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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                      For the year ended December 31, 1998

                                       of

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                    CPA(R):12

                             A Maryland Corporation
                   IRS Employer Identification No. 13-3726306
                            SEC File Number 033-68728

                              50 Rockefeller Plaza,
                            New York, New York 10020
                                 (212) 492-1100

CPA(R):12 has SHARES OF COMMON STOCK registered pursuant to Section 12(g) of the
Act.

CPA(R):12 is not registered on any exchanges.

CPA(R):12 does not have any Securities registered pursuant to Section 12(b) of
the Act.

CPA(R):12 is unaware of any delinquent filers pursuant to Item 405 of Regulation
S-K.

CPA(R):12 (1) has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for 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.

CPA(R):12 has no active market for common stock at March 24, 1999.
Non-affiliates held 28,273,451 shares of common stock, $.001 Par Value
outstanding at March 24, 1999.

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                                     PART I

Item 1 Business.

      Corporate Property Associates 12 (CPA(R):12) Incorporated is a Real Estate
Investment Trust ("REIT") that acquires and owns commercial properties leased to
companies nationwide, primarily on a triple net basis. As of December 31, 1998,
CPA(R):12's portfolio consisted of 85 properties leased to 36 tenants and
totaling more than 7.9 million square feet.

      CPA(R):12's core investment strategy is to purchase and own properties
leased to a variety of companies on a single tenant net lease basis. These
leases generally place the economic burden of ownership on the tenant by
requiring them to pay the costs of maintenance, insurance, taxes, structural
repairs and other operating expenses.

      CPA(R):12 also generally includes in its leases:

      o     clauses providing for mandated rent increases or periodic rent
            increases tied to increases in the consumer price index or other
            indices or, when appropriate, increases tied to the volume of sales
            at the property;

      o     covenants restricting the activity of the tenant to reduce the risk
            of a change in credit quality;

      o     indemnification of CPA(R):12 for environmental and other
            liabilities;

      o     guarantees from parent companies or other entities.

      CPA(R):12 was formed as a Maryland corporation on July 30, 1993. Between
February 1994 and September 1997, CPA(R):12 sold a total of 28,334,451 shares of
common stock for a total of $283,344,510 in offering proceeds. These proceeds
have been combined with limited recourse mortgage debt to purchase CPA(R):12's
property portfolio. As a real estate investment trust, CPA(R):12 is not subject
to federal income taxation as long as it satisfies certain requirements relating
to the nature of its income, the level of its distributions and other factors.

      Carey Property Advisors provides both strategic and day-to-day management
for CPA(R):12, including acquisition services, research, investment analysis,
asset management, capital funding services, disposition of assets, investor
relations and administrative services. Carey Property Advisors also provides
office space and other facilities for CPA(R):12. Carey Property Advisors has
dedicated senior executives in each area of its organization so that CPA(R):12
functions as a fully integrated operating company. CPA(R):12 pays asset
management fees to Carey Property Advisors and pays certain transactional fees.
CPA(R):12 also reimburses Carey Property Advisors for certain expenses. Carey
Property Advisors also serves in this capacity for Corporate Property Associates
10 Incorporated, Carey Institutional Properties Incorporated and Corporate
Property Associates 14 Incorporated.

      CPA(R):12's principal executive offices are located at 50 Rockefeller
Plaza, New York, NY 10020 and its telephone number is (212) 492-1100. As of
March 24, 1999, CPA(R):12 had no employees. An affiliate of Carey Property
Advisors employs 20 individuals who perform services for CPA(R):12.

Business Objectives and Strategy

      CPA(R):12's objectives are to:

      o     pay quarterly dividend at an increasing rate that for taxable
            shareholders may be partially free from current taxation;

      o     purchase and own a portfolio of real estate that will increase in
            value; and

      o     increase the equity in its real estate by making regular mortgage
            principal payments.


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      CPA(R):12 seeks to achieve these objectives by purchasing and holding
industrial and commercial properties each net leased to a single corporate
tenant. CPA(R):12 's portfolio is diversified by geography, property type and by
tenant.

Recent Developments

      On March 23, 1998, CPA(R):12 purchased land and building in Houston, Texas
for $7,199,000 and assumed an existing net lease with First Aid Products, Inc.,
as lessee. The obligations of the lease are unconditionally guaranteed by First
Aid's parent company, NutraMax Products, Inc. The lease has an initial annual
term through April 2013 with one five-year renewal term at the tenant's option.
Annual rent, currently $823,968, provides for annual rent increases based on
increases in the Consumer Price Index, capped at 5%.

      On April 14, 1998, CPA(R):12 purchased a property in Ft. Dodge, Iowa for
$3,874,000 from Silgan Containers Corporation and amended its existing lease
with Silgan to include the Ft. Dodge property with two other properties. As
amended, the initial lease term was extended through March 2013 with three
five-year renewals at Silgan's option and annual rent was increased $893,200 to
$1,275,000.

      On May 18, 1998, CPA(R):12 purchased land in Ashburn, Virginia and entered
into construction and lease agreements with International Management Consultant
Inc. ("IMCI"). Construction was completed in February 1999 at which time IMCI
took occupancy of the property. After a rent abatement period of six months,
annual rent will be $754,404 with rent increases every year based on increases
in the Consumer Price Index, capped at 3%. The lease has an initial term of
fifteen years through February 2014.

      On June 23, 1998, CPA(R):12 purchased land in Mechanicsburg, Pennsylvania
and entered into construction agency and lease agreements with BCC Development
and Management Co. This build-to-suit project is scheduled for completion before
the end of the second quarter of 1999. The lease provides for an initial term of
fifteen years with two five-year renewals at the option of the tenant. Annual
rent will initially be an amount representing 9.9% total project costs, which
are expected to total approximately $4,753,000.

      On December 22, 1998, through a 33 1/3% interest in a limited liability
company that was formed with two affiliates, CPA(R):12 purchased land and
buildings in Sunnyvale, California and entered into a net lease with Advanced
Micro Devices, Inc. ("AMD"). The total purchase price of the building was
$95,287,958 with $68,250,000 of the financing provided through a limited
recourse mortgage loan. CPA(R):12's equity contribution, including its share of
deferred acquisition fees, representing the purchase price less the mortgage
financing was $9,012,653. The AMD lease has an initial term of 20 years with two
ten-year renewal terms at AMD's option. The lease provides for annual rent of
$9,145,500 with rent increases every three years, with each rent increase capped
at 6.903%. The loan has a ten-year term and provides for monthly payments of
interest and principal based on a 30-year amortization schedule and an annual
interest rate of 7.78%. CPA(R):12's share of annual distributions from this
investment is expected to be $1,066,000, representing approximately one-third of
the limited liability company's annual operating cash flow (rent less mortgage
debt service).

      On February 3, 1999,through a 50% interest in a limited liability company
which CPA(R):12 formed with an affiliate, CPA(R):12 acquired an interest in land
and buildings in Gilbert, Arizona, and through the limited liability company
interest, entered into a net lease with Intesys Technologies, Inc. The total
purchase price of the building was $23,560,000. The Intesys lease has an initial
term of 20 years with two ten-year renewal options at the tenant's option. The
lease provides for annual rent of $2,274,750. There are rent increases every
three years based on increases in the Consumer Price Index with increases capped
at 9%.

      In February 1995, CPA(R):12 purchased land and buildings in Hayward,
California for $11,860,000 and entered into a net lease with Etec Systems, Inc.
In August 1996, CPA(R):12 entered into a commitment to construct an additional
building at the Etec property, and in January 1997, the Company completed
construction of the building for $5,241,000. In February 1998, CPA:12 entered
into a series of transactions including paying off the existing limited recourse
mortgage loan on the Etec property, entering into a commitment and construction
agency agreement to fund additional improvements of up to $52,356,000, amending
the existing lease with Etec and transferring ownership of the Etec property to
a limited liability company in which, Corporate Property Associates 14
Incorporated ("CPA(R):14"), an affiliate, has an ownership interest. At that
time, CPA(R):12 paid off the $7,957,947 existing limited recourse mortgage loan
collateralized by the Etec property. Under the limited liability agreement,
CPA(R):14 will have a 49.99% interest 


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in the additional improvements and will not share in the economic benefits from
the existing buildings. CPA(R):12 releveraged the existing buildings with
$15,000,000 of limited recourse mortgage financing and has received a commitment
of $30,000,000 of financing for the additional improvements. The initial
$15,000,000 of mortgage financing provides for monthly payments of principal and
interest at an annual interest rate of 7.11%, and will fully amortize in
December 2013. The remaining $30,000,000 mortgage will also bear interest at an
annual interest rate of 7.11% and will be scheduled to fully amortize over its
term.

      As more fully discussed in Note 10 to the consolidated financial
statements in Item 8, Lanxide Corporation, a tenant of a property in Newark,
Delaware, has filed a petition of bankruptcy and is in the process of
liquidating. CPA(R):12 has assumed three short-term subleases at the property.
As a result, CPA(R):12 expects the annual rent from this property to decrease to
approximately $585,000, representing the subtenants rents, from $1,030,000, if
the lease is terminated pursuant to Lanxide"s bankruptcy petition. There is no
assurance that any of the subleases, which expire in 2000 and 2001, will be
renewed.

Acquisition Strategies

      Carey Property Advisors has a well-developed process with established
procedures and systems for acquiring net leased property on behalf of CPA(R):12.
As a result of its reputation and experience in the industry and the contacts
maintained by its professionals, Carey Property Advisors has a presence in the
net lease market that has provided it with the opportunity to invest in a
significant number of transactions on an ongoing basis. CPA(R):12 takes
advantage of Carey Property Advisors' presence in the net lease market to build
its portfolio. In evaluating opportunities for CPA(R):12, Carey Property
Advisors carefully examines the credit, management and other attributes of the
tenant and the importance of the property under consideration to the tenant's
operations. Careful credit analysis is a crucial aspect of every transaction.
CPA(R):12 believes that Carey Property Advisors has one of the most extensive
underwriting processes in the industry and has an experienced staff of
professionals involved with underwriting transactions. Carey Property Advisors
seeks to identify those prospective tenants whose creditworthiness is likely to
improve over time. CPA(R):12 believes that the experience of Carey Property
Advisors' management in structuring sale-leaseback transactions to meet the
needs of a prospective tenant enables Carey Property Advisors to obtain a higher
return for a given level of risk than would typically be available by purchasing
a property subject to an existing lease.

Carey Property Advisors' strategy in structuring its net lease investments for
CPA(R):12 is to:

      o     combine the stability and security of long-term lease payments,
            including rent increases, with the appreciation potential inherent
            in the ownership of real estate;

      o     enhance current returns by utilizing varied lease structures;

      o     reduce credit risk by diversifying investments by tenant, type of
            facility, geographic location and tenant industry; and

      o     increase potential returns by obtaining equity enhancements from the
            tenant when possible, such as warrants to purchase tenant common
            stock.

Financing Strategies

      Consistent with its investment policies, CPA(R):12 uses leverage when
available on favorable terms. CPA(R):12 has approximately $109,261,000 in
property level debt outstanding. These mortgages mature between 2000 and 2020
and have interest rates between 6.85% and 10.25%. Carey Property Advisors
continually seeks opportunities and considers alternative financing techniques
to finance properties not currently subject to debt, refinance debt, reduce
interest expense or improve its capital structure.

Transaction Origination

      In analyzing potential acquisitions, Carey Property Advisors reviews and
structures many aspects of a transaction, including the tenant, the real estate
and the lease, to determine whether a potential acquisition can be structured to
satisfy CPA(R):12's acquisition criteria. The aspects of a transaction which are
reviewed and structured by Carey Property Advisors include the following:

      o     Tenant Evaluation. Carey Property Advisors subjects each potential
            tenant to an extensive evaluation of its credit, management,
            position within its industry, operating history and profitability.
            Carey Property Advisors seeks tenants it believes will have


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            stable or improving credit. By leasing properties to these types of
            tenants, CPA(R):12 can generally charge rent that is higher than the
            rent charged to tenants with recognized credit and, thereby, enhance
            its current return from these properties as compared with properties
            leased to companies whose credit potential has already been
            recognized by the market. Furthermore, if a tenant's credit does
            improve, the value of CPA(R):12's properties leased to that tenant
            will likely increase (if all other factors affecting value remain
            unchanged). Carey Property Advisors may also seek to enhance the
            likelihood of a tenant's lease obligations being satisfied, such as
            through a letter of credit or a guaranty of lease obligations from
            the tenant's corporate parent. This credit enhancement provides
            CPA(R):12 with additional financial security.

      o     Leases with Increasing Rents. Carey Property Advisors seeks to
            include clauses in CPA(R):12's leases that provide for increases in
            rent over the term of the leases. These increases are generally tied
            to increases in certain indices such as the consumer price index, in
            the case of retail stores, participation in gross sales above a
            stated level, mandated rental increases on specific dates and
            through other methods. CPA(R):12 seeks to avoid entering into leases
            that provide for contractual reductions in rents during their
            primary term (other than reductions related to reductions in debt
            service).

      o     Properties Important to Tenant Operations. Carey Property Advisors,
            on behalf of CPA(R):12, generally seeks to acquire properties with
            operations that are essential or important to the ongoing operations
            of the tenant. CPA(R):12 believes that these properties provide
            better protection in the event that tenants file for bankruptcy,
            because leases on properties essential or important to the
            operations of a bankrupt tenant are less likely to be rejected and
            terminated by a bankrupt tenant. Carey Property Advisors also seeks
            to assess the income, cash flow and profitability of the business
            conducted at the property, so that, if the tenant is unable to
            operate its business, CPA(R):12 can either continue operating the
            business conducted at the property or re-lease the property to
            another entity in the industry which can operate the property
            profitably.

      o     Lease Provisions that Enhance and Protect Value. When appropriate,
            Carey Property Advisors attempts to include provisions in
            CPA(R):12's leases that require CPA(R):12's consent to certain
            tenant activity or require the tenant to satisfy certain operating
            tests. These provisions include, for example, operational and
            financial covenants of the tenant, prohibitions on a change in
            control of the tenant and indemnification from the tenant against
            environmental and other contingent liabilities. Including these
            provisions in its leases enables CPA(R):12 to protect its investment
            from changes in the operating and financial characteristics of a
            tenant that may impact its ability to satisfy its obligations to
            CPA(R):12 or could reduce the value of CPA(R):12's properties.

      o     Diversification. Carey Property Advisors tries to diversify
            CPA(R):12's portfolio of properties to avoid dependence on any one
            particular tenant, type of facility, geographic location and tenant
            industry. By diversifying its portfolio, CPA(R):12 reduces the
            adverse effect on CPA(R):12 of a single underperforming investment
            or a downturn in any particular industry or geographic location.

      Carey Property Advisors employs a variety of other strategies and
practices in connection with CPA(R):12's acquisitions. These strategies include
attempting to obtain equity enhancements in connection with transactions.
Typically, these equity enhancements involve warrants to purchase stock of the
tenant to which the property is leased or the stock of the parent of the tenant.
In certain instances, CPA(R):12 grants to the tenant a right to purchase the
property leased by the tenant, but generally the option purchase price will be
not less than the fair market value of the property. Carey Property Advisors'
practices include performing evaluations of the physical condition of properties
and performing environmental surveys in an attempt to determine potential
environmental liabilities associated with a property prior to its acquisition.

      As a transaction is structured, it is evaluated by the Chairman of the
Investment Committee with respect to the potential tenant's credit, business
prospects, position within its industry and other characteristics important to
the long-term value of the property and the capability of the tenant to meet its
lease obligations. Before a property is acquired, the transaction is reviewed by
the Investment Committee to ensure that it satisfies CPA(R):12's investment
criteria. Aspects of the transaction that are typically reviewed by the
Investment


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Committee include the expected financial returns, the creditworthiness of the
tenant, the real estate characteristics and the lease terms.

      The Investment Committee is not directly involved in originating or
negotiating potential acquisitions, but instead functions as a separate and
final step in the acquisition process. Carey Property Advisors places special
emphasis on having experienced individuals serve on its Investment Committee and
does not invest in a transaction unless it is approved by the Investment
Committee.

      CPA(R):12 believes that the Investment Committee review process gives it a
unique, competitive advantage over other unaffiliated net lease companies
because of the substantial experience and perspective that the Investment
Committee has in evaluating the blend of corporate credit, real estate and lease
terms that combine to make an acceptable risk.

      The following people serve on the Investment Committee:

      o     George E. Stoddard, Chairman, was formerly responsible for the
            direct corporate investments of The Equitable Life Assurance Society
            of the United States and has been involved with the CPA(R) Programs
            for over 19 years.

      o     Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman,
            Director and Chief Investment Officer of The Prudential Insurance
            Company of America. As Chief Investment Officer, Mr. Hoenemeyer was
            responsible for all of Prudential's investments, including stocks,
            bonds, private placements, real estate and mortgages.

      o     Nathaniel S. Coolidge previously served as Senior Vice President -
            Head of Bond & Corporate Finance Department of the John Hancock
            Mutual Life Insurance Company. His responsibilities included
            overseeing $21 billion of Fixed income investments for Hancock, its
            affiliates and outside clients.

      o     Lawrence R. Klein is Benjamin Franklin Professor of Economics
            Emeritus at the University of Pennsylvania and its Wharton School.
            Dr. Klein has been awarded the Alfred Nobel Memorial Prize in
            Economic Sciences and currently advises various governments and
            government agencies. Dr. Klein serves as an alternate member of the
            Investment Committee

Asset Management

      CPA(R):12 believes that effective management of its net lease assets is
essential to maintain and enhance property values. Important aspects of asset
management include restructuring transactions to meet the evolving needs of
current tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process.

      Carey Property Advisors monitors, on an ongoing basis, compliance by
tenants with their lease obligations and other factors that could affect the
financial performance of any of its properties. Monitoring involves receiving
assurances that each tenant has paid real estate taxes, assessments and other
expenses relating to the properties it occupies and confirming that appropriate
insurance coverage is being maintained by the tenant. Carey Property Advisors
reviews financial statements of its tenants and undertakes regular physical
inspections of the condition and maintenance of its properties. Additionally,
Carey Property Advisors periodically analyzes each tenant's financial condition,
the industry in which each tenant operates and each tenant's relative strength
in its industry.


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Holding Period

      CPA(R):12 intends to hold each property it acquires for an extended
period. The determination of whether a particular property should be sold or
otherwise disposed of will be made after consideration of relevant factors with
a view to achieving maximum capital appreciation and after-tax return for the
CPA(R):12 shareholders. If CPA(R):12's common stock is not listed for trading on
a national securities exchange or included for quotation on Nasdaq, CPA(R):12
will generally begin selling properties within ten years after the proceeds of
the public offering are substantially invested, subject to market conditions.
The board of directors will make the decision whether to list the shares,
liquidate or devise an alternative liquidation strategy which is likely to
result in the greatest value for the shareholders.

Competition

      CPA(R):12 faces competition for the acquisition of office and industrial
properties in general, and such properties net leased to major corporations in
particular, from insurance companies, credit companies, pension funds, private
individuals, investment companies and other REITs. CPA(R):12 also faces
competition from institutions that provide or arrange for other types of
commercial financing through private or public offerings of equity or debt or
traditional bank financings. CPA(R):12 believes its management's experience in
real estate, credit underwriting and transaction structuring will allow
CPA(R):12 to compete effectively for office and industrial properties.

Environmental Matters

      Under various federal, state and local environmental laws, regulations and
ordinances, current or former owners of real estate, as well as certain other
categories of parties, may be required to investigate and clean up hazardous or
toxic chemicals, substances or waste or petroleum product or waste
(collectively, "Hazardous Materials") releases on, under, in or from such
property, and may be held liable to governmental entities or to third parties
for certain damage and for investigation and cleanup costs incurred by such
parties in connection with the release or threatened release of Hazardous
Materials. Such laws typically impose responsibility and liability without
regard to whether the owner knew of or was responsible for the presence of
Hazardous Materials, and the liability under such laws has been interpreted to
be joint and several under certain circumstances. CPA(R):12's leases often
provide that the tenant is responsible for all environmental liability and for
compliance with environmental regulations relating to the tenant's operations.

      CPA(R):12 typically undertakes an investigation of potential environmental
risks when evaluating an acquisition. Phase I assessments are performed by
independent environmental consulting and engineering firms for all acquisitions.
Where warranted, Phase II assessments are performed. Phase I assessments do not
involve subsurface testing, whereas Phase II assessments involve some degree of
soil and/or groundwater testing. CPA(R):12 may acquire a property which is known
to have had a release of Hazardous Materials in the past, subject to a
determination of the level of risk and potential cost of remediation. CPA(R):12
normally requires property sellers to indemnify it fully against any
environmental problem existing as of the date of purchase. Additionally,
CPA(R):12 often structures its leases to require the tenant to assume most or
all responsibility for environmental compliance or environmental remediation
relating to the tenants operations and to provide that non-compliance with
environmental laws is deemed a lease default. In certain instances, CPA(R):12
may also require a cash reserve, a letter of credit or a guarantee from the
tenant, the tenant's parent company or a third party to assure lease compliance
and funding of remediation. The value of any of these protections depends on the
amount of the collateral and/or financial strength of CPA(R):12 providing the
protection. Such a contractual arrangement does not eliminate CPA(R):12's
statutory liability or preclude claims against CPA(R):12 by governmental
authorities or persons who are not a party to such an arrangement. Contractual
arrangements in CPA(R):12's leases may provide a basis for CPA(R):12 to recover
from the tenant damages or costs for which CPA(R):12 has been found liable.

Industry Segment

      CPA(R):12 operates in one industry segment, investment in net leased real
property. For the year ended December 31, 1998, no lessee represented 10% or
more of the total operating revenue of CPA(R):12.


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Factors Affecting Future Operating Results

      The provisions of the Private Securities Litigation Reform Act of 1995
(the "Act") became effective in December 1995. The Act provides a "safe harbor"
for companies that make forward-looking statements providing prospective
information. The "safe harbor" under the Act relates to protection for companies
with respect to litigation filed on the basis of such forward-looking
statements.

      CPA(R):12 wishes to take advantage of the "safe harbor" provisions of the
Act and is therefore including this section in its Annual Report on Form 10-K.
The statements contained in this Annual Report, if not historical, are
forward-looking statements and involve risks and uncertainties which are
described below that could cause actual results to differ materially from the
results, financial or otherwise, or other expectations described in such
forward-looking statements. These statements are identified with the words
"anticipated," "expected," "intends," "seeks" or "plans" or words of similar
meaning. Therefore, forward-looking statements should not be relied upon as a
prediction of actual future results or occurrences.

      CPA(R):12's future results may be affected by certain risks and
uncertainties including the following:

Single Tenant Leases Increases Exposure to Failure of Tenant

      We focus our acquisition activities on net leased real properties or
interests therein. Due to the fact that our net leased real properties are
leased to single tenants, the financial failure of or other default by a tenant
resulting in the termination of a lease is likely to cause a reduction in the
operating cash flow of CPA(R):12 and might decrease the value of the property
leased to such tenant.

Dependence on Major Tenants

      Revenues from several of our tenants and/or their guarantors constitute a
significant percentage of our consolidated rental revenues. Our five largest
tenants/guarantors, which occupy 11 properties, represent 30% of annualized
revenues. The default, financial distress or bankruptcy of any of the tenants of
such properties could cause interruptions in the receipt of lease revenues from
such tenants and/or result in vacancies in the respective properties, which
would reduce our revenues until the affected property is re-let, and could
decrease the ultimate sale value of each such property. Upon the expiration of
the leases that are currently in place, we may not be able to re-lease the
vacant property at a comparable lease rate or without incurring additional
expenditures in connection with such re-leasing.

We Can Borrow a Significant Amount of Funds

      We have incurred, and may continue to incur, indebtedness (secured and
unsecured) in furtherance of our activities. Neither the certificate of
incorporation, bylaws nor any policy statement formally adopted by the board of
directors limits either the total amount of indebtedness or the specified
percentage of indebtedness (based upon the total market capitalization of
CPA(R):12) that may be incurred. Accordingly, we could become more highly
leveraged, resulting in increased risk of default on our obligations and in an
increase in debt service requirements which could adversely affect our financial
condition and results of operations and our ability to pay distributions.

Possible Inability to Refinance Balloon Payment on Mortgage Debt

      A significant number of our properties are subject to mortgages with
balloon payments. Scheduled balloon payments for the next five years are as
follows:

      o     1999 - none;
      o     2000 - 7.7 million;
      o     2001 - 2.0 million;
      o     2002 - 4.6 million; and
      o     2003 - 5.1 million;

Our ability to make such balloon payments will depend upon our ability either to
refinance the mortgage related thereto, invest additional equity in the property
or to sell the related property. Our ability to accomplish these goals will be
affected by various factors existing at the relevant time, such as the state of
the national


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and regional economies, local real estate conditions, available mortgage rates,
our equity in the mortgaged properties, our financial condition, the operating
history of the mortgaged properties and tax laws.

There are Uncertainties Relating to Lease Renewals and Re-letting of Space

      o     We will be subject to the risks that, upon expiration of leases, the
            premises may not be re-let or the terms of re-letting (including the
            cost of concessions to tenants) may be less favorable than current
            lease terms. If we are unable to re-let promptly all or a
            substantial portion of our properties or if the rental rates upon
            such re-letting were significantly lower than current rates, our net
            income and ability to make expected distributions to our
            shareholders would be adversely affected. There can be no assurance
            that we will be able to retain tenants in any of our properties upon
            the expiration of their leases. Other than the Lanxide tenants, no
            leases are scheduled to expire during the next five years.

Possible Liability Relating to Environmental Matters

      We own industrial and commercial properties and are subject to the risk of
liabilities under federal, state and local environmental laws. Some of these
laws could impose the following on CPA(R):12:

      o     Responsibility and liability for the cost of investigation and
            removal or remediation of hazardous substances released on our
            property, generally without regard to our knowledge or
            responsibility of the presence of the contaminants;

      o     Liability for the costs of investigation and removal or remediation
            of hazardous substances at disposal facilities for persons who
            arrange for the disposal or treatment of such substances; and

      o     Potential liability for common law claims by third parties based on
            damages and costs of environmental contaminants.

We May be Unable to Make Acquisitions on an Advantageous Basis

      The consummation of any future acquisition will be subject to satisfactory
completion of our extensive analysis and due diligence review and to the
negotiation of definitive documentation. There can be no assurance that we will
be able to identify and acquire additional properties or that we will be able to
finance acquisitions in the future. In addition, there can be no assurance that
any such acquisition, if consummated, will be profitable for us. If we are
unable to consummate the acquisition of additional properties in the future,
there can be no assurance that we will be able to increase the cash available
for distribution to our shareholders.

We May Suffer Uninsured Loss

      We carry comprehensive liability, fire, extended coverage on most of our
properties, with policy specifications and insured limits customarily carried
for similar properties. CPA(R):12 carries similar insurance for these properties
if the tenant is not required to do so. In addition, CPA(R):12 carries
contingent property and liability insurance. There are certain types of losses
(such as due to wars or acts of God) that generally are not insured because they
are either uninsurable or not economically insurable. Should an uninsured loss
or a loss in excess of insured limits occur, we could lose capital invested in a
property, as well as the anticipated future revenues from a property, while
remaining obligated for any mortgage indebtedness or other financial obligations
related to the property. Any such loss would adversely affect our financial
condition. We believe that the properties are adequately insured in accordance
with industry standards.

Changes in Market Interest Rates Could Cause Our Stock Price to Go Down

      The trading prices of equity securities issued by real estate companies
have historically been affected by changes in broader market interest rates,
with increases in interest rates resulting in decreases in trading prices, and
decreases in interest rates resulting in increases in such trading prices. An
increase in market interest rates could therefore adversely affect the trading
prices of any of our equity securities.


                                      -8-
<PAGE>   10

We Face Intense Competition

      The real estate industry is highly competitive. Our principal competitors
include national REITs, many of which are substantially larger and have
substantially greater financial resources than us.

The Value of our Real Estate is Subject to Fluctuation

      We are subject to all of the general risks associated with the ownership
of real estate. In particular, we face the risk that rental revenue from the
properties will be insufficient to cover all corporate operating expenses and
debt service payments on indebtedness we incur. Additional real estate ownership
risks include:

            o     Adverse changes in general or local economic conditions;
            o     Changes in supply of or demand for similar or competing
                  properties;
            o     Changes in interest rates and operating expenses; 
            o     Competition for tenants;
            o     Changes in market rental rates; 
            o     Inability to lease properties upon termination of existing
                  leases;
            o     Renewal of leases at lower rental rates;
            o     Inability to collect rents from tenants due to financial
                  hardship, including bankruptcy;
            o     Changes in tax, real estate, zoning and environmental laws
                  that may have an adverse impact upon the value of real estate;
            o     Uninsured property liability;
            o     property damage or casualty losses;
            o     Unexpected expenditures for capital improvements or to bring
                  properties into compliance with applicable federal, state and
                  local laws; and
            o     Acts of God and other factors beyond the control of our
                  management.

Our Systems May Not Be Year 2000 Compliant

            The "Year 2000 issue" refers to the series of problems that have
resulted or may result from the inability of certain computer software and
embedded processes to properly process dates. This shortcoming could result in
the failure of major systems or miscalculations causing major disruptions to
business operations. CPA(R):12 has no computer systems of its own, but is
dependent upon the systems maintained by an affiliate of its Advisor and certain
other third parties including its banks and transfer agent.

            CPA(R):12 and its affiliates are actively evaluating their readiness
relating to the Year 2000 issue. In 1998, CPA(R):12, its Advisor, and affiliates
commenced an assessment of their local area network of personal computers and
related equipment and are in the process of replacing or upgrading the equipment
that has been identified as not being Year 2000 compliant. The program is
expected to be substantially completed in the second quarter of 1999. CPA(R):12
and its affiliates have also engaged outside consultants experienced in
diagnosing systems and software applications and addressing Year 2000 issues,
and with the help of these consultants currently are remediating as necessary.

            At the same time, CPA(R):12, its Advisor, and affiliates are
evaluating their applications software, all of which are commercial "off the
shelf" programs that have not been customized. During 1998, CPA(R):12 commenced
a project to select a comprehensive integrated real estate accounting and asset
management software package to replace its existing applications. A commercial
Windows-based integrated accounting and asset management based application is
being tested and is scheduled to be installed during the third quarter of 1999.
This software has been designed to use four digits to define a year. Because
CPA(R):12's primary operations consist of investing in and receiving rents on
long-term net leases of real estate, while the failure of the Advisor and its
affiliates to correct fully Year 2000 issues could disrupt CPA(R):12's
administrative operations, the resulting disruptions would not likely have a
material impact on CPA(R):12's results of operations, financial condition or
liquidity. Contingency plans to address potential disruptions are in the process
of being developed. CPA(R):12's share of costs associated with required
modifications to become Year 2000 compliant is not expected to be material to
CPA(R):12's financial position. CPA(R):12's share of the estimated total cost of
the Year 2000 project is expected to be approximately $105,000, of which $71,000
has been incurred to date.


                                      -9-
<PAGE>   11

            Although CPA(R):12 believes that it will address its internal Year
2000 issues in a timely manner, there is a risk that the inability of
third-party suppliers and lessees to meet Year 2000 readiness issues could have
an adverse impact on CPA(R):12 . CPA(R):12 and its affiliates have identified
their critical suppliers and are requiring that these suppliers communicate
their plans and progress in addressing Year 2000 readiness. The most critical
processes provided by third-party suppliers are CPA(R):12's bank and transfer
agent. CPA(R):12's operations may be significantly affected if such providers
are ineffective or untimely in addressing Year 2000 issues.

            CPA(R):12 contacted each of its lessees regarding Year 2000
readiness and has emphasized the need to address Year 2000 issues. Generally,
lessees are contractually required to maintain their leased properties in good
working order and to make necessary alterations, foreseen or unforeseen, to meet
their contractual obligations. Because of those obligations, CPA(R):12 believes
that the risks and costs of upgrading systems related to operations of the
buildings and that contain technology affected by Year 2000 issues will
generally be absorbed by lessees rather than CPA(R):12. The major risk to
CPA(R):12 is that Year 2000 issues have such an adverse effect on the financial
condition of a lessee that its ability to meet its lease obligations, including
the timely payment of rent, is impaired. In such an event, CPA(R):12 may
ultimately incur the costs for Year 2000 readiness at the affected properties.
The potential materiality of any impact is not known at this time.

We Depend on Key Personnel for Our Future Success

      We depend on the efforts of the executive officers and key employees of
Carey Property Advisors. The loss of the services of these executive officers
and key employees could have a material adverse effect on our operations.

      The risk factors may have affected, and in the future could affect, our
actual operating and financial results and could cause such results to differ
materially from those in any forward-looking statements. You should not consider
this list exhaustive. New risk factors emerge periodically, and we cannot
completely assure you that the factors we describe above list all material risks
to CPA(R):12 at any specific point in time. We have disclosed many of the
important risk factors discussed above in our previous filings with the
Securities and Exchange Commission.


                                      -10-
<PAGE>   12

Item 2. Properties.

      The following table provides certain information with respect to the
Company's significant properties as of March 15, 1999.

<TABLE>
<CAPTION>
                                                                                                                             Initial
              Tenant/Guarantor                    Square            Annual          Rent Per              Ownership           Lease
           Location of Properties                 Footage          Rent (1)        Square Ft.             Interest            Term
           ----------------------                 -------          --------        ----------             --------            ----
<S>                                              <C>           <C>               <C>             <C>                        <C>
BEST BUY CO., INC. (3)
  Denver, CO                                      23,987                                         37% interest;
  Fort Collins, CO                                28,520                                         remaining interest
  Bloomingdale, IL                                27,280                                         owned by CIP(R)
  Bedford Park, IL                                27,466
  Aurora, IL                                      28,186
  Matteson, IL                                    27,538
  Schaumberg, IL                                 113,933
  Omaha, NE                                       28,731
  Albuquerque, NM                                 45,653
  Arlington, TX                                   46,361
  Beaumont, TX                                    28,255
  Dallas, TX                                      27,697
  El Paso, TX                                     28,179
  Plano, TX                                       28,075
  Ft. Worth, TX                                   27,460
  Houston, TX                                     28,160
  Madison, WI                                     28,025
                                                 -------
    TOTAL                                        593,506       $1,859,088        $ 8.47(2)                                    2018

BIG V HOLDING CORPORATION (3)
  Ellenville, NY                                  60,750                                         
  Warwick, NY                                     72,804                                         45% interest;      
                                                 -------                                         remaining interest 
    TOTAL                                        133,554          693,563         11.54(2)       owned by CIP(R)              2018

GENSIA, INC.(3)
  San Diego, CA                                  144,311        1,309,000         18.14(2)       50% interest;                2009
                                                                                                 remaining interest
                                                                                                 owned by CIP(R)
ETEC SYSTEMS, INC.
  Hayward, CA (3)                                213,000        2,987,710         14.03          Interest in a limited        2014
  Hayward, CA                                    142,000             (1)                         liability company

WAL-MART STORES, INC.(3)
  Greenfield, IN                                  82,620          397,226          4.81                     100%              2005

Q CLUBS, INC.
  Austin, TX (3)                                  43,935          715,608         16.29                     100%              2013
  Houston, TX                                     46,733          694,000         14.85                     100%              2016

THE GARDEN COMPANIES, INC.
  Chattanooga, TN (3)                            242,317          816,400          3.37                     100%              2015

DEL MONTE CORPORATION (3)
  Mendota, IL                                    239,850                                         50% interest;
  Plover, WI                                     210,000                                         remaining interest
  Toppenish, WA                                  274,750                                         owned by CIP(R)
  Yakima, WA                                     11,165
                                                -------
    TOTAL                                        735,765        1,286,250          3.50(2)                                    2016

APPLIED BIOSCIENCE
  INTERNATIONAL, INC.
  Austin, TX (3)                                 173,000        1,391,715          8.04                     100%              2010

THE UPPER DECK COMPANY (3)
  Carlsbad, CA                                   295,000        1,319,875          8.94(2)       50% interest;                2021
                                                                                                 remaining interest
                                                                                                 owned by CIP(R)
</TABLE>


                                      -11-
<PAGE>   13

<TABLE>
<CAPTION>
                                                                                                                            Initial
              Tenant/Guarantor                    Square            Annual          Rent Per          Ownership              Lease
           Location of Properties                 Footage            Rent          Square Ft.         Interest               Term
           ----------------------                 -------            ----          ----------         --------               ----
<S>                                              <C>              <C>              <C>                  <C>                  <C> 
RHEOMETRIC SCIENTIFIC, INC.
  Piscataway, NJ                                 104,000          833,137          8.01                 100%                 2011
TELOS CORPORATION
  Loudon County, VA. (3)                         192,775        1,543,258          8.00                 100%                 2016
VARIOUS TENANTS
  Newark, DE (3)                                 162,220                                                100%                 2000-
                                                                                                                             2001
CELADON GROUP, INC.
  Indianapolis, IN                                60,900          727,833         11.95                 100%                 2016
SPECTRIAN CORPORATION
  Sunnyvale, CA (3)                               91,476       $1,925,000        $21.04                 100%                 2011
GARDEN RIDGE CORPORATION
  Tulsa, OK (3)                                  141,284          854,164          6.05                 100%                 2016
KNOGO NORTH AMERICA, INC.
  Hauppauge, NY                                   68,333        2,096,000         30.67                 100%                 2016
SCOTT COMPANIES, INC.
  San Leandro, CA (3)                            270,000        1,945,850          7.21                 100%                 2017
QMS, INC.
  Mobile, AL (3)                                 277,000        1,689,375          6.10                 100%                 2012
CHILDTIME CHILDCARE, INC. (3)
  Chandler, AZ                                     6,575          103,894
  Fleming Island, FL                               7,894          111,440
  Sugarland, TX                                   11,331          109,920
  New Territory, TX                                7,894          114,856
  Ackworth, GA
  Siverdale, WA
  Happauge, NY
  Patchogue, NY
  Hampton, VA
                                                  ------          -------         -----                                          
                                                  33,694          440,110         13.06                 100%                 2018

THE BON-TON STORES, INC.
  Allentown, PA (3)                              399,175
  Johnstown, PA (3)                               80,884
                                                  ------
                                                 480,059        1,270,750          2.65                 100%                 2017

SILGAN CONTAINERS
CORPORATION
  Menomonie and
  Oconomowoc, WI
  Fort Dodge, Iowa                               386,265        1,275,000          3.30                 100%                 2013

PAGG CORPORATION
  Milford, MA (3)                                108,125          590,000          5.46                 100%                 2009

VERMONT TEDDY BEAR CO, INC.
  Shelburne, VT (3)                               55,446          652,400         11.77                 100%                 2017

MARCONI INTEGRATED
SYSTEMS, INC.
  San Diego, CA                                  123,200        1,183,722          9.61                 100%                 2007

TEXAS FREEZER COMPANY, INC.
  Dallas, TX (3)                                 219,614          930,750          4.24                 100%                 2019

WESTELL TECHNOLOGIES, INC.
  Aurora, IL                                     185,410        1,748,250          9.43                 100%                 2017
</TABLE>


                                      -12-
<PAGE>   14

<TABLE>
<CAPTION>
                                                                                                                           Initial
              Tenant/Guarantor                    Square            Annual          Rent Per              Ownership         Lease
           Location of Properties                 Footage            Rent          Square Ft.             Interest          Term
           ----------------------                 -------            ----          ----------             --------          ----
<S>                                              <C>            <C>                <C>                      <C>             <C> 
CAREER EDUCATION CORPORATION
  Mendora Heights, MN                            118,241        1,115,100          9.43                     100%            2009

PERRY GRAPHIC
COMMUNICATIONS and JUDD'S
INCORPORATED
  Baraboo, WI (3)                                433,284
  Waterloo, WI (3)                               466,192
                                                 -------
                                                 899,476        1,888,875          2.10                     100%            2017

COMPASS BANK FOR SAVINGS
  Bourne, MA                                       2,083
  Sandwich, MA                                    16,500
  Wareham, MA                                      3,223
                                                 -------
                                                  21,806          185,282          8.50                     100%            2018

NUTRAMAX PRODUCTS, INC
  Houston, TX                                    248,960          823,968          3.31                     100%            2013

INTERNATIONAL MANAGEMENT
CONSULTANT, INC.
  Ashburn, VA                                     69,983          754,404         10.78                    100%            2014

BCC DEVELOPMENT AND
MANAGEMENT CO.
(under construction)
  Mechanicburg, PA                                42,000                                                    100%            2013

ADVANCED MICRO DEVICES, INC.
  Sunnyvale, CA (3)                              362,000        3,048,500         25.27(2)       33 1/3 % interest;         2018
                                                                                                 remaining interests
                                                                                                 owned by CIP(R) and
                                                                                                 CPA(R):14
INTESYS TECHNOLOGIES, INC.
  Gilbert, AZ                                    243,370       $1,137,375          9.35 (2)      50% interest;              2019
                                                                                                 Remaining interest
                                                                                                 owned by CPA(R):14
</TABLE>

(1)   Does not include properties under construction.
(2)   This figure represents the rent per square foot of the property when
      combined with rents payable to co-owners.
(3)   These properties are encumbered by limited recourse mortgages.


                                      -13-
<PAGE>   15

Item 3. Legal Proceedings.

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

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

            No matter was submitted during the fourth quarter of the year ended
December 31, 1998 to a vote of security holders, through the solicitation of
proxies or otherwise.

                                     PART II

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

            Information with respect to the Company's common equity is hereby
incorporated by reference to page 22 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 the Company'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 5 of the Company's Annual Report contained in Appendix
A.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk:

            Approximately $81,675,000 of the Company's long-term debt bears
interest at fixed rates, and therefore the fair value of these instruments is
affected by changes in the market interest rates. The following table presents
principal cash flows based upon expected maturity dates of the debt obligations
and the related weighted-average interest rates by expected maturity dates for
the fixed rate debt. The interest rate on the variable rate debt as of December
31, 1998 ranged from LIBOR and 1.97% to the lender's prime rate and 2%.

(in thousands)

<TABLE>
<CAPTION>
                         1999           2000        2001        2002          2003        Thereafter        Total        Fair Value
                         ----           ----        ----        ----          ----        ----------        -----        ----------
<S>                      <C>           <C>          <C>         <C>          <C>            <C>            <C>             <C>    
Fixed rate               $2,076        $4,438       $2,301      $2,486       $2,622         $67,752        $81,675         $82,094

Average
   interest
   rate                    7.8%         8.54%        7.72%       7.73%        7.73%           7.76%

Variable rate               665        13,058          572       5,030        5,421           2,841         27,587
</TABLE>

As of December 31, 1998, CPA(R):12 had no other material exposure to market
risk.


                                      -14-
<PAGE>   16

Item 8. Consolidated Financial Statements and Supplementary Data

            The following consolidated financial statements and supplementary
data of Registrant are hereby incorporated by reference to pages 6 to 21 of the
Company's Annual Report contained in Appendix A:

  (i)   Report of Independent Accountants.
 (ii)   Consolidated Balance Sheets as of December 31, 1997 and 1998
(iii)   Consolidated Statements of Income for the years ended December 31, 1996,
        1997 and 1998. 
 (iv)   Consolidated Statements of Shareholders' Equity for 
        the years ended December 31, 1996, 1997 and 1998.
  (v)   Consolidated Statements of Cash Flows for the years ended December 31, 
        1996, 1997 and 1998.
 (vi)   Notes to Consolidated Financial Statements.

Item 9. Disagreements on Accounting and Financial Disclosure.

            NONE

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

            This information will be contained in Registrant's definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference.

Item 11. Executive Compensation.

            This information will be contained in Registrant's definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference.

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

            This information will be contained in Registrant's definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference.

Item 13. Certain Relationships and Related Transactions.

            This information will be contained in Registrant's definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference.


                                      -15-
<PAGE>   17

                                    PART IV

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

      (a)   1. Consolidated Financial Statements:

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

      Report of Independent Accountants.

      Consolidated Balance Sheets, December 31, 1997 and 1998.

      Consolidated Statements of Operations for the years ended December 31,
      1996, 1997 and 1998.

      Consolidated Statements of Shareholders' Equity for the years ended
      December 31, 1996, 1997 and 1998.

      Consolidated Statements of Cash Flows for the years ended December 31,
      1996, 1997 and 1998.

      Notes to Consolidated Financial Statements.

      The consolidated financial statements are hereby incorporated by reference
      to pages 6 to 21 of the Company's Annual Report contained in Appendix A.

      (a)   2. Financial Statement Schedules:

            The following schedules are filed as a part of this Report:

      Schedule III -Real Estate and Accumulated Depreciation as of December 31,
      1998.

      Schedule III of the Company is contained on pages 25 to 29 of this Form
      10-K.

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


                                      -16-
<PAGE>   18

      (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   Articles of Incorporation of Registrant.                             Exhibit 3(A) to Regis-
                                                                             tration Statement (Form
                                                                             S-11) No. 33-68728

  3.2   Bylaws of Registrant.                                                Exhibit 3(B) to Regis-
                                                                             tration Statement (Form
                                                                             S-11) No. 33-68728

 10.1   Advisory Agreement between Registrant and                            Exhibit 10(A) to
        Carey Property Advisors.                                             Registration Statement
                                                                             (Form S-11) No. 33-68728

 10.2   Lease Agreement dated October 8, 1993 between                        Filed as Exhibit 10.2
        Elwa-BV (NY) QRS 11-24, Inc., as Landlord, and                       to Registrant's Form 10-K
        Big V Supermarkets, Inc., as Tenant.                                 dated March 30, 1995

 10.3   Amendment to Lease Agreement dated July 15, 1994 by                  Filed as Exhibit 10.3
        and between Elwa-BV (NY) QRS 11-24, Inc. and                         to Registrant's Form 10-K
        Big V Supermarkets, Inc.                                             dated March 30, 1995

 10.4   Amended and Restated Mortgage and Security Agreement                 Filed as Exhibit 10.4
        dated October 8, 1993 from Elwa-BV (NY) QRS 11-24, Inc.,             to Registrant's Form 10-K
        as Mortgagor, to Key Bank of New York.                               dated March 30, 1995

 10.5   $7,500,000 Amended, Restated and Consolidated                        Filed as Exhibit 10.5
        Bonds dated October 8, 1993.                                         to Registrant's Form 10-K
                                                                             dated March 30, 1995

 10.6   Modification and Assumption Agreement dated July 15, 1994            Filed as Exhibit 10.6
        among Elwa-BV (NY) QRS 11-24, Inc., Elwa-BV (NY)                     to Registrant's Form 10-K
        QRS 12-3, Inc. and Key Bank of New York, as Lender.                  dated March 30, 1995

 10.7   Lease dated April 15, 1993 between BB Property                       Filed as Exhibit 10.7
        Company, as Lessor, and Best Buy Co., Inc.,                          to Registrant's Form 10-K
        as Lessee.                                                           dated March 30, 1995

 10.8   Note Purchase Agreement dated April 15, 1993 among                   Filed as Exhibit 10.8
        BB Property Company, Best Buy Co., Inc., and Teachers                to Registrant's Form 10-K
        Insurance and Annuity Association of America.                        dated March 30, 1995

 10.9   $32,800,000 Note dated April 20, 1993 from BB Property               Filed as Exhibit 10.9
        Company, as Maker, to Teachers Insurance and                         to Registrant's Form 10-K
        Annuity Association of America, as Holder.                           dated March 30, 1995

 10.10  Deed of Trust and Security Agreement dated April 15, 1993            Filed as Exhibit 10.10
        from BB Property Company, as Grantor, to Frank E.                    to Registrant's Form 10-K
        Stevenson, II, Esq., Thomas P. Solheim, Esq., Charles D.             dated March 30, 1995
        Calvin, Esq., Wallace A. Richardson. Esq., Michael D. Miselman,
        Esq. and Keleher & McLeod, P.A., as Trustee, and Teachers
        Insurance and Annuity Association of America, as Beneficiary.
</TABLE>


                                      -17-
<PAGE>   19

<TABLE>
<CAPTION>
Exhibit                                                                      Method of
  No.                Description                                             Filing
  ---                -----------                                             ----------------------
<S>         <C>                                                              <C>           
10.11       Owner's Lien Agreement dated April 15, 1993 by Corporate         Filed as Exhibit 10.11
            Property Associates 10 Incorporated ("CPA(R):10") and            to Registrant's Form 10-K
            Carey Institutional Properties Incorporated ("CIP(TM)"),         dated March 30, 1995
            for the benefit of Teachers Insurance and Annuity
            Association of America.

10.12       First Amendment to Owner's Lien Agreement dated                  Filed as Exhibit 10.12
            May 27, 1994 by CPA(R):10, CIP(TM)and Registrant                 to Registrant's Form 10-K
            for the benefit of Teachers Insurance and Annuity                dated March 30, 1995
            Association of America.

10.13       $3,353,745 Limited Obligation Promissory Note dated              Filed as Exhibit 10.13
            May 13, 1994 from BBC (NE) QRS 12-2, Inc., as Borrower,          to Registrant's Form 10-K
            to Registrant, as Lender.                                        dated March 30, 1995

10.14       Lease Agreement dated December 21, 1993 by and between           Filed as Exhibit 10.14
            GENA Property Company, as Landlord, and Gensia, Inc., as         to Registrant's Form 10-K
            Tenant.                                                          dated March 30, 1995

10.15       Deed of Trust, Security Agreement and Financing Statement        Filed as Exhibit 10.15
            dated December 21, 1993 between GENA Property Company,           to Registrant's Form 10-K
            as Trustor, and The Northwestern Mutual Life Insurance Company,  dated March 30, 1995
            as Trustee.

10.16       $13,000,000 Promissory Note dated December 21, 1993 from         Filed as Exhibit 10.16
            GENA Property Company, as Obligor, to The Northwestern           to Registrant's Form 10-K
            Mutual Life Insurance Company, as Obligee.                       dated March 30, 1995

10.17       Lease Agreement dated February 1, 1995 by and between            Filed as Exhibit 10.17 to
            ESI (CA) QRS 12-6, Inc., as Landlord, and ETEC Systems,          Registrant's Form 8-K
            Inc., as Tenant.                                                 dated June 23, 1995

10.18       Deed of Trust, Assignment of Rents and Security Agreement        Filed as Exhibit 10.18 to
            dated February 1, 1995 by ESI (CA) QRS 12-6, Inc., as            Registrant's Form 8-K
            Trustor, in favor of First American Title Insurance Company,     dated June 23, 1995
            as Trustee, for the benefit of Creditanstalt-Bankverein,as
            Beneficiary.

10.19       $6,350,000 Real Estate Note dated February 1, 1995 by            Filed as Exhibit 10.19 to
            ESI (CA) QRS 12-6, Inc., as Maker, to Creditanstalt-             Registrant's Form 8-K
            Bankverein, as Holder.                                           dated June 23, 1995

10.20       Lease dated July 3, 1994 by and between Greenwalt                Filed as Exhibit 10.20 to
            Development, Inc., as Landlord, and Wal-Mart Stores,             Registrant's Form 8-K
            Inc., as Tenant.                                                 dated June 23, 1995

10.21       Assignment and Assumption of Lease dated February 10,            Filed as Exhibit 10.21 to
            1995 by and between Greenwalt Development, Inc., as              Registrant's Form 8-K
            Assignor, and WALS (IN) QRS 12-5, Inc., as Assignee.             dated June 23, 1995

10.22       Estoppal Certificate dated February 9, 1995 from Wal-Mart        Filed as Exhibit 10.22 to
            Stores, Inc. to WALS (IN) QRS 12-5, Inc.                         Registrant's Form 8-K
                                                                             dated June 23, 1995

10.23       Lease Agreement dated June 8, 1995 by and between                Filed as Exhibit 10.23 to
            SFC (TX) QRS 12-7, Inc., as Landlord, and Sports &               Registrant's Form 8-K
            Fitness Clubs of America, Inc., as Tenant.                       dated June 23, 1995
</TABLE>


                                      -18-
<PAGE>   20

<TABLE>
<CAPTION>
Exhibit                                                                      Method of
  No.                Description                                             Filing
  ---                -----------                                             ----------------------
<S>         <C>                                                              <C>           
10.24       Loan Agreement dated June 8, 1995 by and between                 Filed as Exhibit 10.24 to
            SFC (TX) QRS 12-7, Inc., as Borrower, and Bank One,              Registrant's Form 8-K
            Texas, N.A.                                                      dated June 23, 1995

10.25       $2,750,000 Note dated June 8, 1995 from                          Filed as Exhibit 10.25 to
            SFC (TX) QRS 12-7, Inc. to Bank One, Texas, N.A.                 Registrant's Form 8-K
                                                                             dated June 23, 1995

10.26       Deed of Trust and Security Agreement dated June 8, 1995          Filed as Exhibit 10.26 to
            from SFC (TX) QRS 12-7, Inc., as Mortgagor, to Mr. Brian J.      Registrant's Form 8-K
            Tuerff, as Trustee, for Bank One, Texas, N.A., as Mortgagee.     dated June 23, 1995

10.27       Lease Agreement dated June 20, 1995 by and between               Filed as Exhibit 10.27 to
            Bud Limited Liability Company, as Landlord, and NK Lawn          Registrant's Form 8-K
            & Garden Co., as Tenant.                                         dated June 23, 1995

10.28       Construction Agency Agreement dated October 31, 1995             Filed as Exhibit 10.28 to
            between Del Monte Corporation and DELMO (PA) QRS 11-36           Registrant's Form 8-K
            and DELMO (PA) QRS 12-10.                                        dated November 27, 1995

10.29       Lease Agreement dated October 31, 1995 by and between            Filed as Exhibit 10.29 to
            DELMO (PA) QRS 11-36 and DELMO (PA) QRS 12-10,                   Registrant's Form 8-K
            collectively, as Landlord, and Del Monte Corporation, as Tenant. dated November 27, 1995

10.30       Lease Agreement dated November 13, 1995 by and between           Filed as Exhibit 10.30 to
            ABI (TX) QRS 12-11, Inc., as Landlord, and Pharmaco LSR          Registrant's Form 8-K
            International Inc., as Tenant.                                   dated November 27, 1995

10.31       Lease Agreement dated December 26, 1995 by and between           Filed as Exhibit 2.1 to
            Cards Limited Liability Company, as Landlord, and The            Registrant's Form 8-K
            Upper Deck Company, as Tenant.                                   dated February 2, 1996

10.32       $15,000,000 Promissory Note dated January 3, 1996 from           Filed as Exhibit 2.2 to
            Cards Limited Liability Company to Column Financial, Inc.        Registrant's Form 8-K
                                                                             dated February 2, 1996

10.33       Lease Agreement dated February 23, 1996 by and between           Filed as Exhibit 2.1 to
            RSI (NJ) QRS 12-13, Inc., as Landlord, and Rheometric            Registrant's Form 8-K
            Scientific, Inc., as Tenant.                                     dated March 9, 1996

10.34       $3,300,000 Promissory Note dated February 23, 1996 from          Filed as Exhibit 2.2 to
            RSI (NJ) QRS 12-13, Inc. to NatWest Bank N.A.                    Registrant's Form 8-K
                                                                             dated March 9, 1996

10.35       Stock Purchase Warrant for 132,617 Shares of Rheometric          Filed as Exhibit 2.3 to
            Scientific, Inc. Common Stock.                                   Registrant's Form 8-K
                                                                             dated March 9, 1996

10.36       Stock Purchase Warrant for 331,543 Shares of Rheometric          Filed as Exhibit 2.4 to
            Scientific, Inc. Common Stock.                                   Registrant's Form 8-K
                                                                             dated March 9, 1996

10.37       Lease Agreement dated March 11, 1996 by and between              Filed as Exhibit 10.41 to
            TEL (VA) QRS 12-15, Inc., as Landlord, and Telos Corporation,    Registrant's Post-Effective
            a Maryland corporation, Telos Corporation, a California          Amendment No. 3
            corporation, Telos Field Engineering, Inc., a Delaware           dated March 6, 1997
            corporation, and Telos International Corp., a Delaware
            corporation, as Tenants.
</TABLE>


                                      -19-
<PAGE>   21

<TABLE>
<CAPTION>
Exhibit                                                                      Method of
  No.                Description                                             Filing
  ---                -----------                                             ----------------------
<S>         <C>                                                              <C>           
10.38       Lease Agreement dated March 28, 1996 by and between              Filed as Exhibit 10.42 to
            LAX (DE) QRS 12-16, Inc., as Landlord, and Lanxide               Registrant's Post-Effective
            Corporation, as Tenants.                                         Amendment No. 3
                                                                             dated March 6, 1997

10.39       Stock Purchase Warrant for 15,500 Shares of Lanxide              Filed as Exhibit 10.43 to
            Corporation Common Stock.                                        Registrant's Post-Effective
                                                                             Amendment No. 3
                                                                             dated March 6, 1997

10.40       Promissory Note dated March 28, 1996 given by                    Filed as Exhibit 10.44 to
            LAX (DE) QRS 12-16, Inc. to Lanxide Corporation.                 Registrant's Post-Effective
                                                                             Amendment No. 3
                                                                             dated March 6, 1997

10.41       Lease Agreement dated July 23, 1996 by and between               Filed as Exhibit 10.45 to
            SFC (TX) QRS 12-18, Inc., as Landlord, and Sports &              Registrant's Post-Effective
            Fitness Clubs of America, Inc., as Tenant.                       Amendment No. 3
                                                                             dated March 6, 1997

10.42       Stock Purchase Warrant for 5,089 Shares of Q Clubs,              Filed as Exhibit 10.46 to
            Inc. Common Stock.                                               Registrant's Post-Effective
                                                                             Amendment No. 3
                                                                             dated March 6, 1997

10.43       Guaranty and Suretyship Agreement made by Celadon                Filed as Exhibit 10.47 to
            Group, Inc. to QRS 12-17, Inc.                                   Registrant's Post-Effective
                                                                             Amendment No. 3
                                                                             dated March 6, 1997

10.44       Lease Agreement dated September 19, 1996 by and between          Filed as Exhibit 10.48 to
            CEL (IN) QRS 12-17, Inc., as Landlord, and Celadon               Registrant's Post-Effective
            Trucking Services, Inc., as Tenant.                              Amendment No. 3
                                                                             dated March 6, 1997

10.45       Lease Agreement dated November 19, 1996 by and between           Filed as Exhibit 10.49 to
            SPEC (CA) QRS 12-20, Inc., as Landlord, and Spectrian            Registrant's Post-Effective
            Corporation, as Tenants.                                         Amendment No. 3
                                                                             dated March 6, 1997

10.46       Lease Agreement dated December 24, 1996 by and between           Filed as Exhibit 10.50 to
            NOG (NY) QRS 12-23, Inc., as Landlord, and Knogo North           Registrant's Post-Effective
            America, Inc., as Tenants.                                       Amendment No. 3
                                                                             dated March 6, 1997

10.47       Amendment to Lease dated December 14, 1996 by and between        Filed as Exhibit 10.51 to
            WEEDS (OK) QRS 12-22, Inc., as Landlord, and Garden              Registrant's Post-Effective
            Ridge, L.P., as Tenant.                                          Amendment No. 3
                                                                             dated March 6, 1997

10.48       Mortgage Assignment of Rents and Security Agreement dated        Filed as Exhibit 10.52 to
            December 27, 1996 between WEEDS (OK) QRS 12-22, Inc.,            Registrant's Post-Effective
            Mortgagor, and GMAC Commercial Mortgage Corporation.             Amendment No. 3
                                                                             dated March 6, 1997
</TABLE>


                                      -20-
<PAGE>   22

<TABLE>
<CAPTION>
Exhibit                                                                      Method of
  No.                Description                                             Filing
  ---                -----------                                             ----------------------
<S>         <C>                                                              <C>           
10.49       Lease Agreement dated January 23, 1997 by and between            Filed as Exhibit 10.53 to
            BUILD (CA) QRS 12-24, Inc., as Landlord, and Scott               Registrant's Post-Effective
            Corporation, as Tenants.                                         Amendment No. 3
                                                                             dated March 6, 1997

10.50       Lease agreement dated July 8, 1997 by and between GGAP           Filed as Exhibit 10.1 to
            (MA)  QRS 12-31, Inc., as Landlord, and PAGG Corporation,        Registrant's Form 8-K
            as Tenants.                                                      Dated June 13, 1997

10.51       Lease agreement dated July 10, 1997 by and between URSA          Filed as Exhibit 10.2 to
            (VT)  QRS 12-30, Inc., as Landlord, and The Vermont Teddy        Registrant's Form 8-K
            Bear Company, as Tenants.                                        Dated June 13, 1997

10.52       Lease agreement dated April 10, 1997 by and between BT           Filed as Exhibit 10.3 to
            (PA)  QRS 12-25, Inc., as Landlord, and The Bon-Ton              Registrant's Form 8-K
            Department Stores, Inc., as Tenants.                             Dated June 13, 1997

10.53       Lease agreement dated June 13, 1997 by and between CAN           Filed as Exhibit 10.4 to
            (WI)  QRS 12-34, Inc., as Landlord, and Silgan Containers        Registrant's Form 8-K
            Corporation, as Tenants.                                         Dated June 13, 1997

10.54       Lease agreement dated September 30, 1997 by                      Filed as Exhibit 10.1 to
            and between CPA(R):12, Inc. as Landlord, and Westell,            Registrant's Form 8-K
            Inc., as Tenant.                                                 Dated March 31, 1998

10.55       Lease agreement dated November 26, 1997 by                       Filed as Exhibit 10.2 to
            and between CPA(R):12, Inc. as Landlord, and Randall             Registrant's Form 8-K
            International, as Tenant.                                        Dated March 31, 1998

10.56       Lease agreement dated December 31, 1997 by                       Filed as Exhibit 10.3 to
            and between CPA(R):12, Inc. as Landlord, and Sandwich            Registrant's Form 8-K
            Cooperative Bank, as Tenant.                                     Dated March 31, 1998

10.57       Lease agreement dated November 12, 1997 by                       Filed as Exhibit 10.4 to
            and between CPA(R):12, Inc. as Landlord, and Brown               Registrant's Form 8-K
            Institute, Ltd., as Tenant.                                      Dated March 31, 1998

10.58       Lease agreement dated September 25, 1997 by                      Filed as Exhibit 10.5 to
            and between CPA(R):12, Inc. as Landlord, and GDE                 Registrant's Form 8-K
            Systems, Inc., as Tenant.                                        Dated March 31, 1998

10.59       Lease agreement dated July 8, 1997 by                            Filed as Exhibit 10.6 to
            and between CPA(R):12, Inc. as Landlord, and PAGG                Registrant's Form 8-K
            Corporation, as Tenant.                                          Dated March 31, 1998

10.60       Lease agreement dated September 23, 1997 by                      Filed as Exhibit 10.7 to
            and between CPA(R):12, Inc. as Landlord, and Texas               Registrant's Form 8-K
            Freezer Company, Inc., as Tenant.                                Dated March 31, 1998

10.61       Lease agreement dated February 3, 1998 by and                    Filed as Exhibit 10.8 to
            between CPA(R):12, Inc. and CPA:14, Inc., as Landlords,          Registrant's Form 8-K
            and Etec Systems, Inc., as Tenant.                               Dated March 31, 1998

10.62       Lease agreement dated December 16, 1997 by and                   Filed as Exhibit 10.9 to
            between CPA(R):12, Inc., as Landlord, and Perry                  Registrant's Form 8-K
            Graphic Communications, Inc., as Tenant.                         Dated March 31, 1998

21.3        Subsidiaries of Registrant as of March 31, 1999.                 Filed herewith
</TABLE>


                                      -21-
<PAGE>   23

<TABLE>
<CAPTION>
Exhibit                                                                      Method of
  No.                Description                                             Filing
  ---                -----------                                             ----------------------
<S>         <C>                                                              <C>           
28.1        Limited Guaranty of Payment dated October 8, 1993 from           Filed as Exhibit 28.1
            CIP(TM), as Guarantor, to Key Bank of New York, as               to Registrant's Form 10-K
            Lender.                                                          dated March 30, 1995

28.2        Amendment to Limited Guaranty of Payment dated July 15, 1994     Filed as Exhibit 28.2
            among CIP(TM)and Registrant, Guarantors, and Key Bank            to Registrant's Form 10-K
            of New York, as Lender.                                          dated March 30, 1995

28.3        Guaranty and Suretyship Agreement dated June 8, 1995 by          Filed as Exhibit 28.3 to
            Sports & Fitness Clubs, Inc., as Guarantor, to SFC (TX)          Registrant's Form 8-K
            QRS 12-7, Inc., as Landlord.                                     dated June 23, 1995

28.4        Environmental Risk Agreement dated June 8, 1995 by               Filed as Exhibit 28.4 to
            SFC (TX) QRS 12-7, Inc., as Indemnitor, to Bank One,             Registrant's Form 8-K
            Texas, N.A., as Lender.                                          dated June 23, 1995

28.5        Guaranty and Suretyship Agreement dated June 20, 1995 by         Filed as Exhibit 28.5 to
            The Garden Companies, Inc., as Guarantor, to Bud Limited         Registrant's Form 8-K
            Liability Company.                                               dated June 23, 1995

28.6        Guaranty and Suretyship Agreement dated October 31, 1995         Filed as Exhibit 28.6 to
            by Del Monte Foods Corporation, as Guarantor, to DELMO           Registrant's Form 8-K
            (PA) QRS 11-36 and DELMO (PA) QRS 12-10, collectively,           dated November 27, 1995
            as Landlord.

28.7        Guaranty and Suretyship Agreement dated November 13, 1995        Filed as Exhibit 28.7 to
            by Applied Bioscience International, Inc., as Guarantor, to      Registrant's Form 8-K
            ABI (TX) QRS 12-11, Inc., as Landlord.                           dated November 27, 1995
</TABLE>


                                      -22-
<PAGE>   24

(b) Reports on Form 8-K

            During the quarter ended December 31, 1998 the Registrant was not
required to file any reports on Form 8-K.

(c)

            Pursuant to Rule 701 of Regulation S-K, the use of proceeds through
December 31, 1998 from the Company's offering of common stock which commenced
February 2, 1996 (File # 33-99994) is as follows:

<TABLE>
<CAPTION>
             <S>                                                            <C>       
             Shares registered:                                                20,300,000

             Aggregate price of offering amount registered:                  $203,000,000

             Shares sold:                                                      20,198,459

             Aggregated offering price of amount sold:                       $201,984,590

             Direct or indirect payments to directors, officers,
                general partners of the issuer or their associates, to
                persons owning ten percent or more of any class of
                equity securities of the issuer and to affiliates of
                the issuer:                                                  $  5,235,503

             Direct or indirect payments to others:                          $ 10,521,232

             Net offering proceeds to the issuer after
                deducting expenses:                                          $186,227,855

             Purchases of real estate:                                       $181,640,278

             Working capital reserves:                                       $  2,019,846

             Temporary investments in cash and cash
                equivalents:                                                 $  2,567,731
</TABLE>


                                      -23-
<PAGE>   25

                                   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 12 INCORPORATED
                               a Maryland corporation

  03/24/99                     BY:       /s/ Steven M. Berzin
  --------                               -----------------------------------
     Date                                Steven M. Berzin
                                         Executive Vice President, Chief Legal
                                         Officer and Chief Financial Officer
                                         (Principal Financial Officer)


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


                               CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED


  03/24/99                     BY:       /s/ William P. Carey
  --------                               -----------------------------------
    Date                                 William P. Carey
                                         Chairman of the Board
                                         and Director
                                         (Principal Executive Officer)

  03/24/99                     BY:       /s/ H. Augustus Carey
  --------                               -----------------------------------
    Date                                 H. Augustus Carey
                                         President

  03/24/99                     BY:       /s/ Ralph G. Coburn
  --------                               -----------------------------------
    Date                                 Ralph G. Coburn
                                         Director

  03/24/99                     BY:       /s/ William Ruder
  --------                               -----------------------------------
    Date                                 William Ruder
                                         Director

  03/24/99                     BY:       /s/ George E. Stoddard
  --------                               -----------------------------------
    Date                                 George E. Stoddard
                                         Director

  03/24/99                     BY:       /s/ Thomas E. Zacharias
  --------                               -----------------------------------
    Date                                 Thomas E. Zacharias
                                         Director

  03/24/99                     BY:       /s/ Steven M. Berzin
  --------                               -----------------------------------
    Date                                 Steven M. Berzin
                                         Executive Vice President, Chief Legal
                                         Officer and Chief Financial Officer
                                         (Principal Financial Officer)

  03/24/99                     BY:       /s/ Claude Fernandez
  --------                               -----------------------------------
     Date                                Claude Fernandez
                                         Executive Vice President and
                                         Chief Administrative Officer
                                         (Principal Accounting Officer)


                                      -24-
<PAGE>   26

                        REPORT of INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Corporate Property Associates 12 Incorporated
and Subsidiaries:

Our audits of the consolidated financial statements referred to in our report
dated March 5, 1999 appearing on page 6 of the 1998 Annual Report to
Shareholders of Corporate Property Associates 12 Incorporated and Subsidiaries
(which report and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.


/s/ PricewaterhouseCoopers LLP

New York, New York
March 5, 1999


                                      -25-
<PAGE>   27

         CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES

             SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION

                             as of December 31, 1998

<TABLE>
<CAPTION>
                                                             Initial Cost to Company            
                                                       -------------------------------------        Capitalized        Decrease
                                                                                     Personal       Subsequent to       in Net     
        Description               Encumbrances           Land          Buildings     Property       Acquisition (a)  Investment (b) 
        -----------               ------------           ----          ---------     --------       ---------------  -------------- 
<S>                                <C>                 <C>            <C>                               <C>                        
Operating Method:

 Distribution facility leased
   to Wal-Mart Stores, Inc.        $ 2,282,350         $  452,871     $ 3,325,910                       $   12,921                 
 Office/Manufacturing
   facility leased to
   Etec Systems, Inc.               14,729,468          1,272,418      10,588,221                       47,392,707     $(2,633,473)
 Health club facilities                                                                                                            
   leased to Q Clubs, Inc.           2,434,828          3,152,874       8,524,126                                                  
 Warehouses and special
   purpose facility leased
   to Del Monte Corporation          5,725,138            305,733                                       10,237,564                 
 Warehouse/office/
   research facility leased
   to Applied Bioscience
   International, Inc.               7,029,071          1,550,928      11,017,367                           27,856                 
 Distribution/warehouse
   facility leased to
   Celadon, Inc.                                        1,480,600       5,320,400                           40,000                 
 Office/research
   facility leased to                                                                                                              
   Spectrian Corporation             9,647,212          5,570,775      12,073,204                            4,119                 
 Retail store leased
   to Garden Ridge                                                                                                                 
   Corporation                       4,487,745          1,857,607       6,204,923                                                  
 Office/distribution
   facility leased to Knogo
   North America, Inc.                                  1,603,488       3,321,512                                                  
 Office/research facility leased
   to Scott Companies, Inc.          9,962,833          5,734,782      12,175,218                            5,356                 
 Child care centers leased
   to Childtime Childcare, Inc.      2,467,782          2,581,896                                        5,618,699                 
 Office/research facility
   leased to QMS, Inc.               5,433,533          1,361,073      12,513,273                                                  
 Retail/distribution facility
   leased to The Bon-Ton
   Stores, Inc.                      6,900,000          1,780,000      10,261,885                                                  

<CAPTION>
                                               Gross Amount at which                                                                
                                             Carried at Close of Period                                                             
                                       ---------------------------------------                                                      
                                                                   Personal                        Accumulated                    
                                       Land         Buildings      Property          Total       Depreciation(e)  Date Acquired  
                                       ----         ---------      --------          -----       ---------------- -------------  
<S>                                <C>            <C>                            <C>             <C>             <C> 
Operating Method:                 
                                  
 Distribution facility leased     
   to Wal-Mart Stores, Inc.        $  454,420     $ 3,337,282                    $ 3,791,702     $  323,299       February 10, 1995 
 Office/Manufacturing                                                                                                               
   facility leased to                                                                                                               
   Etec Systems, Inc.               1,272,444      55,347,429                     56,619,873      1,398,900       February 16,1995  
 Health club facilities                                                                                           June 8, 1995 and  
   leased to Q Clubs, Inc.          3,152,874       8,524,126                     11,677,000        626,380       July 25, 1996     
 Warehouses and special                                                                                                             
   purpose facility leased                                                                                                          
   to Del Monte Corporation           376,360      10,166,937                     10,543,297        611,473       November 9, 1995  
 Warehouse/office/                                                                                                                  
   research facility leased                                                                                                         
   to Applied Bioscience                                                                                                            
   International, Inc.              1,550,985      11,045,166                     12,596,151        862,333       November 13, 1995 
 Distribution/warehouse                                                                                                             
   facility leased to                                                                                                               
   Celadon, Inc.                    1,480,600       5,360,400                      6,841,000        306,815       September 19, 1996
 Office/research                                                                                                                    
   facility leased to                                                                                                               
   Spectrian Corporation            5,570,775      12,077,323                     17,648,098        641,492       November 19, 1996 
 Retail store leased                                                                                                                
   to Garden Ridge                                                                                                                  
   Corporation                      1,857,607       6,204,923                      8,062,530        316,709       December 16, 1996 
 Office/distribution                                                                                                                
   facility leased to Knogo                                                                                                         
   North America, Inc.              1,603,488       3,321,512                      4,925,000        169,535       December 24, 1996 
 Office/research facility leased                                                                                                    
   to Scott Companies, Inc.         5,734,782      12,180,574                     17,915,356        596,341       January 23, 1997  
 Child care centers leased                                                                                                          
   to Childtime Childcare, Inc.     2,581,896       5,618,699                      8,200,595        151,849       January 29, 1997  
 Office/research facility                                                                                                           
   leased to QMS, Inc.              1,361,073      12,513,273                     13,874,346        586,560       February 18, 1997 
 Retail/distribution facility                                                                                                       
   leased to The Bon-Ton                                                                                                            
   Stores, Inc.                     1,780,000      10,261,885                     12,041,885        438,268       April 10, 1997    
                                                                                                                                    

<CAPTION>
                               Life on which  
                               Depreciation   
                                in Latest    
                               Statement of  
                                Operations   
                                is Computed  
                                -----------  
<S>                               <C>        
Operating Method:                
                                 
 Distribution facility leased    
   to Wal-Mart Stores, Inc.       40 yrs.    
 Office/Manufacturing                        
   facility leased to                        
   Etec Systems, Inc.             40 yrs.    
 Health club facilities                      
   leased to Q Clubs, Inc.        40 yrs.    
 Warehouses and special                      
   purpose facility leased                   
   to Del Monte Corporation       40 yrs.    
 Warehouse/office/                           
   research facility leased                  
   to Applied Bioscience                     
   International, Inc.            40 yrs.    
 Distribution/warehouse                      
   facility leased to                        
   Celadon, Inc.                  40 yrs.    
 Office/research                             
   facility leased to             40 yrs.    
   Spectrian Corporation                     
 Retail store leased                         
   to Garden Ridge                40 yrs.   
   Corporation                               
 Office/distribution                         
   facility leased to Knogo                  
   North America, Inc.            40 yrs.    
 Office/research facility leased             
   to Scott Companies, Inc.       40 yrs.    
 Child care centers leased                   
   to Childtime Childcare, Inc.   40 yrs.    
 Office/research facility                    
   leased to QMS, Inc.            40 yrs.    
 Retail/distribution facility                
   leased to The Bon-Ton                     
   Stores, Inc.                   40 yrs.    
</TABLE>


                                      -26-
<PAGE>   28

         CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED and SUBSIDIARIES

             SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION

                             as of December 31, 1998

<TABLE>
<CAPTION>
                                                              Initial Cost to Company                                              
                                                        ------------------------------------       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:
(continued):

 Technology/manufacturing
   facility leased to Silgan
   Containers Corporation                                 758,670      11,630,675                                                  
 Office/research
   facility leased
   to Pagg Corporation               3,129,900          1,080,000       4,469,738                                                  
 Office/manufacturing
   facility leased
   to Vermont Teddy
   Bear Co., Inc.                    3,219,795          1,465,000       4,398,874                            1,640                 
 Warehouse/special facility
   leased to Texas Freezer
   Company, Inc.                     4,500,000            257,458                      $1,109,900        7,150,544                 
 Research facility
   to GDE Systems, Inc.                                 3,025,000       9,741,810                          446,911                 
 Office/manufacturing
   facility leased to Westell
   Technologies, Inc.                                   2,500,000      14,952,055                                                  
 Office/manufacturing
   facility leased to
   Randall International, Inc.                          2,000,000         471,454                        2,066,542                 
 Administration/classroom
   facility leased to Career
   Education Corporation                                1,150,000       8,840,486                        1,795,282                 
 Printing facility leased to
   Perry Graphic Commun-
   ications, Inc. and Judd's                                                                                                       
   Incorporated                     10,949,622            642,000      18,467,948                            8,000                 
 Office/banking facility leased
   to Sandwich Bancorp, Inc.                              300,000       1,520,000                                                  
 Manufacturing/distribution
   facility leased to
   Nutramax Products, Inc.                              1,160,000       6,127,722                           40,247                 
 Office/light assembly facility
   leased to International
   Management Consulting,
   Inc.                                                   668,211                                        4,545,328                 
 Office facility leased to
   Balance Care Corporation                               558,600                                        1,686,795                 
                                   -----------        -----------    ------------      ----------      -----------     ----------- 
                                   $92,899,277        $44,269,984    $175,946,801      $1,109,900      $81,080,511     $(2,633,473)
                                   ===========        ===========    ============      ==========      ===========      ========== 

<CAPTION>
                                             Gross Amount at which                                                         
                                           Carried at Close of Period                                                       
                                  -------------------------------------------                                             
                                                                     Personal                          Accumulated       
                                     Land             Buildings      Property            Total         Depreciation (e)  
                                     ----             ---------      --------            -----         ----------------  
<S>                               <C>               <C>            <C>               <C>              <C>           
Operating Method:                 
(continued):                     
                                 
 Technology/manufacturing        
   facility leased to Silgan     
   Containers Corporation            758,670          11,630,675                       12,389,345        371,467       
 Office/research                                                                                                       
   facility leased                                                                                                     
   to Pagg Corporation             1,080,000           4,469,738                        5,549,738        162,419       
 Office/manufacturing                                                                                                  
   facility leased                                                                                                     
   to Vermont Teddy                                                                                                    
   Bear Co., Inc.                  1,465,000           4,400,514                        5,865,514        160,417       
 Warehouse/special facility                                                                                            
   leased to Texas Freezer                                                                                             
   Company, Inc.                     257,458           7,150,544      $1,109,900        8,517,902        108,196       
 Research facility                                                                                                     
   to GDE Systems, Inc.            3,025,000          10,188,721                       13,213,721        314,962       
 Office/manufacturing                                                                                                  
   facility leased to Westell                                                                                          
   Technologies, Inc.              2,500,000          14,952,055                       17,452,055        482,827       
 Office/manufacturing                                                                                                  
   facility leased to                                                                                                  
   Randall International, Inc.     2,000,000           2,537,996                        4,537,996                      
 Administration/classroom                                                                                              
   facility leased to Career                                                                                           
   Education Corporation           1,150,000          10,635,768                       11,785,768        249,036       
 Printing facility leased to                                                                                           
   Perry Graphic Commun-                                                                                               
   ications, Inc. and Judd's                                                                                           
   Incorporated                      642,000          18,475,948                       19,117,948        481,136       
 Office/banking facility leased                                                                                        
   to Sandwich Bancorp, Inc.         300,000           1,520,000                        1,820,000         38,000       
 Manufacturing/distribution                                                                                            
   facility leased to                                                                                                  
   Nutramax Products, Inc.         1,160,000           6,167,969                        7,327,969        121,783       
 Office/light assembly facility                                                                                        
   leased to International                                                                                             
   Management Consulting,                                                                                              
   Inc.                              668,211           4,545,328                        5,213,539                      
 Office facility leased to                                                                                             
   Balance Care Corporation          558,600           1,686,795                        2,245,395                      
                                 -----------         -----------    ------------      -----------       --------       
                                                                                                                       
                                 $44,342,243        $254,321,580      $1,109,900     $299,773,723     $9,520,197       
                                 ===========        ============      ==========     ============     ==========       
                                                                                                                       

<CAPTION>
                                                           Life on which  
                                                            Depreciation  
                                                            in Latest     
                                                            Statement of  
                                                             Operations   
                                 Date Acquired              is Computed   
                                 -------------              -----------   
<S>                             <C>                        <C>            
Operating Method:               
(continued):                    
                                
 Technology/manufacturing       
   facility leased to Silgan    
   Containers Corporation         June 13, 1997                  40 yrs.       
 Office/research                                                               
   facility leased                                                             
   to Pagg Corporation            July 8, 1997                   40 yrs.       
 Office/manufacturing                                                          
   facility leased                                                             
   to Vermont Teddy                                                            
   Bear Co., Inc.                 July 18 1997                 7 to 40 yrs.   
 Warehouse/special facility                                                    
   leased to Texas Freezer                                                     
   Company, Inc.                  September 23, 1997             40 yrs.       
 Research facility                                                             
   to GDE Systems, Inc.           September 28, 1997             40 yrs.       
 Office/manufacturing                                                          
   facility leased to Westell                                                  
   Technologies, Inc.             September 29, 1997             40 yrs.       
 Office/manufacturing                                                          
   facility leased to                                                          
   Randall International, Inc.    October 17, 1997               40 yrs.       
 Administration/classroom                                                      
   facility leased to Career                                                   
   Education Corporation          November 12,1997               40 yrs.       
 Printing facility leased to                                                   
   Perry Graphic Commun-                                                       
   ications, Inc. and Judd's                                     40 yrs.      
   Incorporated                   December 16, 1997                            
 Office/banking facility leased                                                
   to Sandwich Bancorp, Inc.      December 30, 1997              40 yrs.       
 Manufacturing/distribution                                                    
   facility leased to                                                          
   Nutramax Products, Inc.        March 28, 1998                 40 yrs.       
 Office/light assembly facility                                                
   leased to International                                                     
   Management Consulting,                                                      
   Inc.                           May 18, 1998                   40 yrs.       
 Office facility leased to                                                     
   Balance Care Corporation       June, 23, 1998                 40 yrs.       
</TABLE>
                                                                               
See accompanying notes to Schedule.                                            


                                      -27-
<PAGE>   29

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED

             SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION

                             as of December 31, 1998

<TABLE>
<CAPTION>
                                                                                                Cost                               
                                                         Initial Cost to Company              Capitalized                          
                                                       ---------------------------           Subsequent to         Increase in     
                               Encumbrances            Land              Buildings          Acquisition (a)      Net Investment (c)
                               ------------            ----              ---------         ---------------      ------------------ 
<S>                               <C>                  <C>                <C>                   <C>              <C>               
   Direct Financing
    Method:
    Supermarkets
       leased to
       Big V Holding Corp.        $ 3,231,168          $1,157,294         $ 5,254,309           $58,940             $520,114       
    Manufacturing
       facility leased to
       The Garden
       Companies, Inc.              3,235,280           1,544,265           5,430,735                                              
    Office/manufacturing
       facility leased to
       Rheometric
       Scientific, Inc.                                 1,510,791           4,789,209             4,500                            
    Office facility leased
       to Telos Corporation         5,834,949           1,549,022          10,597,978             5,500                            
    Research and development
        facility leased to
       Lanxide Corporation          4,060,674           1,390,122           7,281,878             7,421           (4,281,421)      
                                  -----------          ----------         -----------           -------          -----------       
                                  $16,362,071          $7,151,494         $33,354,109           $76,361          $(3,761,307)      
                                  ===========          ==========         ===========           =======          ===========       

<CAPTION>
                                      Gross Amount                                 
                                      which Carried                                
                                   at Close of Period (e)                         
                              --------------------------------                     
                                        Total                    Date Acquired    
                              -----------------------------      -------------    
<S>                                  <C>                              <C>           
 Direct Financing                      
  Method:                     
  Supermarkets                
     leased to                
     Big V Holding Corp.             $6,990,657                  July 13,1994       
  Manufacturing                                                                     
     facility leased to                                                             
     The Garden                                                                     
     Companies, Inc.                  6,975,000                  June 20, 1995      
  Office/manufacturing                                                              
     facility leased to                                                             
     Rheometric                                                                     
     Scientific, Inc.                 6,304,500                  February 23,1996   
  Office facility leased                                                            
     to Telos Corporation            12,152,500                  March 11, 1996     
  Research and development                                                          
      facility leased to                                                            
     Lanxide Corporation              4,398,000                  March 28, 1996     
                                    -----------                                     
                                    $36,820,657                  March 28, 1996     
                                    ===========                                     
</TABLE>

See accompanying notes to Schedule


                                      -28-
<PAGE>   30

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                       NOTES to SCHEDULE III - REAL ESTATE
                          and ACCUMULATED DEPRECIATION

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

      (b)   Represents partial refund of purchase price.

      (c)   The increase in net investment is due (i) to the amortization of
            unearned income producing a constant periodic rate of return on the
            net investment which is more than lease payments received, (ii) the
            writedown of a property to its estimated fair value.

      (d)   At December 31, 1998, the aggregate cost of real estate owned by
            Registrant and its subsidiaries for Federal income tax purposes is
            $283,736,765.

     (e)

<TABLE>
<CAPTION>
                                             Reconciliation of Real Estate Accounted
                                             ---------------------------------------
                                                  for Under the Operating Method
                                                  ------------------------------
                                                           December 31,
                                                           ------------
                                                   1997                   1998
                                                   ----                   ----
Balance at beginning
      of year                                 $  84,999,148        $ 227,014,400

Additions                                       142,021,252           72,759,323

Dispositions                                         (6,000)
                                              -------------        -------------
Balance at close of year                      $ 227,014,400        $ 299,773,723
                                              =============        =============

<CAPTION>
                                             Reconciliation of Accumulated Depreciation
                                             ------------------------------------------
                                                            December 31,
                                                            ------------
                                                      1997               1998
                                                      ----               ----
<S>                                                <C>                <C>       
Balance at beginning
          of year                                  $1,337,513         $4,360,196

Depreciation expense                                3,022,683          5,160,001
                                                   ----------         ----------

Balance at close of year                           $4,360,196         $9,520,197
                                                   ==========         ==========
</TABLE>


                                      -29-
<PAGE>   31


                                                         APPENDIX A TO FORM 10-K

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED

                                AND SUBSIDIARIES

                                                              1998 ANNUAL REPORT

<PAGE>   32


SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------

(In thousands except share amounts)

<TABLE>
<CAPTION>
                                      1994           1995          1996         1997           1998
                                      ----           ----          ----         ----           ----
<S>                            <C>            <C>           <C>           <C>           <C>        
OPERATING DATA:

   Revenues                    $       465    $     3,994   $    11,434   $    25,313   $    34,563

   (Loss) income before
    extraordinary items                (28)         2,115         6,210        12,804        12,078

   Net (loss) income                   (28)         2,115         6,210        12,804        11,699

   Basic earnings (loss)
    per share before
    extraordinary items (1)           (.03)           .53           .60           .57           .41

   Basic earnings (loss)
    per share (1)                     (.03)           .53           .60           .57           .42

   Weighted average
    number of Shares
    outstanding-basic              843,911      4,016,686    10,365,828    22,387,928    28,416,013

   Dividends paid                      289          2,351         6,780        15,082        23,028
   Dividends paid per share            .30            .76           .80           .81           .81

   Payments of mortgage
      principal (2)                      6            262         1,192         1,708         2,174

BALANCE SHEET DATA:

   Total consolidated assets        30,444         81,173       193,294       358,693       398,604

   Long-term obligations (3)         3,267         19,016        47,734        84,745       113,868
</TABLE>

(1)   The Company has a simple equity capital structure with only common stock
      outstanding. As a result, the Company has presented basic per share
      amounts only.
(2)   Represents scheduled mortgage principal amortization paid.
(3)   Represents mortgage obligations and deferred acquisition fees due after
      more than one year.


                                      -1-
<PAGE>   33

MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

Overview

            The following discussion and analysis of financial condition and
results of operations of Corporate Property Associates 12 Incorporated
("CPA(R):12") should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 1998. The following
discussion includes forward looking statements. Forward looking statements,
which are based on certain assumptions, describe future plans, strategies and
expectations of CPA(R):12. Such statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievement of CPA(R):12 to be materially different from the results of
operations or plan expressed or implied by such forward looking statements.
Accordingly, such information should not be regarded as representations by
CPA(R):12 that the results or conditions described in such statements or
objectives and plans of CPA(R):12 will be achieved.

            CPA(R):12 was formed in 1993 for the purpose of engaging in the
business of investing in and owning commercial and industrial real estate. In
February 1994, CPA(R):12 commenced a public offering of common stock at $10 per
share on a "best efforts" basis. A second public offering of common stock at $10
per share on a "best efforts" basis concluded in September 1997. Through these
offerings, CPA(R):12 issued 28,334,451 shares of common stock raising
$283,344,510.

            CPA(R):12 is using the proceeds from the public offerings along with
limited recourse mortgage financing to purchase properties and enter into
long-term net leases with corporate tenants. A majority of CPA(R):12's net
leases have been structured to place certain economic burdens of ownership on
these corporate tenants by requiring them to pay the costs of maintenance and
repair, insurance and real estate taxes. The leases have generally been
structured to include periodic rent increases that are stated or based on
increases in the consumer price index or, for retail properties, provide for
additional rents based on sales in excess of a specified base amount.

            CPA(R):12's primary objectives are to provide rising cash flow and
property values, protecting its investors from the effects of inflation through
rent escalation provisions, property appreciation, tenant credit improvement and
regular paydown of limited recourse mortgage debt. In addition, CPA(R):12 has
successfully negotiated grants of common stock warrants from selected tenants
and expects to realize the benefits of appreciation from those grants. CPA(R):12
cannot guarantee that its objectives will be ultimately realized.

            The Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments
of an Enterprise and Related Information", which is effective for fiscal years
beginning after December 15, 1997. This statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. Management evaluates the performance of
its portfolio of properties as a whole, rather than by identifying discrete
operating segments. This evaluation includes assessing CPA(R):12's ability to
meet distribution objectives, increase the dividend and increase value by
evaluating potential investments in single tenant net lease real estate and by
seeking opportunities such as refinancing mortgage debt at lower rates of
interest, restructuring leases or paying off lenders at a discount to the face
value of the outstanding mortgage balance.

Financial Condition

            One of CPA(R):12's objectives is to use its cash flow from
operations to meet operating expenses, service its mortgage debt, maintain
adequate cash reserves and fund an increasing rate of dividends to shareholders.
Cash flow from operations of $21,781,000 was not sufficient to fully pay
dividends of $23,028,000. CPA(R):12 believes that prudent investment in net
lease real estate requires a discipline that does not always allow for
investment of new funds in real estate as soon as new capital is received. As a
result, CPA(R):12 still had $34,957,000 available for investment as of December
31, 1998. Cash flow from operations was affected by higher cash balances; cash
flow will increase as the cash balance is reduced and deployed in higher
yielding real estate investments. CPA(R):12 also used $59,826,000 in 1998 to
fund several build-to-suit projects that are still under construction. The
leases on build-to-suit transactions generally require the tenant to provide a
return to CPA(R):12 based on the funds advanced. Generally accepted accounting
principles require, however, that any return received by an owner-lessor during
a construction period be 


                                      -2-
<PAGE>   34

recorded as a reduction of an investment rather than rental income. As a result,
construction period rents received totalling $818,000 in 1998 were not recorded
in income nor included in cash flow from operations.

            CPA(R):12 used $79,286,000 in 1998 for new real estate purchases,
including using $8,471,000 to purchase an interest in an equity investment owned
with two affiliates, and $59,826,000 for several build-to suit commitments that
are still under construction. Remaining commitments on properties under
construction are approximately $25,918,000 with all such existing projects
expected to be completed during 1999. After completion, revenues and cash flow
from these projects will be included in operations. CPA(R):12 has devoted a
substantial portion of its resources to build-to-suit projects as it has
concluded that these types of investments should provide a return on investment
that's superior to that of many other opportunities being evaluated by the
Advisor's acquisition team.

            In addition to the payment of dividends and payment of mortgage
principal on scheduled debt service installments, CPA(R):12's financing
activities included (a) paying off an existing mortgage loan on the Etec
Systems, Inc. property and (b) obtaining $30,500,000 of limited recourse
mortgages on unleveraged properties. CPA(R):12's financing strategy is to
leverage substantially all of its properties with limited recourse mortgages so
that the portfolio will be diversified to limit risk. A lender on a limited
recourse mortgage loan has recourse only to the property collateralizing such
debt and not to any of CPA(R):12's other assets. CPA(R):12 received $26,970,000
from Corporate Property Associates 14 Incorporated ("CPA(R):14") toward its
participation in the Etec property. CPA(R):14 will ultimately be reimbursed at
least $15,000,000 of its advances when the new building is completed and the
$30,000,000 of mortgage financing is received. Completion of the project is
scheduled for the second quarter of 1999. CPA(R):12 is in the process of
negotiating a $40,000,000 credit facility that will be used to fund acquisitions
on a transitional basis. There is no assurance, however that the credit facility
agreement will be completed.

            In June 1998, the shareholders of CPA(R):12 approved a proposal to
amend CPA(R):12's Advisory Agreement to allow CPA(R):12, with the consent of the
Advisor, to pay asset management and performance fees in common stock rather
than cash. As a result of this amendment to the Advisory Agreement, CPA(R):12
was able to convert a liability of $3,394,000 for unpaid performance fees to
equity (339,410 shares), which had voluntarily been deferred by the Advisor. An
additional 43,865 shares ($438,650) were issued in 1998 in satisfaction of
current year performance fees. By issuing shares rather than paying fees in
cash, CPA(R):12's liquidity has been enhanced. The issuance of shares to pay
fees increases the cash available to CPA(R):12 to pay expenses, strengthens
CPA(R):12's balance sheet and increases the equity ownership of the Advisor with
the effect of aligning more strongly the interests of the Advisor and
shareholders of the company. With such issuance, the Advisor's ownership in
CPA(R):12 has increased to more than 1%.

            In connection with the purchase of its properties, CPA(R):12
requires sellers of such properties to perform environmental reviews. Management
believes, based on the results of such reviews, that CPA(R):12's properties were
in substantial compliance with Federal and state environmental statutes at the
time the properties were acquired. Tenants are generally subject to
environmental statutes and regulations regarding the discharge of hazardous
materials and any related remediation obligations. In addition, CPA(R):12's
leases generally require tenants to indemnify CPA(R):12 from all liabilities and
losses related to the leased properties with provisions of such indemnification
specifically addressing environmental matters. The leases generally include
provisions that allow for periodic environmental assessments, paid for by the
tenant, and allow CPA(R):12 to extend leases until such time as a tenant has
satisfied its environmental obligations. CPA(R):12 also attempts to negotiate
lease provisions to require financial assurances from tenants such as
performance bonds or letters of credit if the costs of remediating environmental
conditions are, in the estimation of CPA(R):12, are in excess of specified
amounts. Accordingly, management believes that the ultimate resolution of any
environmental matters would not have a material adverse effect on CPA(R):12's
financial condition, liquidity or results of operations.

            The "Year 2000 issue" refers to the series of problems that have
resulted or may result from the inability of certain computer software and
embedded processes to properly process dates. This shortcoming could result in
the failure of major systems or miscalculations causing major disruptions to
business operations. CPA(R):12 has no computer systems of its own, but is
dependent upon the systems maintained by an affiliate of its Advisor and certain
other third parties including its banks and transfer agent.

            CPA(R):12 and its affiliates are actively evaluating their readiness
relating to the Year 2000 issue. In 1998, CPA(R):12, its Advisor, and affiliates
commenced an assessment of their local area network of personal computers and
related equipment and are in the process of replacing or upgrading the equipment


                                      -3-
<PAGE>   35

that has been identified as not being Year 2000 compliant. The program is
expected to be substantially completed in the second quarter of 1999. CPA(R):12
and its affiliates have also engaged outside consultants experienced in
diagnosing systems and software applications and addressing Year 2000 issues,
and with the help of these consultants currently are remediating as necessary.

            At the same time, CPA(R):12, its Advisor, and affiliates are
evaluating their applications software, all of which are commercial "off the
shelf" programs that have not been customized. During 1998, CPA(R):12 commenced
a project to select a comprehensive integrated real estate accounting and asset
management software package to replace its existing applications. A commercial
Windows-based integrated accounting and asset management based application is
being tested and is scheduled to be installed during the third quarter of 1999.
This software has been designed to use four digits to define a year. Because
CPA(R):12's primary operations consist of investing in and receiving rents on
long-term net leases of real estate, while the failure of the Advisor and its
affiliates to correct fully Year 2000 issues could disrupt its administrative
operations, the resulting disruptions would not likely have a material impact on
CPA(R):12's results of operations, financial condition or liquidity. Contingency
plans to address potential disruptions are in the process of being developed.
CPA(R):12's share of costs associated with required modifications to become Year
2000 compliant is not expected to be material to CPA(R):12's financial position.
CPA(R):12's share of the estimated total cost of the Year 2000 project is
expected to be approximately $105,000, of which $71,000 has been incurred to
date.

            Although CPA(R):12 believes that it will address its internal Year
2000 issues in a timely manner, there is a risk that the inability of
third-party suppliers and lessees to meet Year 2000 readiness issues could have
an adverse impact on CPA(R):12. CPA(R):12 and its affiliates have identified
their critical suppliers and are requiring that these suppliers communicate
their plans and progress in addressing Year 2000 readiness. The most critical
processes provided by third-party suppliers are CPA(R):12 bank and transfer
agent. CPA(R):12's operations may be significantly affected if such providers
are ineffective or untimely in addressing Year 2000 issues.

            CPA(R):12 contacted each of its lessees regarding Year 2000
readiness and has emphasized the need to address Year 2000 issues. Generally,
lessees are contractually required to maintain their leased properties in good
working order and to make necessary alterations, foreseen or unforeseen, to meet
their contractual obligations. Because of those obligations, CPA(R):12 believes
that the risks and costs of upgrading systems related to operations of the
buildings and that contain technology affected by Year 2000 issues will
generally be absorbed by lessees rather than CPA(R):12. The major risk to
CPA(R):12 is that Year 2000 issues have such an adverse effect on the financial
condition of a lessee that its ability to meet its lease obligations, including
the timely payment of rent, is impaired. In such an event, CPA(R):12 may
ultimately incur the costs for Year 2000 readiness at the affected properties.
The potential materiality of any impact is not known at this time.

Results of Operations:

            Net income for 1998 decreased by $1,105,000 as compared with 1997
because of two nonrecurring items that reduced 1998 income by $4,660,000, namely
an extraordinary charge on extinguishment of debt resulting from a prepayment
charge of $379,000 and the writedown of a property to fair value resulting in a
noncash charge of $4,281,000. Income, as adjusted for these items, would have
reflected an increase of $3,555,000.

            The increase in income as adjusted was entirely due to increased
revenues, and, for the most part, reflects the increase in lease revenues
(rental income and interest income from direct financing leases) which included
a full year of rent in 1998 from twelve leases that CPA(R):12 entered into in
1997, rents from three build-to-suit projects completed in 1998 and two new
leases in 1998. CPA(R):12 also had rent increases on three leases in 1998. On an
annualized basis, such rent increases total $112,000 (of which $37,000 was
reflected in 1998 lease revenue). CPA(R):12's leases usually provide for rent
increases with intervals ranging between one and five years per increase. The
number of rent increases from the existing portfolios of properties can be
expected to increase over the next several years.

            The increase in income resulting from the increase in lease revenues
was partially offset by increases in interest, depreciation, property and
general administrative expenses. The increases in interest and depreciation
expenses were due to the increase in limited recourse mortgage loan balances and
real estate asset balances, respectively. The increase in property expense was
also due to the increase in real 


                                      -4-
<PAGE>   36

estate assets as the asset management and performances fees payable to the
Advisor are directly based on the historical cost of properties. The increase in
general and administrative expense was due solely to the accrual of a monitoring
fee payable to the sellers of the Company's common stock in accordance with
CPA(R):12's Prospectus.

            In 2000, the asset management and performance fees will be based on
an independent valuation of the properties as of December 31, 1999. The fees are
expected to increase because CPA(R):12 believes there has been appreciation in
the value of its properties. The extent of any increase in value, however,
cannot be determined until the valuation is performed. Since December 31, 1998,
CPA(R):12 has purchased a 50% interest in a limited liability company with the
remaining 50% interest owned by an affiliate. The limited liability company
entered into a sale-leaseback with Intesys Technologies, Inc. This equity
investment will provide annual cash flow of $1,137,000 until a limited recourse
mortgage is placed on the property. CPA(R):12's share of proceeds from a
mortgage will be used to fund additional real estate investments. In addition,
CPA(R):12 and two affiliates, each with one-third interests, purchased the
headquarters of Advanced Micro Devices, Inc. in Sunnyvale, California in
December 1998 and entered into a net lease with AMD. CPA(R):12's share of annual
cash flow (rental less mortgage debt service) from the AMD investment will be
approximately $1,066,000. Accordingly, income and the related cash flow from
equity investments will increase substantially in 1999. Rent increases on two
leases each owned as equity investments are scheduled in 1999 and 2001. Several
build-to-suit projects are scheduled to be completed in 1999 including
properties leased to Randall International, Inc., BCC Development and Management
Co. (Balanced Care Corporation), International Management Consultant, Inc. and
expansion at the Career Education Corporation and Marconi Integrated Systems,
Inc. properties. After the completion of these projects, CPA(R):12 will
recognize the rents on these properties as current income, at which time cash
flow from operations is expected to fund fully dividends to shareholders.

            Other interest income decreased during the year as cash balances
decreased. This decrease was expected as CPA(R):12 was using its cash balances
for additional real estate purchases. This trend of decrease should continue as
an objective of CPA(R):12 is to hold cash balances sufficient for a working
capital reserve.

            During 1998, CPA(R):12 recognized a noncash charge of $4,281,000 for
the writedown of a property leased to Lanxide Corporation to its expected fair
value as Lanxide has vacated the property and CPA(R):12 expects Lanxide to
terminate the lease in connection with its bankruptcy petition. The Lanxide
lease was structured so that the leases of three subtenants would be assumed by
CPA(R):12 if Lanxide did not meet its lease obligations. With the expected lease
termination, annual rental income from the Lanxide property will decrease by
$445,000. The initial terms of the subleases expire in 2000 through 2001.

            Results of operations for 1997 are not directly comparable to the
results for 1996, as the purchase of properties and the growth of CPA(R):12's
asset base continued throughout 1997. Directly owned real estate assets (before
accumulated depreciation) increased from $125,846,000 at December 31, 1996 to
$267,981,000 at December 31, 1997. Increases in lease revenues, equity income,
interest and general and administrative expenses, property expenses,
depreciation and amortization were primarily due to the increases in real estate
assets and related mortgage borrowings. The increase in other interest income
was due to the increase in cash balances, as a substantial amount of capital was
raised in 1997 prior to the end of CPA(R):12's stock offering in September 1997.

            Because of the long-term nature of CPA(R):12's net leases, inflation
and changing prices have not unfavorably affected CPA(R):12's revenues and net
income. CPA(R):12's net leases have rent increases based on formulas indexed to
increase in the Consumer Price Index, sales overrides or other periodic
increases which are designed to increase lease revenues in the future.

            In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for all quarters of fiscal years
beginning after June 15, 1999. CPA(R):12 believes adoption of SFAS No. 133 will
not have a material impact on the consolidated financial statements.


                                      -5-
<PAGE>   37

                        REPORT of INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Corporate Property Associates 12 Incorporated
and Subsidiaries:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Corporate Property
Associates 12 Incorporated and Subsidiaries at December 31, 1997 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Carey Property Advisors, a Pennsylvania limited partnership (the "Advisor"); our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by the
Advisor, and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed above.


/s/ PricewaterhouseCoopers LLP

New York, New York
March 5, 1999


                                      -6-
<PAGE>   38

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 1997 and 1998

<TABLE>
<CAPTION>
                                                                      1997                          1998
                                                                      ----                          ----
           ASSETS:
<S>                                                                <C>                            <C>         
Real estate leased to others:
    Accounted for under the
       operating method:
           Land                                                    $ 40,993,440                   $ 44,342,243
           Buildings                                                186,020,960                    255,431,480
                                                                   ------------                   ------------
                                                                    227,014,400                    299,773,723
           Accumulated depreciation                                   4,360,196                      9,520,197
                                                                   ------------                   ------------
                                                                    222,654,204                    290,253,526
Net investment in direct financing leases                            40,966,665                     36,820,657
                                                                   ------------                   ------------
    Real estate leased to others                                    263,620,869                    327,074,183
Equity investments                                                   16,635,180                     25,971,837
Cash and cash equivalents                                            72,423,221                     37,790,505
Marketable equity securities, at fair value                           3,174,137                      2,730,440
Other assets, net of reserve for uncollected
    rents of $162,137 and $402,418 in 1997 and 1998                   2,839,719                      5,036,689
                                                                   ------------                   ------------
             Total assets                                          $358,693,126                   $398,603,654
                                                                   ============                   ============

           LIABILITIES:

Limited recourse mortgage notes payable                            $ 88,893,692                   $109,261,349
Accrued interest                                                        650,800                        907,922
Accounts payable to affiliates                                        3,430,059                      1,839,533
Accounts payable and accrued expenses                                   259,189                        659,750
Deferred acquisition fees payable to affiliate                        6,469,146                      8,876,292
Dividends payable                                                                                    5,805,617
Prepaid rental income and security deposits                           5,416,573                      4,996,561
                                                                   ------------                   ------------
             Total liabilities                                      105,119,459                    132,347,024
                                                                   ------------                   ------------
Minority interest                                                                                   26,969,738
                                                                                                  ------------
Commitments and contingencies

           SHAREHOLDERS' EQUITY:

Common stock, $.001 par value; authorized, 
     40,000,000 shares; issued and
     outstanding, 28,334,451 and 28,717,726 shares
     at December 31, 1997 and 1998                                       28,334                         28,717
Additional paid-in capital                                          253,835,934                    257,668,301
Dividends in excess of accumulated earnings                          (2,768,966)                   (19,903,364)
Accumulated other comprehensive income                                3,031,300                      2,607,571
                                                                   ------------                   ------------
                                                                    254,126,602                    240,401,225
Less, treasury stock at cost, 68,043 and 129,301
    shares at December 31, 1997 and 1998                               (552,935)                    (1,114,333)
                                                                   ------------                   ------------ 
             Total shareholders' equity                             253,573,667                    239,286,892
                                                                   ------------                   ------------
             Total liabilities and
                 shareholders' equity                              $358,693,126                   $398,603,654
                                                                   ============                   ============
</TABLE>

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


                                      -7-
<PAGE>   39

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                        CONSOLIDATED STATEMENTS of INCOME

              For the years ended December 31, 1996, 1997 and 1998


<TABLE>
<CAPTION>
                                                    1996          1997          1998
                                                    ----          ----          ----
<S>                                           <C>             <C>            <C>         
Revenues:
    Rental income                             $  5,000,989    $ 16,651,513   $ 27,097,224
    Interest income from direct financing
       leases                                    4,559,544       4,966,730      4,940,298
    Other interest income                        1,873,094       3,695,176      2,525,620
                                              ------------    ------------   ------------
                                                11,433,627      25,313,419     34,563,142
                                              ------------    ------------   ------------
Expenses:
    Interest expense                             3,525,774       6,499,865      8,557,890
    Depreciation                                   947,206       3,022,683      5,160,001
    General and administrative                   1,488,793       2,209,171      2,566,317
    Property expense                             1,269,968       2,786,890      3,989,894
    Amortization                                    34,085          78,187        108,277
    Writedown to fair value                                                     4,281,421
                                              ------------    ------------   ------------
                                                 7,265,826      14,596,796     24,663,800
                                              ------------    ------------   ------------

           Income before income from
               equity investments and
               extraordinary item                4,167,801      10,716,623      9,899,342


Income from equity investments                   2,042,400       2,086,993      2,178,813
                                              ------------    ------------   ------------

           Income before extraordinary item      6,210,201      12,803,616     12,078,155

Extraordinary loss on extinguishment
    of debt                                                                     (379,246)
                                              ------------    ------------   ------------

            Net income                        $  6,210,201    $ 12,803,616   $ 11,698,909
                                              ============    ============   ============

Basic earnings per common share
    before extraordinary item                        $ .60           $ .57          $ .42
Extraordinary item                                                                   (.01)
                                              ------------    ------------   ------------
Basic earnings per share                             $ .60           $ .57          $ .41
                                              ============    ============   ============

Weighted average shares outstanding-basic       10,365,828      22,387,928     28,416,013
                                              ============    ============   ============
</TABLE>

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


                                      -8-
<PAGE>   40

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                 CONSOLIDATED STATEMENTS of SHAREHOLDERS' EQUITY

              For the years ended December 31, 1996, 1997 and 1998

<TABLE>
<CAPTION>
                                                                                      Dividends in      Accumulated
                                                      Additional                        Excess of          Other
                                        Common          Paid-in    Comprehensive       Accumulated      Comprehensive    Treasury
                                         Stock          Capital       Income            Earnings          Income           Stock   
                                      ----------    ---------------------------      ------------        -------        -----------

<S>                                     <C>           <C>             <C>               <C>              <C>            <C>        
Balance at December 31, 1995            $ 6,028       $52,488,567                       $(1,110,127)                               

9,117,364 shares issued
  at $10 per share, net of
  offering costs of $8,988,624            9,117        82,175,899                                                                  

Dividends declared                                                                       (7,684,030)                               

Net income                                                               $6,210,201       6,210,201                      
                                                                         ==========                                       

Repurchase of 14,395 shares                                                                                              $(140,008)

Reclassification of common stock
  subject to redemption at end of
  redemption period, 523,171
  shares                                    523         5,232,185                              (998)                               
                                        -------      ------------                       -----------                       -------- 
 
Balance at December 31, 1996             15,668       139,896,651                        (2,584,954)                      (140,008)

12,666,048 shares issued
  at $10 per share, net of
  offering costs of $12,708,531          12,666       113,939,283                                                                  

Dividends declared                                                                      (12,987,628)                               

Comprehensive income:
Net income                                                            $12,803,616        12,803,616                                
Other comprehensive income:
  Unrealized appreciation of
   marketable equity securities
   for 1997                                                             3,031,300                         3,031,300                
                                                                      -----------                                                  
                                                                      $15,834,916
Repurchase of 53,648 shares                                           ===========                                          (412,927)
                                        -------      ------------                       -----------       ---------      --------- 
                                                                                  
Balance at December 31, 1997             28,334       253,835,934                        (2,768,966)      3,031,300       (552,935)

383,275 shares issued at
  $10 per share                             383         3,832,367                                                                  
Dividends declared                                                                      (28,833,307)                               

Comprehensive income:
Net income                                                            $11,698,909        11,698,909                                
Other comprehensive income:
  Unrealized appreciation of
   marketable equity securities
   for 1998                                                              (423,729)                         (423,729)               
                                                                      -----------                                                  
                                                                      $11,275,180
                                                                      ===========
Repurchase of 61,258 shares                                                                                               (561,398)
                                        -------      ------------                       -----------       ---------      --------- 

Balance at December 31, 1998            $28,717      $257,668,301                      $(19,903,364)     $2,607,571    $(1,114,333)
                                        =======      ============                      ============      ==========    =========== 

<CAPTION>
                                       Total           
                                       -----           
<S>                                 <C>                               
Balance at December 31, 1995        $51,384,468                       
                                                     
9,117,364 shares issued                              
  at $10 per share, net of                           
  offering costs of $8,988,624       82,185,016      
                                                     
Dividends declared                   (7,684,030)     
                                                     
Net income                            6,210,201               
                                                     
                                                     
Repurchase of 14,395 shares            (140,008)     
                                                     
Reclassification of common stock                     
  subject to redemption at end of                    
  redemption period, 523,171                         
  shares                              5,231,710      
                                   ------------      
                                                     
Balance at December 31, 1996        137,187,357      
                                                     
12,666,048 shares issued                             
  at $10 per share, net of                           
  offering costs of $12,708,531     113,951,949      
                                                     
Dividends declared                  (12,987,628)     
                                                     
Comprehensive income:                                
Net income                           12,803,616      
Other comprehensive income:                          
  Unrealized appreciation of                         
   marketable equity securities                      
   for 1997                           3,031,300      
                                                     
                                                     
Repurchase of 53,648 shares            (412,927)     
                                    -----------      
                                                     
Balance at December 31, 1997        253,573,667      
                                                     
383,275 shares issued at                             
  $10 per share                       3,832,750      
Dividends declared                  (28,833,307)     
                                                     
Comprehensive income:                                
Net income                           11,698,909      
Other comprehensive income:                          
  Unrealized appreciation of                         
   marketable equity securities                      
   for 1998                            (423,729)     
                                                     
                                                     
Repurchase of 61,258 shares            (561,398)     
                                    -----------      
                                                     
Balance at December 31, 1998       $239,286,892      
                                   ============      
</TABLE>

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


                                      -9-
<PAGE>   41

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS of CASH FLOWS

              For the years ended December 31, 1996, 1997 and 1998

<TABLE>
<CAPTION>
                                                                   1996            1997            1998
                                                                   ----            ----            ----
<S>                                                          <C>              <C>              <C>          
Cash flows from operating activities:
   Net income                                                $   6,210,201    $  12,803,616    $  11,698,909
   Adjustments to reconcile net income
       to net cash provided by operating activities:
       Depreciation and amortization                               981,291        3,100,870        5,268,278
       Straight-line adjustments and other
         noncash rent adjustments                                 (164,456)        (491,601)      (1,173,220)
       Income from equity investments in excess
         of distributions received                                (294,055)        (543,245)        (230,590)
       Provision for uncollected rents                                              162,137          240,281
       Extraordinary loss on extinguishment of debt                                                  379,246
       Writedown to fair value                                                                     4,281,421
       Change in operating assets and liabilities, net (a)       1,014,123        4,923,814        1,316,973
                                                             -------------    -------------    -------------

            Net cash provided by operating activities            7,747,104       19,955,591       21,781,298
                                                             -------------    -------------    -------------

Cash flows from investing activities:
   Refund of real estate purchase price                          2,633,473
   Purchase of stock warrants                                     (124,000)
   Purchases of equity investments                              (5,158,908)                       (8,470,814)
   Purchases of real estate and other capitalized
       costs                                                   (77,739,925)    (138,960,203)     (70,815,192)
                                                             -------------    -------------    -------------

            Net cash used in investing activities              (80,389,360)    (138,960,203)     (79,286,006)
                                                             -------------    -------------    -------------

Cash flows from financing activities:
   Proceeds from stock issuance, net of costs                   82,185,016      113,951,949
   Dividends paid                                               (6,779,669)     (15,081,819)     (23,027,690)
   Payments of mortgage principal                               (1,191,750)      (1,707,976)      (2,174,394)
   Prepayment of mortgage payable                               (2,949,629)      (4,096,000)      (7,957,949)
   Proceeds from issuance of mortgages                          32,300,000       48,411,509       30,500,000
   Deferred financing costs                                        (90,654)        (530,217)        (497,069)
   Capital contributions from minority partners                                                   26,969,738
   Purchase of treasury stock                                     (140,008)        (412,927)        (561,398)
   Payment made on extinguishment of debt                                                           (379,246)
   Redemption of stock                                             (37,500)
                                                             -------------    -------------    -------------

            Net cash provided by financing activities          103,295,806      140,534,519       22,871,992
                                                             -------------    -------------    -------------

            Net increase (decrease) in cash and
                cash equivalents                                30,653,550       21,529,907      (34,632,716)

Cash and cash equivalents, beginning of period                  20,239,764       50,893,314       72,423,221
                                                             -------------    -------------    -------------

       Cash and cash equivalents, end of period              $  50,893,314    $  72,423,221    $  37,790,505
                                                             =============    =============    =============

Supplemental Disclosure of noncash operating
   and investing activities:

Deferred acquisition fee payable to affiliate                $   1,836,458    $   3,055,049    $   2,407,146
                                                             =============    =============    =============
</TABLE>

During the year ended December 31, 1998, the Company issued 383,275 shares of
common stock to the Advisor in settlement of accrued performance fees of
$3,832,750.

(a)   Excludes changes in accounts payable and accrued expenses and accounts
      payable to affiliates balances which relate to the raising of capital
      (financing activities) rather than the Company's real estate operations.

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


                                      -10-
<PAGE>   42

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

1.    Summary of Significant Accounting Policies:

      Basis of Consolidation:

        The consolidated financial statements include the accounts of Corporate
          Property Associates 12 Incorporated, its wholly-owned subsidiaries and
          a controlling interest in a limited liability company (collectively,
          the "Company"). All material inter-entity transactions have been
          eliminated.

      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 the recoverability of real
          estate assets and investments. 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.

        The Company 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 as 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
            Company's net investment in the lease.

            Operating 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.

        For properties under construction, interest on mortgages is capitalized
          rather than expensed and rentals received are recorded as a reduction
          of capitalized project (i.e., construction) costs.

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

        The Company 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.

      Depreciation:

        Depreciation is computed using the straight-line method over the
          estimated useful lives of properties - generally 40 years.

      Cash  Equivalents:

        The Company 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

                                   Continued


                                      -11-
<PAGE>   43

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

      funds. At December 31, 1997 and 1998, the Company's cash and cash
      equivalents were held in the custody of two financial institutions, and
      which balances at times exceed federally insurable limits. The Company
      mitigates this risk by depositing funds with major financial institutions.

      Offering Costs:

        Costs incurred in connection with the raising of capital through the
          sale of common stock are charged to shareholders' equity upon the
          issuance of shares.

      Equity Investments:

        The Company's interests in general partnerships and limited liability
          companies in which its ownership interests range from 37% to 50%, are
          accounted for under the equity method, i.e. at cost, increased or
          decreased by the Company's share of earnings or losses, less
          distributions.

      Marketable Equity Securities:

        The Company's marketable equity securities, which consist of 68,261
          shares of common stock of Etec Systems, Inc. ("Etec"), are classified
          as available-for-sale securities and are reported at fair value with
          the Company's interest in unrealized gains and losses on these
          securities reported as a separate component of shareholder's equity
          (accumulated other comprehensive income) until realized. As of
          December 31, 1998, fair value of the Etec common stock was $2,607,571.
          The cost basis in the Etec common stock is carried on the Company's
          books at a nominal cost.

      Other Assets:

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

      Treasury Stock:

        Treasury stock is recorded at cost

      Deferred Acquisition Fees:

        Fees are payable for services provided by Carey Property Advisors, a
          Pennsylvania limited partnership (the "Advisor") to the Company
          relating to the identification, evaluation, negotiation, financing and
          purchase of properties. A portion of such fees are deferred and are
          payable in annual installments with each installment equal to .25% of
          the purchase price of the properties over no less than eight years
          following the first anniversary of the date a property was purchased.
          Payment of such fees is subject to the 2%/25% Guidelines (see Note 3).

      Earnings Per Share:

        The Company has a simple equity capital structure with only common stock
          outstanding. As a result, the Company has presented basic per-share
          amounts only for all periods presented in the accompanying
          consolidated financial statements.

                                   Continued


                                      -12-
<PAGE>   44

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

      Federal Income Taxes:

        The Company qualifies as a real estate investment trust ("REIT") for the
          years ended December 31, 1996, 1997 and 1998 under the Internal
          Revenue Code of 1986. The Company is not subject to Federal income
          taxes, provided it distributes at least 95% of its REIT taxable income
          to its shareholders and meets other conditions.

      Operating Segments:

        The Financial Accounting Standards Board ("FASB") issued Statement of
          Financial Accounting Standards ("SFAS") No. 131, "Disclosure about
          Segments of an Enterprise and Related Information". SFAS No. 131,
          effective for fiscal year beginning after December 15, 1997,
          establishes accounting standards for the way public business
          enterprises report selected information about operating segments and
          guidelines for defining the operating segment of an enterprise. Based
          on the definition of an operating segment in SFAS No. 131, the Company
          has concluded that it engages in a single operating segment.

        Reclassification:

        Certain 1996 and 1997 amounts have been reclassified to conform to the
          1998 financial statement presentation.

2. Organization and Offering:

        The Company was formed on July 30, 1993 for the purpose of engaging in
          the business of investing in and owning industrial and commercial real
          estate. Subject to certain restrictions and limitations, the business
          of the Company is managed by the Advisor. The Advisor will be entitled
          to certain incentive fees in the event of the liquidation of the
          Company, subject to certain conditions.

        An initial offering of the Company's shares which commenced on February
          18, 1994 concluded on January 26, 1996, at which time the Company had
          issued an aggregate of 8,135,992 shares ($81,359,920). The Company
          filed a post-effective amendment in March 1996, withdrawing from
          registration the balance of unsold shares from such offering. On
          February 2, 1996, the Company commenced an offering (the " Second
          Offering") for a maximum of 20,000,000 shares of common stock. The
          shares were offered to the public on a "best efforts" basis at a price
          of $10 per share. On August 22, 1997, the Company registered an
          additional 300,000 shares under the Second Offering. The Second
          Offering was concluded on September 18, 1997, at which time 20,198,459
          ($201,984,590) shares were issued.

        In connection with performing services relating to the Company's real
          estate purchases, affiliates of the Company received acquisition fees
          of $513,847, $862,415 and $724,763 in 1996, 1997 and 1998,
          respectively.

3. Transactions with Related Parties:

        The Company's asset management and performance fees are each 1/2 of 1%
          of Average Invested Assets, as defined in the Prospectus of the
          Company. Asset management fees were $631,051, $1,202,124 and
          $1,751,817 in 1996, 1997 and 1998, respectively, with performance fees
          in like amount. General and administrative expense reimbursements
          consist primarily of the actual cost of personnel needed to provide
          administrative services necessary to the operation of the Company.
          General and administrative expense reimbursements were $747,779,
          $1,121,018 and $560,957 in 1996, 1997 and 1998, respectively.

                                   Continued


                                      -13-
<PAGE>   45

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

        In June 1998, the Company's shareholders approved a proposal to allow
          the Company, subject to the Advisor's consent, to pay fees to the
          Advisor in Company common stock rather than cash. Since the approval,
          the Company has issued 383,275 shares of common stock to the Advisor
          in settlement of accrued performance fees of $3,832,750. The
          collection of a portion of the performance fees had previously been
          voluntarily deferred by the Advisor. The stock is subject to certain
          restrictions and will vest ratably over a five year period. The
          Advisor receives dividends on its restricted shares and has the rights
          to vote its shares currently. For purposes of determining the number
          of shares to be issued, the Company used the $10.00 per share price
          used in connection with its sale of common stock. The Company has been
          notified by the Advisor that it has elected to receive restricted
          stock for the performance fee in 1999. The shares will be based on a
          share price of $10 until an independent valuation of the Company's
          assets is performed. Pursuant to the Prospectus of the Company, an
          independent appraisal of the fair value of the Company's assets is
          required annually, beginning as of December 31, 1999. Determination of
          a per share value for any shares issued after that date will be based
          on the appraised fair value per share as of the end of the prior year.

        Pursuant to its advisory agreement, the Advisor performs certain
          services for the Company including the identification, evaluation,
          negotiation, purchase and disposition of property and the day-to-day
          administration and management of the Company. The Advisor and certain
          affiliates receive fees and compensation in connection with the
          Offering and the operation of the Company, including reimbursement for
          organization and offering expenses, acquisition and structuring fees,
          reimbursement for expenses incurred by the Advisor in connection with
          the administration of the Company, asset management and performance
          fees, and loan refinancing fees, and may ultimately receive
          subordinated disposition fees, that are dependent on the Company's
          performance. In connection with performing services related to the
          Company's real estate purchases in 1996, 1997 and 1998, affiliates of
          the Company received structuring and development fees of $1,284,619,
          $2,156,038 and $1,811,907, respectively. Fees are paid only in
          connection with completed transactions. The affiliate is entitled to
          receive deferred acquisition fees of $8,876,292 as of December 31,
          1998 over a period of no less than eight years, subject to the 2%/25%
          Guidelines limitation described below. A portion of such deferred
          acquisition fees have been paid since December 31, 1998.

        The Company's interests in properties jointly held with affiliated
          entities range from 27.38% to 50% with such interests held as
          tenants-in-common and through ownership interests in general
          partnerships and limited liability companies. The Company accounts for
          its undivided interest in assets and liabilities relating to
          tenants-in-common interests on a proportional basis. Ownership
          interests in general partnerships and a limited liability company,
          owned with an affiliate, are accounted for under the equity method
          when such ownership interest is 50% or less.

        The Advisor must reimburse the Company at least annually for the amount
          by which operating expenses of the Company exceed the 2%/25%
          Guidelines (the greater of 2% of Average Invested Assets or 25% of Net
          Income) as defined in the Prospectus. If in any year when the
          operating expenses of the Company exceed the 2%/25% Guidelines, the
          Advisor will have an obligation to reimburse the Company for such
          excess, subject to certain conditions. If the Independent Directors
          find that such expenses were justified based on any unusual and
          nonrecurring factors which they deem sufficient, the Advisor may be
          reimbursed in future years for the full amount or any portion of such
          excess expenses, but only to the extent such reimbursement would not
          cause the Company's operating expenses to exceed the 2%/25% Guidelines
          in any such year.

                                   Continued


                                      -14-
<PAGE>   46

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES
              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

        For the years ended December 31, 1996, 1997 and 1998, fees aggregating
          $348,733, $79,377 and $103,466, respectively, were incurred for legal
          services provided by a firm in which the Secretary, until July 1997,
          of the Company and of the Corporate General Partner of the Advisor is
          a partner.

        The Company is a participant in an agreement with W. P. Carey & Co.,
          Inc. ("W. P. Carey") and certain 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 Company's share of rental, occupancy and
          leasehold improvement costs is based on adjusted gross revenues, as
          defined. Expenses incurred in 1996, 1997 and 1998 were $26,851,
          $69,825 and $143,003, respectively.

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

        Scheduled future minimum rents, exclusive of renewals, under
          noncancellable operating leases amount to approximately $27,530,000 in
          1999; $27,552,000 in 2000; $27,710,000 in 2001; $27,787,000 in 2002;
          $27,998,000 in 2003 and aggregate approximately $429,911,000 through
          2019.

        Contingent rents were approximately $9,000, $32,000 and $71,000 in 1996,
          1997 and 1998, respectively.

5. Net Investment in Direct Financing Leases:

        Net investment in direct financing leases is summarized as follows:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                       --------------------------------
                                                           1997                1998
                                                           ----                ----
               <S>                                     <C>                 <C>         
               Minimum lease payments
                 receivable                            $ 88,289,457        $ 83,497,133
               Unguaranteed residual value               40,581,966          36,300,545
                                                       ------------        ------------
                                                        128,871,423         119,797,678
               Less: Unearned income                     87,904,758          82,977,021
                                                       ------------        ------------
                                                       $ 40,966,665        $ 36,820,657
                                                       ============        ============
</TABLE>

        Scheduled future minimum rents, exclusive of renewals, under
          noncancellable direct financing leases are approximately $4,898,000 in
          each of the years 1999 through 2003 and aggregate approximately
          $83,497,000 through 2018.

        Contingent rents were approximately $13,000 in 1998. The Company did not
          earn contingent rents in 1996 and 1997.

                                   Continued


                                      -15-
<PAGE>   47

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

6. Mortgage Notes Payable:

        Mortgage notes payable, all of which are limited recourse to the
          Company, are collateralized by an assignment of various leases and by
          real property with a carrying value of approximately $235,072,289. As
          of December 31, 1998, mortgage notes payable had interest rates
          ranging from 6.85% to 10.25% per annum.

        Scheduled principal payments during each of the five years following
          December 31, 1998 are as follows:

<TABLE>
<CAPTION>
                  Year Ending December 31,
                  ------------------------
                  <S>                               <C>                
                     1999                            $  2,740,971
                     2000                              17,496,806
                     2001                               2,873,262
                     2002                               7,515,477
                     2003                               8,042,446
                     Thereafter                        70,592,387
                                                     ------------
                        Total                        $109,261,349
                                                     ============
</TABLE>


        Interest paid, excluding capitalized interest, was $3,243,825,
          $5,932,311 and $7,758,956 in 1996, 1997, and 1998, respectively.

        In connection with the placement of mortgages, fees of $513,847,
          $862,415 and $724,763 were paid to an affiliate of the Company in
          1996, 1997 and 1998, respectively.

7. Dividends Payable:

        A dividend of $.0022478 per share per day in the period from October 1,
          1998 through December 31, 1998 ($5,805,617) was declared in December
          1998 and paid in January 1999.

8. Lease Revenues:

        The Company's operations consist of the investment in and the leasing of
          industrial and commercial real estate. The financial reporting sources
          of 1996, 1997 and 1998 lease revenues are as follows:

<TABLE>
<CAPTION>
                                                     1996        1997           1998
                                                     ----        ----           ----
<S>                                           <C>           <C>           <C>        
     Per Statements of Income:
        Interest income from direct
           financing leases                   $ 4,559,544   $ 4,966,730   $ 4,940,298
        Rental income from operating leases     5,000,989    16,651,513    27,097,224
     Adjustment:
        Share of lease revenues from
           equity investments                   4,419,078     4,422,114     4,501,027
                                              -----------   -----------   -----------
                                              $13,979,611   $26,040,357   $36,538,549
                                              ===========   ===========   ===========
</TABLE>

                                   Continued


                                      -16-
<PAGE>   48

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

        In 1996, 1997 and 1998, the Company earned its share of net lease
          revenues from its direct and indirect ownership of real estate from
          the following lease obligors:

<TABLE>
<CAPTION>
                                                1996              %           1997              %           1998              %
                                                ----             --           ----            ----          ----             --
<S>                                      <C>                      <C>  <C>                      <C>  <C>                      <C>
Etec Systems, Inc.                       $ 1,208,583              9%   $ 1,556,393              6%   $ 2,857,105              8%
Perry Graphic Communications, Inc. 
    and Judd's Incorporated                                                 82,800                     2,191,567              6
Scott Companies, Inc.                                                    1,826,069              7      1,940,850              5
Spectrian Corporation                        223,704              2      1,925,000              7      1,925,000              5
Westell Technologies, Inc.                                                 441,853              2      1,916,387              5
Best Buy Co., Inc. (a)                     1,797,435             13      1,793,239              7      1,787,480              5
QMS, inc                                                                 1,454,097              6      1,689,375              5
Telos Corporation                          1,166,936              8      1,447,000              5      1,447,000              4
Q Clubs, Inc.                                979,795              7      1,390,123              5      1,404,608              4
The Upper Deck Company (a)                 1,312,643              9      1,319,875              5      1,319,875              4
Applied Bioscience International, Inc.     1,302,000              9      1,302,000              5      1,309,476              4
Gensia, Inc. (a)                           1,309,000              9      1,309,000              5      1,309,000              4
Del Monte Corporation                        643,125              5      1,286,250              5      1,286,250              4
Marconi Integrated Systems, Inc. 
     (formerly GDE Systems, Inc.)                                          334,734              1      1,262,030              3
Career Education Corporation                                               202,701              1      1,220,308              3
The Bon-Ton Stores, Inc.                                                   921,294              4      1,270,750              3
Silgan Containers Corporation                                              491,260              2      1,165,952              3
Lanxide Corporation                          770,086              5      1,030,000              4      1,030,000              3
Garden Ridge Corporation                      36,738                       995,764              4        995,764              3
Big V Holding Corporation                    800,221              6        813,741              3        828,976              2
Rheometric Scientific, Inc.                1,005,901              7        859,589              3        817,922              2
The Garden Companies, Inc.                   816,400              6        816,400              3        816,400              2
Celadon Group, Inc.                          198,333              2        703,944              3        718,791              2
Childtime Childcare, Inc.                                                  218,813              1        670,662              2
Vermont Teddy Bear Co., Inc.                                               296,857              1        652,400              2
Nutramax Products, Inc.                                                                                  637,244              2
Pagg Corporation                                                           284,628              1        590,000              2
Knogo North America, Inc.                     11,485                       524,000              2        524,000              1
Wal-Mart Stores, Inc.                        397,226              3        397,226              2        397,226              1
Texas Freezer Company, Inc.                                                                              304,196              1
Compass Bank for Savings
    (formerly Sandwich
     Bancorp, Inc.)                                                         15,707                       167,283
Advanced Micro Devices, Inc. (a)                                                                          84,672
                                         -----------     -----------    -----------    -----------    -----------    -----------
                                         $13,979,611            100%   $26,040,357            100%   $36,538,549            100%
                                         ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

(a) Represents the Company's proportionate share of lease revenues from its
    equity investment.

                                   Continued


                                      -17-
<PAGE>   49

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

9.  Equity Investments:

        The Company holds a 37% interest in BB Property Company ("BB Property"),
          a general partnership which net leases 17 retail stores to Best Buy
          Co., Inc., a 50% interest in Gena Property Company ("Gena"), a general
          partnership that net leases two office buildings to Gensia, Inc., a
          50% interest in Cards Limited Liability Company ("Cards LLC"), which
          net leases two office buildings to The Upper Deck Company and a 33
          1/3% interest in Delaware Chip LLC ("Chip"), a limited liability
          company which owns land and a building in Sunnyvale, California, net
          leased to Advanced Micro Devices, Inc. ("AMD"). The interest in Chip
          was purchased in December 1998 and is described below.

        On December 22, 1998, the Company and two affiliates, Carey
          Institutional Properties Incorporated ("CIP(R)") and Corporate
          Property Associates 14 Incorporated ("CPA(R):14"), purchased land and
          a building in Sunnyvale, California and entered into a net lease
          agreement with AMD. The purchase price of the property was $95,287,958
          of which $68,250,000 was financed by limited recourse debt. The
          Company, CIP(R) and CPA(R):14, each own a 33 1/3% interest in Chip.

        The AMD lease provides for an initial lease term of twenty years through
          December 2018 with two ten-year renewal terms at AMD's option. Annual
          rent is $9,145,500, with rent increases every three years based on a
          formula indexed to increases in the Consumer Price Index ("CPI"). The
          $68,250,000 limited recourse mortgage loan is collateralized by a deed
          of trust on the property and an assignment of the lease. The loan
          bears interest at an annual interest rate of 7.78% with monthly
          principal and interest payments based on a 30-year amortization
          schedule. The loan matures in January 2009, when a balloon payment
          will be due.

                                   Continued


                                      -18-
<PAGE>   50

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

Summarized financial information of the Company's equity investees is as
follows:

                     (In thousands)

Gena
<TABLE>
<CAPTION>
                                          1996                 1997                1998
                                          ----                 ----                ----
<S>                                    <C>                  <C>                 <C>    
       Assets                          $21,826              $21,274             $20,686
       Liabilities                      11,832               11,235              10,587
       Capital                           9,994               10,039              10,099

       Revenues                          2,618                2,618               2,618
       Expenses                          1,439                1,387               1,336
       Net income                        1,179                1,231               1,282

BB Property
                                          1996                 1997                1998
                                          ----                 ----                ----
       Assets                         $ 45,739             $ 45,626            $ 45,433
       Liabilities                      30,755               29,994              29,138
       Capital                          14,984               15,632              16,295

       Revenues                          4,858                4,846               4,831
       Expenses                          2,786                2,756               2,644
       Net income                        2,072                2,090               2,187

Cards LLC
                                          1996                 1997                1998
                                          ----                 ----                ----
       Assets                          $26,581              $26,729            $ 26,591
       Liabilities                      15,704               15,511              15,290
       Capital                          10,877               11,218              11,301

       Revenues                          2,632                2,640               2,640
       Expenses                          1,259                1,244               1,229
       Net income                        1,373                1,396               1,411

Chip
                                                                               1998
                                                                               ----

       Assets                                                                  $ 91,350
       Liabilities                                                               68,251
       Capital                                                                   23,099

       Revenues                                                                     254
       Expenses                                                                     185
       Net income                                                                    69
</TABLE>

                                   Continued


                                      -19-
<PAGE>   51

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES
              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

10. Writedown to Fair Value:

        In March 1996, the Company entered into a direct financing lease for a
          property in Newark, Delaware with Lanxide Corporation ("Lanxide") that
          was purchased for $8,679,000. The Company financed the purchase with
          $4,400,000 from two limited recourse mortgages. In January 1998,
          Lanxide filed a voluntary bankruptcy petition and is in the process of
          liquidating. Lanxide subsequently vacated the property.

        The Lanxide lease was structured to provide the Company the rights of
          assignment on subleases with three Lanxide subsidiaries. During 1998,
          Lanxide sold the subsidiaries. As result of Lanxide's difficulties,
          the Company has assumed the leases. The initial terms of the leases
          expire in 2000 and 2001. Annual rent from the three subleases is
          $584,393.

        Annual rent under the Lanxide lease was $1,030,000. Based on the
          Company's expectation that future cash flow from the properties will
          be reduced, Management concluded that there had been an impairment of
          the value to the property. Based on a writedown of the Company's
          interest in the property to an estimated fair value of $4,398,000, the
          Company incurred a noncash charge of $4,281,421.

        The Company remains current on its debt service payments under the
          $4,000,000 limited recourse first priority loan which matures in March
          2001 and has an outstanding balance of $3,693,000 as of December 31,
          1998.

11. Extraordinary Charge on Extinguishment of Debt:

        In February 1995, the Company purchased land and buildings in Hayward,
          California for $11,860,000 and entered into a net lease with Etec
          Systems, Inc. ("Etec"). In August 1996, the Company entered into a
          commitment to construct an additional building at the Etec property,
          and in January 1997, the Company completed construction of the
          building for $5,241,000.

        In February 1998, the Company entered into a series of transactions
          including paying off the existing limited recourse mortgage loan on
          the Etec property, funding additional improvements at the Etec
          property of approximately $11,518,000, entering into a commitment and
          construction agency agreement to fund additional improvements of up to
          $52,356,000, amending the existing lease with Etec and transferring
          ownership of the Etec property to a limited liability company in which
          CPA(R):14 has an ownership interest. At that time, the Company paid
          off the $7,957,947 existing limited recourse mortgage loan
          collateralized by the Etec property. In connection with paying off the
          loan, the Company incurred a prepayment charge of $379,246 which has
          been recorded in 1998 as an extraordinary charge on the extinguishment
          of debt. Under the limited liability company agreement, CPA(R):14 will
          have a 49.99% interest in the additional improvements and will not
          share in the economic benefits from the existing buildings. The
          Company has releveraged the existing property with $15,000,000 of
          limited recourse mortgage financing and has received a commitment of
          $30,000,000 of financing for the additional improvements.

12. Subsequent Event:

        On February 3, 1999, the Company and CPA(R):14, each acquired 50%
          ownership interests in a newly formed limited liability company, and
          purchased land and a building in Gilbert, Arizona for $23,560,000 and
          entered into a net lease with Intesys Technologies, Inc. ("Intesys").

        The Intesys lease has an initial term of twenty years with two ten-year
          renewal terms at the option of Intesys. The lease provides for annual
          rent payments of $2,274,750 with rent increases every three years
          based on a formula indexed to the increase in the CPI, with any single
          increase capped at 9%.

                                   Continued


                                      -20-
<PAGE>   52

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

13. Disclosures About Fair Value of Financial Instruments:

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

        The Company estimates that the fair value of mortgage notes payable
          approximates the carrying value of such mortgage notes at December 31,
          1997 and was approximately $109,681,000 at December 31, 1998. The fair
          value of the mortgage notes payable was evaluated using a cash flow
          model with a discount rate that takes into account the credit of the
          tenant and interest rate risk.

        In conjunction with executing a number of its leases, the Company was
          granted warrants to purchase common stock of the lessee or lease
          guarantor. To the extent that the lessee is not a publicly traded
          company, the warrants were judged at the time of issuance to be
          speculative in nature and a nominal cost basis is attributed to them.
          The Company believes it is not practicable to estimate the fair value
          of its stock warrants for closely-held companies. For publicly traded
          companies, fair value represents the amount by which quoted market
          value of common stock exceeds the exercise price at December 31, 1998.
          The Company has warrants to purchase, (a) 150,000 shares of Vermont
          Teddy Bear Co., Inc. ("Vermont Teddy Bear") common stock, (b) 100,000
          shares of QMS common stock and (c) 464,260 shares of Rheometric
          Scientific, Inc. ("Rheometric") common stock, all of which have
          publicly traded common stock. There is no market for the stock
          warrants of these companies. As of December 31, 1998, the exercise
          price of the QMS and Rheometric warrants was in excess of the quoted
          value for their common stock.

14. Accounting Pronouncement:

        In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
          Instruments and Hedging Activities". SFAS No. 133 establishes
          accounting and reporting standards for derivative instruments,
          including certain derivative instruments embedded in other contracts
          and for hedging activities. It requires that an entity recognize all
          derivatives as either assets or liabilities in the statement of
          financial position and measure those instruments at fair value. SFAS
          No. 133 is effective for all quarters of fiscal years beginning after
          June 15, 1999. The Company believes that SFAS No. 133 will not have a
          material impact on the consolidated financial statements.


                                      -21-
<PAGE>   53

MARKET FOR THE PARTNERSHIP'S COMMON STOCK AND RELATED
         STOCKHOLDER MATTERS

            Except for limited or sporadic transactions, there is no established
public trading market for the Shares of the Company.

            As of December 31, 1998 there were 14,036 holders of record of the
Shares of the Company.

            In accordance with the Prospectus of the Company, dividends will be
paid quarterly regardless of the frequency with which such dividends are
declared. The Company is required to distribute annually its Distributable REIT
Taxable Income, as defined in the Prospectus, to maintain its status as a REIT.
The following shows the frequency and amount of dividends paid for the past
three years.

<TABLE>
<CAPTION>
                               1996                 1997              1998
                               ----                 ----              ----

<S>                          <C>                 <C>                <C>   
     First quarter           $.20050             $. 2015            $.2023
     Second quarter           .20080              . 2017             .2025
     Third quarter            .20100              . 2019             .2027
     Fourth quarter           .20125              . 2021             .2029
                             -------             -------            ------
                             $.80355             $. 8072            $.8104
                             =======             =======            ======
</TABLE>


            Dividends paid to shareholders consist of ordinary income, capital
gains, return of capital or a combination thereof for income tax purposes. For
the three years ended December 31, 1998, dividends paid per share reported for
tax purposes were as follows:

<TABLE>
<CAPTION>
                                1996               1997              1998
                                ----               ----              ----
<S>                           <C>                 <C>               <C>  
     Ordinary income          $ .68               $ .81             $ .56
     Return of capital          .12                                   .25
                              -----               -----             -----
                              $ .80               $ .81             $ .81
                              =====               =====             =====
</TABLE>

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

            The Advisor will supply to any shareholder, upon written request and
without charge, a copy of the Annual Report on Form 10-K for the year ended
December 31, 1998 as filed with the Securities and Exchange Commission.


                                      -22-
<PAGE>   54

<TABLE>
<CAPTION>
Exhibit                                                                      Method of
  No.                Description                                             Filing
  ---                -----------                                             ----------------------
<S>         <C>                                                              <C>           


21.3        Subsidiaries of Registrant as of March 31, 1999.                 Filed herewith

27          Financial Data Schedule                                          Filed herewith
</TABLE>