibility of the General Partners. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

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

                  In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Corporate
Property Associates 5 (a California limited partnership) as of December 31, 1996
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the Schedule of
Real Estate and Accumulated Depreciation as of December 31, 1997, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the financial information required to
be included therein pursuant to Securities and Exchange Commission Regulation
S-X Rule 12-28.



                                                     /s/Coopers & Lybrand L.L.P.

New York, New York
March 24, 1998


                                     - 5 -
<PAGE>   33
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                                 BALANCE SHEETS

                           December 31, 1996 and 1997

<TABLE>
<CAPTION>
                                                                    1996                  1997
                                                               ------------          ------------
<S>                                                            <C>                   <C>
        ASSETS:

Real estate leased to others:
   Accounted for under the
      operating method:
         Land                                                  $  3,960,767          $  3,704,767
         Buildings                                               22,753,408            15,200,853
                                                               ------------          ------------
                                                                 26,714,175            18,905,620
         Accumulated depreciation                                 9,111,827             7,205,039
                                                               ------------          ------------
                                                                 17,602,348            11,700,581
   Net investment in direct financing leases                     19,298,726            19,257,669
                                                               ------------          ------------
         Real estate leased to others                            36,901,074            30,958,250
Operating real estate, net of accumulated depreciation
   of $4,637,421 in 1996 and $5,106,449 in 1997                   7,463,300             7,377,569
Cash and cash equivalents                                         5,237,995             3,046,822
Funds in escrow                                                     575,051               591,917
Other assets, net of accumulated amortization
   of $130,589 in 1996 and net of reserve for
   uncollected rents of $45,140 in 1997                           2,474,117             2,289,995
                                                               ------------          ------------
             Total assets                                      $ 52,651,537          $ 44,264,553
                                                               ============          ============


        LIABILITIES:

Mortgage notes payable                                         $ 14,283,940          $  9,295,000
Note payable to affiliate                                         1,151,000             1,151,000
Accrued interest payable                                             45,707
Accounts payable and accrued expenses                               433,842               262,658
Accounts payable to affiliates                                      111,526             1,656,880
Deferred gain, net of accumulated amortization of
   $180,278 in 1996 and $225,347 in 1997                            901,390               856,321
Prepaid rental income                                                                     140,472
Other liabilities                                                   658,542               614,600
                                                               ------------          ------------
             Total liabilities                                   17,585,947            13,976,931
                                                               ------------          ------------
Commitments and contingencies


        PARTNERS' CAPITAL:

General Partners                                                    (67,666)           (1,625,151)
Limited Partners (113,200 Limited Partnership
   Units issued and outstanding)                                 35,133,256            31,912,773
                                                               ------------          ------------
             Total partners' capital                             35,065,590            30,287,622
                                                               ------------          ------------
             Total liabilities and
             partners' capital                                 $ 52,651,537          $ 44,264,553
                                                               ============          ============
</TABLE>


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


                                     - 6 -
<PAGE>   34
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                              STATEMENTS of INCOME

              For the years ended December 31, 1995, 1996 and 1997

<TABLE>
<CAPTION>
                                                            1995                1996               1997
                                                        -----------         -----------         ----------
<S>                                                     <C>                 <C>                 <C>
Revenues:
   Rental income                                        $ 4,642,686         $ 3,225,129         $2,544,856
   Interest income from direct financing leases           3,879,125           3,409,166          3,473,565
   Other interest income                                    307,951             210,913            150,047
   Revenue of hotel operations                            6,768,268           6,359,758          3,571,232
   Other income                                             170,107                                 10,000
                                                        -----------         -----------         ----------
                                                         15,768,137          13,204,966          9,749,700
                                                        -----------         -----------         ----------
Expenses:
   Interest                                               3,495,872           2,075,230          1,363,680
   Depreciation                                           2,065,781           1,331,028          1,131,397
   General and administrative                               841,920             460,948            677,531
   Property expenses                                        810,581             579,189            632,612
   Amortization                                              33,599              13,301
   Writedown to fair value                                1,980,550           1,300,000          1,350,000
   Operating expense of hotel operations                  5,241,370           4,952,959          2,865,861
                                                        -----------         -----------         ----------
                                                         14,469,673          10,712,655          8,021,081
                                                        -----------         -----------         ----------

      Income before gain on sale                          1,298,464           2,492,311          1,728,619

   Gain on foreclosure                                                                             956,829
   Gain on sale of real estate, net                         614,234           5,284,165
                                                        -----------         -----------         ----------

      Net income                                        $ 1,912,698         $ 7,776,476         $2,685,448
                                                        ===========         ===========         ==========

Net income allocated to:
   Individual General Partner                           $    52,520         $   119,855         $   26,178
                                                        ===========         ===========         ==========

   Corporate General Partner                            $   148,208         $   342,857         $  154,097
                                                        ===========         ===========         ==========

   Limited Partners                                     $ 1,711,970         $ 7,313,764         $2,505,173
                                                        ===========         ===========         ==========

Net income per Limited
   Partnership Unit
   (113,200 Units outstanding)                          $     15.12         $     64.61         $    22.13
                                                        ===========         ===========         ==========
</TABLE>


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


                                     - 7 -
<PAGE>   35
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                         STATEMENTS of PARTNERS' CAPITAL

              For the years ended December 31, 1995, 1996 and 1997

<TABLE>
<CAPTION>
                                                           Partners' Capital Accounts
                                       ------------------------------------------------------------------------
                                                                                                     Limited
                                                                                                     Partners'
                                                               General              Limited          Amount Per
                                          Total                Partners             Partners          Unit  (a)
                                       ------------          -----------          ------------       ----------
<S>                                    <C>                   <C>                  <C>                   <C>
Balance, December 31, 1994             $ 37,888,347          $   (94,987)         $ 37,983,334          $ 335

Distributions                            (8,054,982)            (368,702)           (7,686,280)           (68)

Net income, 1995                          1,912,698              200,728             1,711,970             15
                                       ------------          -----------          ------------          -----

Balance, December 31, 1995               31,746,063             (262,961)           32,009,024            282

Distributions                            (4,456,949)            (267,417)           (4,189,532)           (37)

Net income, 1996                          7,776,476              462,712             7,313,764             65
                                       ------------          -----------          ------------          -----

Balance, December 31, 19967              35,065,590              (67,666)           35,133,256            310

Distributions                            (6,040,572)            (314,916)           (5,725,656)           (51)

Accrued preferred distribution           (1,422,844)          (1,422,844)

Net income, 1997                          2,685,448              180,275             2,505,173             22
                                       ------------          -----------          ------------          -----

Balance, December 31, 1997             $ 30,287,622          $(1,625,151)         $ 31,912,773          $ 281
                                       ============          ===========          ============          =====
</TABLE>


(a)     Based on 113,200 Units issued and outstanding during all periods.


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

                                     - 8 -
<PAGE>   36
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)
                            STATEMENTS of CASH FLOWS

              For the years ended December 31, 1995, 1996 and 1997

<TABLE>
<CAPTION>
                                                                         1995                  1996                 1997
                                                                     ------------          ------------          -----------
<S>                                                                  <C>                   <C>                   <C>
Cash flows from operating activities:
    Net income                                                       $  1,912,698          $  7,776,476          $ 2,685,448
    Adjustments to reconcile net income to net
       cash provided by operating activities:
       Depreciation and amortization                                    2,099,380             1,344,329            1,131,397
       Amortization of deferred gains                                     (71,678)              (64,974)             (45,069)
       Other noncash items                                                 13,162                54,212               41,057
       Writedown to fair value                                          1,980,550             1,300,000            1,350,000
       Gain on foreclosure                                                                                          (956,829)
       Net gain on sale of real estate                                   (614,234)           (5,284,165)
       Provision for uncollected rents                                    180,164               235,313              345,140
       Net change in operating assets and liabilities                    (811,972)              245,119             (157,498)
                                                                     ------------          ------------          -----------
            Net cash provided by operating
               activities                                               4,688,070             5,606,310            4,393,646
                                                                     ------------          ------------          -----------

Cash flows from investing activities:
    Additional capitalized costs                                       (1,078,951)             (172,447)            (383,297)
    Proceeds on sale and transfer of real estate                        3,387,362            18,592,329
    Purchase of limited partnership interests                          (1,750,175)
                                                                     ------------          ------------          -----------
         Net cash provided by (used in) investing activities              558,236            18,419,882             (383,297)
                                                                     ------------          ------------          -----------

Cash flows from financing activities:
    Distributions to partners                                          (8,054,982)           (4,456,949)          (5,967,522)
    Release of escrow funds in
      connection with mortgage prepayment                                                     2,295,000
    Prepayments of mortgage payable                                    (2,200,000)          (18,561,812)
    Payments on mortgage principal                                       (463,487)             (365,118)            (234,000)
    Partial prepayment of note payable to affiliate                      (144,000)
    Deferred financing costs                                              (10,000)
                                                                     ------------          ------------          -----------
            Net cash used in financing activities                     (10,872,469)          (21,088,879)          (6,201,522)
                                                                     ------------          ------------          -----------

            Net (decrease) increase in cash and
               cash equivalents                                        (5,626,163)            2,937,313           (2,191,173)

Cash and cash equivalents, beginning of year                            7,926,845             2,300,682            5,237,995
                                                                     ------------          ------------          -----------

            Cash and cash equivalents, end of year                   $  2,300,682          $  5,237,995          $ 3,046,822
                                                                     ============          ============          ===========
</TABLE>


<TABLE>
<S>                                                                                                                   <C>
Supplemental Schedule of noncash investing and financing activity:

A.  Accrued preferred distribution                                                                                    $ 1,422,844
                                                                                                                      ===========

B.  In connection with the sales of properties, purchasers assumed a mortgage
    loan obligation of $2,854,275 and accrued interest thereon of $12,049 in
    1996 and a mortgage loan obligation of $720,401 and accrued interest thereon
    of $5,780 in 1995 in lieu of paying cash.

C.  In connection with a foreclosure on a Partnership property in 1997, the
    Partnership transferred the property to the lender and was released from the
    obligations of the limited recourse mortgage loan. The gain on the
    foreclosure was as follows:

                  Mortgage loan payable released                                                                      $ 4,754,940
                  Other liabilities and assets, net                                                                        91,287
                  Carrying value of property                                                                           (3,889,398)
                                                                                                                      -----------
                            Gain on foreclosure                                                                       $   956,829
                                                                                                                      ===========
</TABLE>

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


                                     - 9 -
<PAGE>   37
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                          NOTES to FINANCIAL STATEMENTS


1.      Summary of Significant Accounting Policies:

         Use of Estimates:

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

         Real Estate Leased to Others:

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

            Corporate Property Associates 5 (the "Partnership") diversifies its
               real estate investments among various corporate tenants engaged
               in different industries and by property type throughout the
               United States.

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

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

                      Operating method - Under this method, real estate is
                      recorded at cost, rental revenue is recognized on a
                      straight-line basis over the term of the leases and
                      expenses (including depreciation) are charged to
                      operations as incurred.

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

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

         Operating Real Estate:

            Land, buildings and personal property are carried at cost. Major
               renewals and improvements are capitalized to the property
               accounts, while replacements, maintenance and repairs which do
               not improve or extend the lives of the respective assets are
               expensed currently.

         Depreciation:

            Depreciation is being computed using the straight-line method over
               the estimated useful lives of components of the particular
               properties, which range from 5 to 30 years.

         Cash Equivalents:

            The Partnership considers all short-term, highly liquid investments
               that are both readily convertible to cash and have a maturity of
               generally three months or less at the time of purchase to be cash
               equivalents. Items classified as cash equivalents include
               commercial paper and money market funds. Substantially all of the
               Partnership's cash and cash equivalents at December 31, 1996 and
               1997 were held in the custody of three, and two financial
               institutions, respectively.


                                   Continued

                                     - 10 -
<PAGE>   38
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued



         Other Assets and Liabilities:

            Included in other assets are deferred charges incurred in connection
               with mortgage note financings and refinancings, an investment in
               a limited partnership and deferred costs of Consolidation (Note
               15). Deferred charges are amortized over the terms of the
               mortgages. The Partnership's 17.5% investment in an unaffiliated
               limited partnership is accounted for under the cost method, i.e.,
               income is recorded based on distributions received from net
               accumulated earnings. Included in other liabilities is deferred
               rental income for the aggregate difference on an operating method
               lease between scheduled rents which vary during the lease term
               and rent recognized on a straight-line basis. Deferred costs of
               Consolidation represent certain costs related to a Consolidation
               transaction which have been capitalized. Such Consolidation costs
               will be included in the revaluation of assets subsequent to
               December 31, 1997.

         Deferred Gain:

            Deferred gain consists of certain funds received in 1992, in
               connection with the loan refinancings of the Alpena and Petoskey,
               Michigan mortgage which are being amortized on a straight-line
               basis over 24 years.

         Income Taxes:

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

         Reclassifications:

            Certain 1995 and 1996 amounts have been reclassified to conform to
               the 1997 financial statement presentation.

 2.     Partnership Agreement:

            The Partnership was organized on April 12, 1983 under the Uniform
               Limited Partnership Act of the State of California for the
               purpose of engaging in the business of investing in and leasing
               industrial and commercial real estate. All the Units were sold
               prior to December 21, 1983, at which time the offering
               terminated. The Partnership will terminate on December 31, 2005,
               or sooner, in accordance with the terms of the Amended Agreement
               of Limited Partnership (the "Agreement").

            Through December 31, 1997, the Agreement provided that the General
               Partners were allocated 6% (1% to the Individual General Partner,
               and 5% to the Corporate General Partner, Carey Corporate
               Property, Inc.), and the Limited Partners were allocated 94% of
               the profits and losses as well as distributions of Distributable
               Cash From Operations, as defined in the Agreement, as well as net
               proceeds from the sale of Partnership properties. Effective
               January 1, 1998, as a result of the merger (see Note 15) of the
               Partnership with a subsidiary partnership of Carey Diversified
               LLC ("Carey Diversified"), Carey Diversified is the sole general
               partner of the Partnership. Carey Diversified and the holders of
               Subsidiary Partnership Units are allocated 94% of the profits and
               losses and distributable cash, and two special limited partners,
               Carey Management LLC ("Carey Management") and William P. Carey,
               are allocated 5% and 1% of the profits and losses and
               distributable cash from operations, respectively.


                                   Continued

                                     - 11 -
<PAGE>   39
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued



            In connection with the merger with Carey Diversified and the listing
               on the New York Stock Exchange, the former Corporate General
               Partner will be entitled to receive a subordinated preferred
               return of $1,422,844 which was measured based upon the cumulative
               proceeds arising from the sale of the Partnership's assets. To
               satisfy the conditions for receiving the preferred return, the
               shares of Carey Diversified must achieve a closing price equal to
               or in excess of $23.11 for five consecutive trading days. The
               General Partner believes that it is probable, as defined pursuant
               to Statement of Financial Accounting Standards No. 5, that the
               conditions for paying the preferred return will be achieved, and
               the full amount of the subordinated preferred return is included
               in accounts payable to affiliates as of December 31, 1997 in the
               accompanying financial statements.

            In accordance with the Agreement, the former General Partners, as a
               result of having negative capital balances at the beginning of
               each year, were allocated a portion of the 1995, 1996 and 1997
               gains on sale of property as well as the related tax gain in
               order to reduce their negative balances. The Partnership paid a
               special distribution in 1995 of proceeds from a property sale.
               The distribution was allocated 1% to the Individual General
               Partner and 99% to the Limited Partners in accordance with the
               Agreement.

3.      Transactions with Related Parties:

            The Partnership holds a 65% undivided interest as tenants-in-common
               in hotel properties in Alpena and Petoskey, Michigan with
               Corporate Property Associates 6 ("CPA(R):6"), an affiliate which
               owns the remaining 35% interest. The Partnership accounts for its
               interest in the Alpena and Petoskey properties on a proportional
               basis.

            Under the Agreement, W.P. Carey & Co., Inc. ("W.P. Carey") and other
               affiliates were also entitled to receive a property management
               fee and reimbursement of certain expenses incurred in connection
               with the Partnership's operations. General and administrative
               expense reimbursements consist primarily of the actual cost of
               personnel needed in providing administrative services necessary
               to the operation of the Partnership. Effective January 1, 1998,
               the fees and reimbursements are payable to Carey Management, an
               affiliate of Carey Diversified. Property management fee and
               general and administrative expense reimbursements are summarized
               as follows:

<TABLE>
<CAPTION>
                                                                          1995             1996              1997
                                                                        --------         --------          --------
<S>                                                                     <C>              <C>               <C>
                  Property management fee                               $116,825         $ 76,763          $ 62,086
                  General and administrative
                      expense reimbursements                             117,584          113,288           201,875
                                                                        --------         --------          --------
                                                                        $234,409         $190,051          $263,961
                                                                        ========         ========          ========
</TABLE>


            During 1995, 1996 and 1997, fees aggregating $180,242, $91,265 and
               $63,323, respectively, were incurred for legal services performed
               by a firm in which the Secretary, until July 1997, of the
               Corporate General Partner and other affiliates is a partner.

            The mortgage loans on the Alpena and Petoskey properties consist of
               tax-exempt bond obligations of $7,150,000 for each property of
               which the Partnership's share of each is $4,647,500. The bonds
               are also collateralized by mortgage and/or lease assignments on
               eight other Partnership properties. In the event of default, the
               bondholders have recourse to the Partnership's collateral to the
               full extent of the outstanding balance of the bonds including the
               portion of the obligation applicable to CPA(R):6. In connection
               with restructuring the bond obligation in 1992, the Partnership
               received cash and other consideration from CPA(R):6.

                                   Continued

                                     - 12 -
<PAGE>   40
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


            The Partnership is a participant in an agreement with W.P. Carey and
               other affiliates for the purpose of leasing office space used for
               the administration of real estate entities and W.P. Carey and for
               sharing the associated costs. Pursuant to the terms of the
               agreement, the Partnership's share of rental, occupancy and
               leasehold improvement costs is based on adjusted gross revenues,
               as defined. Net expenses incurred in 1995, 1996 and 1997 were
               $182,843, $83,533 and $63,108, respectively.

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

      A.    Real Estate Leased to Others:

            Scheduled future minimum rents, exclusive of renewals, under
               noncancellable operating leases amount to approximately
               $1,355,000 in 1998, $1,179,000 in 1999, $793,000 in 2000 and
               $477,000 each of the years 2001 to 2002, and aggregate
               approximately $6,456,000 through 2010.

            Contingent rents were approximately $5,000, $6,000 and $6,000 in
               1995, 1996 and 1997, respectively.

      B.    Operating Real Estate:

            Operating real estate, at cost, is summarized as follows:

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                                     ------------
                                                                            1996                      1997
                                                                        -----------               -----------
<S>                                                                     <C>                       <C>
                      Land                                              $   479,050               $   479,050
                      Buildings                                           9,603,750                10,177,569
                      Personal property                                   2,017,921                 1,827,399
                                                                        -----------               -----------
                                                                         12,100,721                12,484,018
                          Less: Accumulated depreciation                  4,637,421                 5,106,449
                                                                        -----------               -----------
                                                                        $ 7,463,300               $ 7,377,569
                                                                        ===========               ===========
</TABLE>

5.      Net Investment in Direct Financing Leases:

            Net investment in direct financing leases is summarized as follows:

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                                     ------------
                                                                            1996                      1997
                                                                        -----------               -----------
<S>                                                                     <C>                       <C>
                      Minimum lease payments receivable                 $32,483,668               $29,899,105
                      Unguaranteed residual value                        17,495,677                17,495,677
                                                                        -----------               -----------
                                                                         49,979,345                47,394,782
                          Less: Unearned income                          30,680,619                28,137,113
                                                                        -----------               -----------
                                                                        $19,298,726               $19,257,669
                                                                        ===========               ===========
</TABLE>


            Scheduled future minimum rents, exclusive of renewals, under
               noncancellable financing leases amount to approximately
               $2,585,000 in each of the years from 1998 to 2002 and aggregate
               approximately $29,899,000 through 2017.

            Contingent rents were approximately $758,000, $776,000 and $930,000
               in 1995, 1996 and 1997, respectively.

                                   Continued


                                     - 13 -
<PAGE>   41
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


6.      Mortgage Notes Payable and Note Payable to Affiliate:

        A.  Mortgage Notes Payable

            The Partnership's mortgage note payable is collateralized by lease
               assignments and by real property with a gross amount of
               approximately $12,484,000, before accumulated depreciation (also
               see Note 3). As of December 31, 1997, mortgage notes payable bear
               interest at rates varying from 6.8% to 8% per annum and mature in
               2015.

         Scheduled principal payments during each of the next five years
               following December 31, 1997 and thereafter, are as follows:

<TABLE>
<CAPTION>
               Year Ending December 31,
               ------------------------
<S>                                                                        <C>
                  1998                                                     $  253,500
                  1999                                                        266,500
                  2000                                                        286,000
                  2001                                                        312,000
                  2002                                                        331,500
                  Thereafter                                                7,845,500
                                                                           ----------
                     Total                                                 $9,295,000
                                                                           ==========
</TABLE>

        B.  Note Payable to Affiliate:
            A  note payable to CPA(R):6 of $1,151,000 provides for payments of
               interest only at a rate of 13.48% per annum through August 1,
               1999, at which time the interest rate will reset to the
               Applicable Federal Rate (as defined in the Internal Revenue Code
               of 1986). The note, which is a recourse obligation of the
               Partnership, matures on May 1, 2012, at which time a balloon
               payment for any unpaid principal is due. The note may be prepaid
               in part or whole at any time.

            Interest paid on mortgage notes payable and the note payable to
               affiliate was $3,554,413, $2,254,150 and $983,568 in 1995, 1996
               and 1997, respectively.


 7.     Distributions to Partners:

            Distributions declared and paid to partners are summarized as
               follows:

<TABLE>
<CAPTION>
                                       Distributions Paid
         Year Ending                     and Payable to                  Distributions Paid to               Limited Partners'
         December 31,                  General Partners                     Limited Partners                 Per Unit Amount
         ------------                  ----------------                     ----------------                 ---------------
<S>                                    <C>                               <C>                                 <C>
              1995:
         Quarterly distributions           $345,833                           $5,422,280                         $47.90
         Special distribution                22,869                            2,264,000                          20.00
                                           --------                           ----------                         ------
              Total 1995                   $368,702                           $7,686,280                         $67.90
                                           ========                           ==========                         ======

              1996                         $267,417                           $4,189,532                         $37.01
                                           ========                           ==========                         ======

              1997:
         Quarterly distributions           $314,916                           $4,933,256                         $43.58
         Special distribution                                                    792,400                           7.00
                                           --------                           ----------                         ------
              Total 1997                   $314,916                           $5,725,656                         $50.58
                                           ========                           ==========                         ======
</TABLE>

         Distributions for 1997 include distributions of $1,144,452 to Limited
               Partners and $73,050 to General Partners declared in December
               1997.


                                   Continued


                                     - 14 -
<PAGE>   42
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


 8.     Income for Federal Tax Purposes:

            Income for financial statement purposes differs from income for
               Federal income tax purposes because of the difference in the
               treatment of certain items for income tax purposes and financial
               statement purposes. A reconciliation of accounting differences is
               as follows:

<TABLE>
<CAPTION>
                                                                  1995                    1996                 1997
                                                               -----------             -----------           -----------
<S>                                                            <C>                     <C>                   <C>
      Net income per Statements of Income                      $ 1,912,698             $ 7,776,476           $ 2,685,448
      Excess tax depreciation                                   (2,399,357)             (1,980,182)           (1,408,880)
      Writedowns of assets                                       1,980,550               1,300,000             1,350,000
      Difference in gains or losses on
         dispositions of property                                 (157,203)              3,475,585             1,970,372
      Other                                                        284,878                (544,552)             (188,565)
                                                               -----------             -----------           -----------
         Income reported for Federal
             income tax purposes                               $ 1,621,566             $10,027,327           $ 4,408,375
                                                               ===========             ===========           ===========
</TABLE>


9.      Industry Segment Information:

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

            In 1995, 1996 and 1997, the Partnership earned its total leasing
               revenues (rental income plus interest income from financing
               leases) from the following lease obligors:

<TABLE>
<CAPTION>
                                                       1995           %              1996           %               1997         %
                                                       ----          ---             ----          ---              ----        --
<S>                                                 <C>              <C>          <C>              <C>           <C>            <C>
   Gould, Inc.                                      $1,132,500        13%         $1,215,000        18%          $1,113,750      19%
   Duff-Norton Company, Inc.                         1,020,717        12           1,020,717        15            1,020,717      17
   DeVlieg Bullard, Inc.                               830,984        10             912,864        14              953,803      16
   Exide Electronics
      Corporation                                      528,926         6             572,130         9              572,130      10
   Penn Virginia Corporation                           498,750         6             498,750         8              498,750       8
   DS Group Limited (formerly
      Stoody Deloro Stellite, Inc.)                    404,719         5             390,068         6              491,298       8
   Arley Merchandise
      Corporation                                      600,000         7             600,000         9              300,000       5
   Harcourt General Corporation                        233,750         3             233,750         4              233,750       4
   Penberthy Products, Inc.                            182,529         2             200,514         3              209,507       3
   Winn Dixie Stores, Inc.                             191,534         2             191,534         3              191,534       3
   Other                                               212,383         2              31,602                        150,000       3
   Sunds Defibrator Woodhandling, Inc.
      (formerly FMP/Rauma Company)                     131,033         2             144,239         2              144,239       2
   Rochester Button Company                            199,968         2             225,706         3              138,943       2
   GATX Logistics, Inc.                              1,398,600        16             380,730         6
   IBM Corporation                                     318,097         4              16,691
   Industrial General Corporation                      637,321         8
                                                    ----------       ---          ----------       ---           ----------     ---
                                                    $8,521,811       100%         $6,634,295       100%          $6,018,421     100%
                                                    ==========       ===          ==========       ===           ==========     === 
</TABLE>

                                   Continued


                                     - 15 -
<PAGE>   43
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


            The Partnership's share of the operating results for the hotel
                properties are as follows:

<TABLE>
<CAPTION>
                                                       1995                            1996                      1997
                                                   -----------                     -----------                 -----------
<S>                                                <C>                             <C>                         <C>
         Revenues                                  $ 6,768,268                     $ 6,359,758                 $ 3,571,232
         Fees to hotel management
           company                                    (143,498)                       (134,872)                    (75,356)
         Other operating expenses                   (5,097,872)                     (4,818,087)                 (2,790,505)
                                                   -----------                     -----------                 -----------
         Hotel operating income                    $ 1,526,898                     $ 1,406,799                 $   705,371
                                                   ===========                     ===========                 ===========
</TABLE>

10.     Property in Oxnard, California:

            In November 1985, the Partnership purchased land and building for
               $9,840,500 and entered into a net lease with Gould, Inc.
               ("Gould"). The Gould lease provided for an initial term of
               fourteen years ending November 30, 1999 with multiple five-year
               renewal terms at Gould's option.

            On November 12, 1997, the Partnership and Gould entered into an
               agreement to terminate the lease effective October 1, 1997 with a
               remaining obligation on the part of Gould to perform certain
               repairs to the building. In consideration for the termination of
               the lease, Gould paid a termination fee of $1,837,500 in January
               1998.

            On October 1, 1997, the Partnership entered into a lease with
               Lockheed Martin Corporation ("Lockheed") for approximately 48% of
               the leaseable space. The Lockheed lease provides for an initial
               term through August 31, 2000 with options for two one-year
               renewal terms. Annual rent is $360,000 increasing to $475,000 in
               December 1999. In the event that the Partnership receives a bona
               fide offer to lease the remaining space, Lockheed will have a
               right of first refusal. If the remaining space is vacant,
               Lockheed can exercise the right to occupy such space.

            The termination fee is being amortized through November 1999.


11.     Funds in Escrow:

            Funds in escrow at December 31, 1996 and 1997 consist of reserves
               and escrow funds for the hotel properties and related mortgage
               debt.

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                                    ------------
                                                                            1996                      1997
                                                                          ---------                 ---------
<S>                                                                       <C>                       <C>
                      Debt service escrow account and bond
                         reserves on Alpena and Petoskey
                         properties                                       $ 490,100                 $ 496,600
                      Hotel furniture, fixture
                        and equipment reserves                               84,951                    95,317
                                                                          ---------                 ---------
                                                                          $ 575,051                 $ 591,917
                                                                          =========                 =========
</TABLE>


                                   Continued


                                     - 16 -
<PAGE>   44
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


12.     Gains and Losses on the Sale of Real Estate:

        Industrial General Corp.:

            In August 1985, the Partnership purchased from and net leased to
               Industrial General Corporation ("IGC") and certain of its
               wholly-owned subsidiaries, seven properties located in Elyria and
               Bellville, Ohio; Forrest City and Bald Knob, Arkansas; Carthage,
               New York; and Newburyport, Massachusetts. Subsequent to the
               purchase, the Partnership agreed to exchange the Saginaw property
               for an expansion of the Newburyport facility, severed the
               Carthage property from the lease and entered into a lease with
               FMP/Rauma Company ("FMP"). In December 1994, the Partnership sold
               the Forrest City property.

            In July 1995, IGC filed a voluntary petition of bankruptcy under
               Chapter 11 of the United States Bankruptcy Code. In connection
               with an asset acquisition of the plastics division of IGC, on
               September 14, 1995, the Partnership entered into a series of
               transactions which resulted in the termination of the IGC lease,
               the sale of the Bald Knob, Bellville and Newburyport properties
               and the full satisfaction of the mortgage loan obligation
               collateralized by all of the IGC properties and the FMP property
               which had been scheduled to mature on September 1, 1995. In
               connection with the sale of the Bald Knob property to IGC, the
               Partnership received cash of $987,362 and IGC, with the consent
               of the mortgage lender, assumed a mortgage obligation from the
               Partnership of $720,401 and accrued interest thereon of $5,780.
               Additionally, IGC agreed to pay an additional $200,000 in
               installments to the Partnership of which $185,000 had been
               received as of December 31, 1997. The Bellville and Newburyport
               properties were sold for $2,400,000 in cash to G.I. Plastek
               Industrial Properties Limited Partnership ("Plastek Properties"),
               an affiliate of G.I. Plastek Limited Partnership ("Plastek")
               which acquired the assets of the IGC plastics division.

               The Partnership used $2,200,000 of the proceeds to pay off the
               remaining balance on the matured mortgage loan obligation on the
               IGC and FMP properties. In connection with the sale of the three
               properties, the Partnership realized a loss of $1,719,828.

            The Partnership also purchased limited partnership interests in
               Plastek. The Partnership made capital contributions of $175 and
               $1,750,000 for Class A and Class B limited partnership interests,
               respectively. The Class A interest provides for a 17.5%
               participation in the profits and losses of Plastek after payment
               of preferred returns to Class B interests. Class B interests are
               entitled to a cumulative preferred return of 10% on their
               contributions; however, they do not participate in nor receive
               other allocations of any gains or losses of Plastek. The Class B
               interest is redeemable on September 8, 2000. As of December 31,
               1997, the Partnership has not received any distributions.

                                   Continued


                                     - 17 -
<PAGE>   45
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued



            The Partnership retains ownership of the Elyria property. In 1995,
               based on the appraised value of the property and the costs that
               would need to be incurred to prepare the property for sale or
               lease after IGC vacated, the Partnership wrote off the value of
               the property and recognized a charge of $691,640.

         Liberty Fabrics of New York:

            In January 1984, the Partnership purchased properties in
               Gordonsville, Virginia and in North Bergen, New Jersey and
               entered into a net lease with Liberty Fabrics of New York
               ("Liberty"). In December 1993, Liberty notified the Partnership
               of its intention to exercise its purchase option on the
               properties. Pursuant to the lease, the purchase price would be
               the greater of $7,000,000, the Partnership's purchase price for
               the property, or fair market value as encumbered by the lease.

            On December 29, 1994, the Partnership and Liberty terminated the
               lease and agreed that the properties would be transferred to
               Liberty for $9,359,000, subject to a final determination of the
               fair value of the property. The final determination was made with
               no adjustment made to the fair market value thereby completing
               the sale. As a result, the Partnership recognized a gain of
               $2,334,062 in 1995 on the sale of the properties.

        Rapid City Hotel:

            In 1985, the Partnership purchased a hotel in Rapid City, South
               Dakota, which was operated as a Holiday Inn, with $6,800,000 of
               tax-exempt bonds which were supported by a letter of credit
               issued by a third party. In September 1994, the Partnership was
               advised by Holiday Inn that it would need to upgrade the hotel's
               physical plant by January 1997 in order to meet the requirements
               of a modernization plan adopted by Holiday Inn or surrender its
               Holiday Inn license. Management concluded that such additional
               investment required was not in the best interests of the
               Partnership and determined to sell the property.

            In 1995, the Partnership reevaluated the net realizable value of the
               property and recognized a noncash charge of $1,000,000 on the
               writedown. In the second quarter of 1996, the Partnership charged
               an additional $1,300,000 as a writedown to fair value to an
               amount Management believed would approximate the proceeds from a
               sale.

            On October 1, 1996, the Partnership sold the property and the
               operating assets and liabilities of the hotel for $4,105,000. The
               Partnership recognized a gain of $784,618 on the sale in 1996,
               and the bonds were paid off. The gain includes the recognition of
               the release of unamortized deferred gains relating to the
               acquisition of the hotel operation in 1991 from the former
               lessee.


                                   Continued


                                     - 18 -
<PAGE>   46
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


        Helena, Montana Office Building:

            In May 1985, the Partnership purchased an office building in Helena,
               Montana and was assigned an existing net lease with IBM
               Corporation ("IBM") as lessee. In 1992, the lease with IBM and
               the mortgage loan on the property were modified at which time IBM
               reduced its occupancy from 100% to 40% of the leasable space. The
               Partnership subsequently leased the remaining space to various
               other tenants.

            On January 19, 1996, the Partnership sold the property for
               $4,800,000 including the purchaser's assumption of the existing
               mortgage loan on the property. Net of closing costs, the
               Partnership received cash proceeds of $1,741,261, assigned the
               mortgage loan obligation of $2,854,275 and accrued interest
               thereon of $12,049 to the purchaser and recognized a gain of
               $90,356 on the sale in 1996.

        GATX Logistics, Inc.:

            In June 1985, the Partnership purchased a warehouse property in
               Hodgkins, Illinois leased to General Motors Corporation ("GM").
               In November 1993, GM terminated its lease and the Partnership
               entered into a short-term lease with GATX Logistics,
               Inc.("GATX"). Subsequently, in November 1994, GATX and the
               Partnership entered into a new lease which provided for a
               five-year term and a renewal term of five years at GATX's option.

            On April 9, 1996, the Partnership sold the Hodgkins property for
               $13,200,000 and assigned the GATX lease, as lessor, to the
               purchaser. Net of costs and amounts necessary to pay the
               remaining $3,208,526 balance on the property's mortgage loan, the
               Partnership received cash proceeds of $9,428,270 and recognized a
               gain on sale in 1996 of $4,409,191.

        Arley Merchandise Corporation:

            The Partnership owned two properties in Sumter and Columbia, South
               Carolina that were leased to Arley Merchandise Corporation
               ("Arley"). In July 1997, the Arley lease was terminated by the
               Bankruptcy Court in connection with Arley's voluntary petition of
               bankruptcy. In connection with the termination of the lease, the
               Partnership wrote off $300,000 of uncollected rents and wrote
               down the Arley properties by $1,350,000.

            In May 1997, the lender on the limited recourse mortgage loan
               collateralized by the Arley properties made a demand for payment
               for the entire outstanding principal balance of the loan of
               $4,754,940. The loan had initially matured in January 1993, at
               which time the lender and the Partnership entered into a
               forbearance agreement and attempted to reach an agreement to
               restructure the loan. Such an agreement was not reached and the
               forbearance agreement expired July 1, 1995.

            In June 1997, the lender initiated a lawsuit for the purpose of
               foreclosing on the Arley properties. The Partnership did not
               contest the lender's actions, and on November 17, 1997, the
               ownership of the Arley properties was transferred to the lender
               and the loan obligation was canceled. Since the loan was limited
               recourse, the lender's sole recourse was to the Arley properties
               and certain deposits. In connection with the foreclosure, the
               Partnership recognized a gain of $956,829 on the difference
               between liabilities forgiven and assets surrendered.


                                   Continued


                                     - 19 -
<PAGE>   47
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


13.     Environmental Matters:

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

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

14.     Disclosure on Fair Value of Financial Instruments:

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

            The Partnership estimates that the fair value of mortgage notes
               payable approximates $13,914,000 and $9,420,000 at December 31,
               1996 and 1997, respectively. The fair value of debt instruments
               was evaluated using a discounted cash flow model with discount
               rates which take into account the credit of the tenants and
               interest rate risk. Management believes that it is not
               practicable to estimate fair value for the note payable to
               affiliate.

            The carrying amount of the Partnership's limited partnership
               investment in Plastek, which interest was purchased in September
               1995 and which is accounted for under the cost method,
               approximates fair value.

15.     Exchange of Limited Partnership Units:

            On October 16, 1997, Carey Diversified distributed a Consent
               Solicitation Statement/Prospectus to the Limited Partners that
               described a proposal to consolidate the Partnership with the
               other CPA(R) Partnerships. The General Partners' proposals that
               each of the nine CPA(R) limited partnerships be merged with a
               corresponding subsidiary partnership of Carey Diversified, of
               which Carey Diversified is the general partner, was approved by
               the Limited Partners of all nine of the CPA(R) limited
               partnerships. Each limited partner had the option of either
               exchanging his or her limited partnership interest for an
               interest in Carey Diversified ("Listed Shares") or to retain a
               limited partnership interest in the subsidiary partnership
               ("Subsidiary Partnership Units"). On January 1, 1998, 3,494
               holders representing 111,658 of the 113,200 limited partnership
               units


                                   Continued


                                     - 20 -
<PAGE>   48
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued




               exchanged such units for 2,051,157 Listed Shares with 48 holders
               with the remaining 1,542 limited partnership units exchanging
               such units for Subsidiary Partnership Units.

            Listed shares commenced public trading on the New York Stock
               Exchange on January 21, 1998. Subsidiary Partnership Units
               provide substantially the same economic interests and legal
               rights as those of a limited partnership unit in the Partnership,
               but are not listed on a securities exchange. A liquidating
               distribution to holders of Subsidiary Partnership Units will be
               made after an appraisal of the Partnership's properties which
               date is to be no later than December 31, 2001.

16.     Accounting Pronouncements:

            In June 1997, the FASB issued Statement of Financial Accounting
               Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and
               SFAS No. 131, "Disclosure about Segments of an Enterprise and
               Related Information." SFAS No. 130 establishes standards for
               reporting and display of comprehensive income and its components
               (revenues, expenses, gains and losses) in full set general
               purpose financial statements. SFAS No. 131 establishes accounting
               standards for the way that public business enterprises report
               selected information about operating segments in interim
               financial reports issued to shareholders. SFAS No. 130 and SFAS
               No. 131 are required to be adopted by 1998. The Partnership is
               currently evaluating the impact, if any, of SFAS No. 130 and SFAS
               131.


                                     - 21 -
<PAGE>   49
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

              SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION

                             as of December 31, 1997

<TABLE>
<CAPTION>

                                                          Initial Cost to Partnership           Costs
                                                       ---------------------------------     Capitalized         Decrease
                                                                                Personal    Subsequent to         in Net
         Description              Encumbrances         Land        Buildings    Property    Acquisition (a)   Investment (b)
         -----------              ------------         ----        ---------    --------    ---------------   --------------
<S>                               <C>               <C>            <C>          <C>         <C>               <C>
Operating method:
 Manufacturing and office
  leased to Penn
  Virginia Corporation                              $  453,192     $ 3,246,808                $    3,112
 Land leased to
  Exide Electronics
  Corporation                                        1,170,000
 Motion picture theater leased
  to Harcourt General
  Corporation                                          243,000       1,927,000                    25,424
 Office and research facility
  leased to Lockheed Martin
  Corporation                                        1,422,000       8,418,500                    34,587
 Retail store leased to
  Winn Dixie Stores, Inc.                              414,700       1,525,872                    21,425
 Office/Manufacturing leased
  to Inno Tech Industries, Inc.                        122,884         568,756                                 $(691,640)
                                                    ----------     -----------                ----------       ---------
                                                    $3,825,776     $15,686,936                $   84,548       $(691,640)
                                                    ==========     ===========                ==========       =========

Operating real estate (e):
 Hotel properties located in
  Alpena, Michigan                 $4,647,500        $ 136,500      $4,905,875    $482,625      $822,768
  Petoskey, Michigan                4,647,500          342,550       4,684,875     497,575       611,250
                                   ----------        ---------      ----------    --------     ---------
                                   $9,295,000        $ 479,050      $9,590,750    $980,200    $1,434,018
                                   ==========        =========      ==========    ========    ==========
</TABLE>


<TABLE>
<CAPTION>
                                                     Gross Amount at which Carried
                                                      at Close of Period  (c)(d)
                                        ------------------------------------------------------
                                                                       Personal
         Description                    Land           Buildings       Property          Total
         -----------                    ----           ---------       --------          -----
<S>                                    <C>             <C>             <C>             <C>
Operating method:
 Manufacturing and office
  leased to Penn
  Virginia Corporation                 $  453,192      $ 3,249,920                      $ 3,703,112
 Land leased to
  Exide Electronics
  Corporation                           1,170,000                                         1,170,000
 Motion picture theater leased
  to Harcourt General
  Corporation                             243,000        1,952,424                        2,195,424
 Office and research facility
  leased to Lockheed Martin
  Corporation                           1,423,875        8,451,212                        9,875,087
 Retail store leased to
  Winn Dixie Stores, Inc.                 414,700        1,547,297                        1,961,997
 Office/Manufacturing leased
  to Inno Tech Industries, Inc.
                                       ----------      -----------                      -----------
                                       $3,704,767      $15,200,853                      $18,905,620
                                       ==========      ===========                      ===========

Operating real estate (e):
 Hotel properties located in
  Alpena, Michigan                     $  136,500       $5,265,396        $945,872       $6,347,768
  Petoskey, Michigan                      342,550        4,912,173         881,527        6,136,250
                                       ----------       ----------       ---------      -----------
                                       $  479,050      $10,177,569      $1,827,399      $12,484,018
                                       ==========      ===========      ==========      ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                   Life on which
                                                                                    Depreciation in
                                                                                   Latest Statement
                                         Accumulated                                  of Income
         Description                   Depreciation (d)       Date Acquired           is Computed
         -----------                   ----------------       --------------          ------------
<S>                                    <C>                    <C>                  <C>
Operating method:
 Manufacturing and office
  leased to Penn
  Virginia Corporation                    $2,477,521          August 7, 1984             5-30 YRS.
 Land leased to
  Exide Electronics
  Corporation                                                 June 20, 1985
 Motion picture theater leased
  to Harcourt General
  Corporation                                810,796          July 17, 1985              30 YRS.
 Office and research facility
  leased to Lockheed Martin
  Corporation                              3,407,405          November 25, 1985          30 YRS.
 Retail store leased to
  Winn Dixie Stores, Inc.                    509,317          March 17, 1988             30 YRS.
 Office/Manufacturing leased
  to Inno Tech Industries, Inc.                               August 30, 1995            N/A
                                          ----------
                                          $7,205,039
                                          ==========

Operating real estate (e):
 Hotel properties located in
  Alpena, Michigan                        $2,784,649          March 6, 1987              7-30 YRS.
  Petoskey, Michigan                       2,321,800          January 30, 1987           7-30 YRS.
                                          ----------
                                          $5,106,449
                                          ==========
</TABLE>


See accompanying notes to Schedule.

                                     - 22 -
<PAGE>   50
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

              SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION

                             as of December 31, 1997

<TABLE>
<CAPTION>
                                                                                                     Gross Amount
                                           Initial Cost to             Cost                           at which
                                             Partnership           Capitalized       Decrease in      Carried
                              Encum-    ---------------------     Subsequent to          Net        at Close of
         Description         brances    Land        Buildings     Acquisition(a)   Investment (b)    Period  (c)   Date Acquired
         -----------         -------    ----        ---------     --------------   --------------   ------------   ------------
<S>                          <C>      <C>           <C>           <C>             <C>               <C>            <C>
Direct financing method:
 Manufacturing facility
  to Duff-Norton
  Company, Inc.                       $  444,730    $ 5,055,270                                     $ 5,500,000    December 30, 1983
 Manufacturing facility
  leased to Rochester
  Button Company, Inc.                    86,663      2,815,596     $ 4,429       $(1,044,696)        1,861,992    April 11, 1984
 Office and research
  facility leased to
  Exide Electronics
  Corporation                                         2,030,000       1,500                           2,031,500    June 20, 1985
 Manufacturing
  facilities leased to
  DeVlieg Bullard, Inc.                  310,032      4,782,667                                       5,092,699    April 3, 1986
 Manufacturing
  facilities leased to
  Penberthy Products, Inc.                48,968      1,028,333                                       1,077,301    April 3, 1986
 Manufacturing
  facilities leased
  to DS Group Limited                    200,000      2,800,000                                       3,000,000    December 22, 1986
 Manufacturing
  facilities leased
  to Sunds Defibrator
  Woodhandling, Inc.                      24,750        669,427                                         694,177    August 30, 1985
                                      ----------    -----------     -------       -----------       -----------
                                      $1,115,143    $19,181,293     $ 5,929       $(1,044,696)      $19,257,669
                                      ==========    ===========     =======       ===========       ===========
</TABLE>


See accompanying notes to Schedule.


                                     - 23 -
<PAGE>   51
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

          NOTES TO SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION



        (a)  Consists of additional costs capitalized and acquisition costs,
             including legal fees, appraisal fees, title costs and other related
             professional fees, property acquired in connection with acquiring
             hotel assets and purchases of equipment for hotel operations.

        (b)  The decrease in net investment is due to the amortization of
             unearned income producing constant periodic rate on the net
             investment in direct financing leases and does not include lease
             payments received, which may be greater or less than such
             amortization and the writedown of properties to fair value.

        (c)  At December 31, 1997, the aggregate cost of real estate owned for
             Federal income tax purposes is $51,290,721.


                  RECONCILIATION OF REAL ESTATE ACCOUNTED FOR
                           UNDER THE OPERATING METHOD

<TABLE>
<CAPTION>
                                                                    December 31,
                                                                    ------------
                                                              1996                1997
                                                           ------------          -----------
<S>                                                        <C>                   <C>
         Balance at beginning
             of year                                       $ 38,994,553          $26,714,175

         Additions

         Disposition of property                            (12,280,378)          (6,458,555)

         Writedown to net realizable value                                        (1,350,000)
                                                           ------------          -----------
         Balance at close of
             year                                          $ 26,714,175          $18,905,620
                                                           ============          ===========
</TABLE>

<TABLE>
<CAPTION>
                                                     Reconciliation of Accumulated Depreciation
                                                     ------------------------------------------
                                                                    December 31,
                                                                    ------------
                                                              1996                1997
                                                            -----------          -----------
<S>                                                         <C>                  <C>
         Balance at beginning
             of year                                        $12,371,727          $ 9,111,827

         Depreciation expense                                   840,660              662,369

         Disposition of property                             (4,100,560)          (2,569,157)
                                                            -----------          -----------

         Balance at close of year                           $ 9,111,827          $ 7,205,039
                                                            ===========          ===========
</TABLE>


                                     - 24 -
<PAGE>   52
                         CORPORATE PROPERTY ASSOCIATES 5
                       (a California limited partnership)

                NOTES TO SCHEDULE OF REAL ESTATE AND ACCUMULATED
                             DEPRECIATION - Continued

<TABLE>
<CAPTION>
(e)                                                      Reconciliation of Operating Real Estate

                                                                    December 31,
                                                                    ------------
                                                              1996                1997
                                                            -----------          -----------
<S>                                                         <C>                  <C>
         Balance at beginning of year                       $12,001,027          $12,100,721
         Additions                                               99,694              383,297
                                                            -----------          -----------
         Balance at close of year                           $12,100,721          $12,484,018
                                                            ===========          ===========
</TABLE>


<TABLE>
<CAPTION>
                                                     Reconciliation of Accumulated Depreciation for
                                                              Operating Real Estate

                                                                    December 31,
                                                                    ------------
                                                              1996                1997
                                                             ----------           ----------
<S>                                                          <C>                  <C>
         Balance at beginning of year                        $4,265,218           $4,637,421

         Reclassification to real estate
             held for sale                                     (118,165)
         Depreciation expense                                   490,368              469,028
                                                             ----------           ----------
         Balance at close of year                            $4,637,421           $5,106,449
                                                             ==========           ==========
</TABLE>


                                     - 25 -
<PAGE>   53
PROPERTIES


<TABLE>
<CAPTION>
    LEASE                                                                                          TYPE OF OWNERSHIP
  OBLIGOR                         TYPE OF PROPERTY                     LOCATION                        INTEREST
------------                      ----------------                     --------                    ------------------
<S>                               <C>                                  <C>                         <C>
DUFF-NORTON                       Manufacturing and                    Forrest City,               Ownership of land
COMPANY, INC.                     Office Facility                      Arkansas                    and building

ROCHESTER BUTTON                  Manufacturing                        Kenbridge,                  Ownership of land
COMPANY                           Facilities -                         South Boston,               and buildings (2)
                                  2 locations                          Virginia

PENN VIRGINIA                     Office and                           Duffield,                   Ownership of land
CORPORATION                       Manufacturing                        Virginia                    and building (3)
                                  Facilities -                         Cuyahoga Falls,
                                  3 locations                          Ohio and
                                                                       Broomall,
                                                                       Pennsylvania

(4)                               Hotels                               Petoskey and                Ownership of 65%
                                                                       Alpena,                     interest in land
                                                                       Michigan                    and buildings (1)

EXIDE ELECTRONICS                 Office and                           Raleigh,                    Ownership of land
CORPORATION                       Research Facility                    North Carolina              and building

HARCOURT GENERAL                  Movie Theatre                        Canton,                     Ownership of land
CORPORATION                                                            Michigan                    and building (3)

INNO TECH INDUSTRIES,             Office, and                          Elyria,                     Ownership of land
INC.                              Manufacturing                        Ohio                        and building
                                  Facility


LOCKHEED MARTIN                   Manufacturing and                    Oxnard,                     Ownership of land
CORPORATION                       Research Facility                    California                  and building


DEVLIEG BULLARD, INC.             Manufacturing                        Frankenmuth,                Ownership of land
                                  Facilities -                         Michigan                    and buildings (3)
                                  2 locations                          McMinnville,
                                                                       Tennessee


PENBERTHY                         Manufacturing                        Prophetstown,               Ownership of land
PRODUCTS, INC.                    Facility                             Illinois                    and building (3)


DS GROUP LIMITED                  Manufacturing                        Goshen,                     Ownership of land
                                  Facility                             Indiana                     and building
</TABLE>


                                     - 26 -
<PAGE>   54
<TABLE>
<CAPTION>
    LEASE                                                                                          TYPE OF OWNERSHIP
  OBLIGOR                         TYPE OF PROPERTY                     LOCATION                        INTEREST
------------                      ----------------                     --------                    ------------------
<S>                               <C>                                  <C>                         <C>
WINN-DIXIE                        Supermarket                          Montgomery,                 Ownership of land
STORES, INC.                                                           Alabama                     and buildings (3)


                         
                         
SUNDS DEFIBRATOR                  Manufacturing                        Carthage,                   Ownership of land
WOODHANDLING, INC.                Facility                             New York                    and buildings
(formerly FMP/RAUMA, CO.)

</TABLE>



(1)   These properties are encumbered by mortgage notes payable.

(2)   These properties are subject to a mortgage as collateral for loans issued
      by unaffiliated parties to the lessee.

(3)   These properties are encumbered by mortgages and/or lease assignments in
      connection with mortgage notes payable on other of the Partnership's
      properties.

(4)   The Partnership operates a hotel business at these properties.


                                     - 27 -
<PAGE>   55
      MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS


                  As of December 31, 1997, there were 3,542 holders of record of
the Limited Partnership Units of the Partnership. On January 1, 1998 3,494
holders of Limited Partnership Units exchanged such units for interests in Carey
Diversified LLC and 48 holders exchanged such interests for Subsidiary
Partnership Units. There is no established trading market for Subsidiary
Partnership Units.

                  In accordance with the requirements of the Partnership's
Amended Agreement of Limited Partnership (the "Agreement") the Corporate General
Partner expects to continue to make quarterly distributions of Distributable
Cash From Operations, as defined, in the Agreement. The following table shows
the frequency and amount of distributions paid per Unit since 1994:

<TABLE>
<CAPTION>
                                                 Cash Distributions Paid Per Unit
                                                 --------------------------------
                                              1995             1996              1997
                                             ------           ------            ------
<S>                                          <C>              <C>               <C>
                  First quarter              $12.20           $11.75            $15.45 (b)
                  Second quarter              32.21 (a)         8.40              8.34
                  Third quarter               11.74             8.42              8.34
                  Fourth quarter              11.75             8.44             18.45 (c)
                                             ------           ------            ------
                                             $67.90           $37.01            $50.58
                                             ======           ======            ======
</TABLE>

(a)   Includes a special distribution of $20 per Unit.

(b)   Includes a special distribution of $7 per Unit.

(c)   Includes distributions of $8.34 and $10.11 per Limited Partnership Unit
      paid in October 1997 and December 1997, respectively.


                  On October 16, 1997, the Partnership began the solicitation of
consents from limited partners to approve the merger of the Partnership with all
of the CPA(R) Partnerships into Carey Diversified LLC, a Delaware limited
liability company. Limited Partners were offered the opportunity to vote to
approve or disapprove the merger and to choose either interests ("Listed
Shares") in the Carey Diversified LLC or interests ("Subsidiary Partnership
Units") in the partnership which survived the merger. The solicitation period
ended on December 16, 1997. The results of the voting were as follows:

<TABLE>
                           Units Voted               Units Voted            Units Voted         Units Not
                           Yes                       No                     Abstaining          Voting
                          ----------------           --------------         -----------         ----------------
<S>                        <C>      <C>              <C>      <C>           <C>    <C>          <C>        <C>
Merger of Partnership
with Carey Diversified     79,113   69.89%           2,474    2.19%         644    .57%         30,969     27.35
</TABLE>

<TABLE>
<CAPTION>
                                                                       Subsidiary
                           Listed Shares                               Partnership Units
                           -------------                               -----------------
<S>                        <C>                                         <C>
Number of Units
Electing                   111,658                                     1,542
</TABLE>



                                     - 28 -