<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [FEE REQUIRED]

For the quarterly period ended DECEMBER 31, 1997

                                       or

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

For the transition period from                       to                        
                               ---------------------    ----------------------- 
Commission file number 033-68728

                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

         MARYLAND                                           13-3726306
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization)                           Identification No.)


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

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

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

<TABLE>
<CAPTION>
    Title of each class               Name of each exchange on which registered
<S>                                   <C>
         NONE                                           NONE

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

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

</TABLE>


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

                             SHARES OF COMMON STOCK
--------------------------------------------------------------------------------
                                (Title of Class)

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

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

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

      Aggregate market value of the voting stock held by non-affiliates of
Registrant: There is no active market for common stock of Registrant at April 6,
1998. Non-affiliates held 28,282,951 shares of common stock, $.001 Par Value
outstanding at April 6, 1998.
<PAGE>   2
                                     PART I

Item 1.  Business.

            Registrant is engaged in the business of investing in commercial and
industrial real estate properties that are net leased to commercial and
industrial entities. Registrant was organized as a Maryland corporation on July
30, 1993 and qualifies as a real estate investment trust ("REIT") for Federal
income tax purposes for the year ended December 31, 1997. Registrant's day to
day operations are managed by Carey Property Advisors, a Pennsylvania limited
partnership, (the "Advisor") in accordance with an advisory agreement between
Registrant and the Advisor. The sole general partner of the Advisor is Carey
Fiduciary Advisors, Inc., a Pennsylvania corporation ("CFA"). An affiliate of
the Advisor, Carey Diversified LLC, is the sole general partner of the nine
CPA(R) real estate limited partnerships. The Advisor is also the advisor of
Corporate Property Associates 10 Incorporated ("CPA(R):10"), Carey Institutional
Properties Incorporated ("CIP(TM)") and Corporate Property Associates 14
Incorporated ("CPA(R):14"). Reference is made to the Prospectus of Registrant
dated October 21, 1996 filed pursuant to Rule 424(b), as supplemented by a
Supplement dated January 27, 1997 under the Securities Act of 1933 and such
Prospectus and such Supplement is incorporated herein by reference (said
Prospectus, as so supplemented, is hereinafter called the "Prospectus").

            In February 1994, Registrant commenced a public offering of common
stock at $10 per share on a "best efforts" basis. Between May 1994 and January
1996, Registrant sold 8,135,992 shares ($81,359,020) including 20,000 shares
($200,000) which were purchased by Registrant's Advisor. Registrant filed a
post-effective amendment on March 14, 1996 withdrawing from registration the
balance of the unsold shares.

            On February 2, 1996, Registrant commenced a second public offering
of 20,000,000 shares of common stock at $10 per share on a "best efforts" basis.
In August 1997, Registrant registered an additional 300,000 shares under the
second offering. In September 1997, the Second Offering concluded, and
20,198,459 Shares ($201,984,590) were issued. Registrant intends to invest the
net offering proceeds (except for funds used to establish a working capital
reserve) in additional real estate investments in order to diversify further
Registrant's portfolio of real estate investments. The properties owned by
Registrant are described in Item 2.


            It is anticipated that a portion of Registrant's property
acquisitions may be made in conjunction with acquisitions, recapitalizations and
other financial restructurings. In some of these transactions, an acquiring
entity may purchase all or substantially all of the stock or assets of a company
and the acquired company or its successor in interest thereby may become
obligated on the substantial loans necessary to finance the acquisition.
Registrant may act as one of several sources of financing by purchasing real
property from the seller of the subject company and net leasing it to such
company or its successor. The lessee typically will have substantially greater
debt and substantially lower net worth than that attributable to Registrant
prior to the transaction. Consequently, the lessee may be particularly
vulnerable to adverse conditions in the lessee's business or industry, adverse
economic conditions generally and increases in interest rates, which directly or
indirectly may result in higher payments under the debt portion of the lessee's
lease with Registrant. In addition, the lessee's payment of lease rentals and
debt service may prevent the lessee from investing in new equipment and from
devoting resources to research and development or making other expenditures that
are necessary to keep the lessee competitive in its industry. Furthermore, if
the lessee replaces existing management, it will be more difficult for the
Advisor to determine the likelihood of the lessee's success in its business and
of its ability to pay rentals throughout the term of a lease with Registrant.

            Registrant has only one industry segment which consists of the
investment in and the leasing of industrial and commercial real estate. See
Selected Financial Data in Item 6 and Management's Discussion and Analysis in
Item 7 for a summary of Registrant's operations. Also see the material contained
in the Prospectus under the heading INVESTMENT OBJECTIVES AND POLICIES.

            For the year ended December 31, 1997, no lessee represented 10% or
more of total operating revenue. See Note 8 to the Consolidated Financial
Statements in Item 8. As Registrant continues to invest proceeds of the
Offering, these percentages are expected to decrease. Lessees retain the
obligation for the operating expenses of their leased properties so that, other
than rental income, there are no significant


                                     - 1 -
<PAGE>   3
operating data (i.e., expenses) reportable on Registrant's leased properties. As
discussed in Registrant's Management's Discussion and Analysis in Item 7,
Registrant's leases generally provide for periodic rent increases or percentage
rents based on specified sales levels. The periodic rent increases are either
fixed or based on formulas indexed to increases in the Consumer Price Index.

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

            Since Registrant's objective is to invest in properties that are
occupied by a single corporate tenant which are subject to net leases backed by
the credit of the corporate lessee, Registrant's properties are not initially
subject to the competitive conditions of local and regional real estate markets.
Because Registrant would be affected by the financial conditions of its lessees
rather than the competitive conditions of the real estate marketplace,
Registrant's strategy is to diversify its investments among tenants, property
types and industries in addition to achieving geographical diversification.
Registrant faces competition for acquisition of commercial and industrial
properties net leased to corporate tenants from financial institutions and other
REITs. Registrant 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. Registrant believes
that its expertise in credit underwriting and transaction structuring will allow
Registrant to compete effectively. In underwriting a net lease transaction,
Registrant undertakes an analysis of the subject real estate and a credit
analysis of the prospective lessee. Registrant evaluates the prospective
lessee's business and financial outlook to determine the prospective lessee's
ability to meet its ongoing obligations. In performing this analysis, Registrant
evaluates a number of factors, including, but not limited to, the position of
the prospective lessee in its industry, its business franchise and the
importance of the property to its business.

            Registrant qualifies and intends to continue to qualify as a real
estate investment trust ("REIT") for the year ended December 31, 1997 under the
Internal Revenue Code of 1986. Registrant should not be subject to Federal
income taxes in future years, provided it distributes at least 95% of its REIT
taxable income to its shareholders and meets other conditions. Registrant
anticipates that future cash flows will be in excess of REIT taxable income and
that it will have sufficient funds to pay dividends in excess of 95% of its REIT
taxable income. Registrant anticipates that it will be able to pay dividends at
an increasing rate in future years, however, there is no assurance that its
objective of increasing the rate of distributions will be achieved.

            In connection with the purchase of its properties, Registrant
requires sellers of such properties to perform environmental reviews. Management
believes, based on the results of such reviews, that Registrant's properties
were in substantial compliance with Federal and state environmental statutes at
the time the properties were acquired. In addition, Registrant's leases
generally require tenants to indemnify Registrant 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 Registrant to extend leases until such time as a tenant has
satisfied its environmental obligations. Certain of the leases allow Registrant
to require financial assurances from tenants such as performance bonds or
letters of credit if the costs of remediating environmental conditions, in the
estimation of Registrant, are in excess of specified amounts. Accordingly,
Management believes that the ultimate resolution of environmental matters will
not have a material adverse effect on Registrant's financial condition,
liquidity or results of operations.


                                     - 2 -
<PAGE>   4
            Registrant's Advisor has responsibility for maintaining Registrant's
books and records. An affiliate of the Advisor services the computer systems
used for maintaining such books and records. In its preliminary assessment of
Year 2000 issues, the affiliate believes that such issues will not have a
material effect on Registrant's operations. Such assessment; however, has not
been completed. Registrant relies on its bank and transfer agent for certain
computer-related services and has initiated discussions to determine whether
they are addressing Year 2000 issues that might affect Registrant.

            Registrant does not have any employees. Employees of an affiliate of
the Advisor perform accounting, secretarial and transfer services for
Registrant. Service Resource Phoenix Corporation performs certain transfer
services for Registrant and The Chase Manhattan Bank performs certain banking
services for Registrant. In addition, Registrant has an agreement with the
Advisor pursuant to which the Advisor provides certain management services for
Registrant.

            During 1997, Registrant purchase properties and entered into net
leases with Scott Companies, Inc. ("Scott"), Childtime Childcare, Inc.
("Childtime"), QMS, Inc. ("QMS"), The Bon-Ton Stores, Inc. ("Bon-Ton"), Silgan
Containers Corporation ("Silgan"), PAGG Corporation ("PAGG"), Vermont Teddy Bear
Co., Inc. ("Vermont Teddy Bear"), GDE Systems, Inc. ("GDE"), Texas Freezer
Company, Inc. ("Texas Freezer") and Westell Technologies, Inc. ("Westell") as
described hereafter.

            On January 23, 1997, Registrant purchased from Scott Co. of
California, land and manufacturing, office, warehouse and parking facilities in
San Leandro, California for $17,910,000 and entered into a net lease. The lease
obligations are guaranteed by Scott Companies, Inc., the parent company. The
initial term of the lease is 20 years, followed by three five-year renewal terms
at the option of Scott. Annual rent under the lease is $1,940,850 with rent
increases every three years based on increases to the Consumer Price Index
("CPI").

            On February 19, 1997, Registrant purchased from QMS its
headquarters, research and manufacturing facilities in Mobile, Alabama for
$13,874,346 and entered into a net lease with QMS. In connection with the
purchase, Registrant was granted warrants for 100,000 share of common stock of
QMS at an exercise price of $6.50 per share, exercisable at any time prior to
December 31, 2001. The initial term of the lease is 15 years followed by six
five-year renewal terms. Annual rent is $1,689,375 with rent increases every
three-years based on increases to the CPI. Concurrently with the acquisition of
the QMS properties, a limited recourse mortgage loan of $7,200,000 was obtained.
As a result of a restructuring, QMS incurred charges that resulted in violation
of certain financial covenants relating to tangible net worth and fixed charge
coverage ratios under its lease agreement. On December 8, 1997, the Company
agreed to waive QMS's default for a one year period, in consideration for a
$1,300,000 prepayment of rent and a reduction of the exercise price of the
warrants to $4.00 per share. The $1,300,000 has been applied as a principal
prepayment on the mortgage loan, and the lender has reamortized the loan and
reduced monthly principal payments from $24,303 to $20,645.

            On January 29, 1997, Registrant purchased four parcels of land on
which there are existing or were to be constructed childcare facilities and
entered into a net lease with Childtime. Concurrently with the acquisition and
net lease agreement, Registrant and Childtime entered into a construction agency
agreement and a commitment to purchase and lease up to an additional six
properties. The cost of constructing the ten Childtime facilities is estimated
to amount to up to $9,977,000 plus structuring and acquisition fees payable to
an affiliate of the Registrant. Upon completion but no later than October 1998,
an initial lease term of 20 years will commence with two five-year renewal
terms. Annual rent will be $1,120,000 with rent increases every three years
based on increases to the CPI, capped at 3.5% for any one lease year. Additional
sites in Ackworth, Georgia, Silverdale, Washington and Hauppauge, New York have
been purchased and are being developed as Childtime facilities.

            On April 10, 1997, Registrant purchased land and a distribution
center in Allentown, Pennsylvania and land and a retail store in Johnstown
Pennsylvania for $12,041,885 and entered into a net lease agreement with Bon-Ton
Department Stores, Inc. ("Bon-Ton"). Bon-Ton's parent company, The Bon-Ton
Stores, Inc., has unconditionally guaranteed Bon-Ton's obligations under the
lease. The lease has an initial term of 20 years with six five-year renewal
terms, at the option of the lessee. Annual rent is $1,270,750, with rent
increases every three years during the initial term based on increases to the
CPI, capped


                                     - 3 -
<PAGE>   5
at 3% for any lease year. Registrant subsequently obtained a limited recourse
mortgage loan of $6,900,000 collateralized by Bon-Ton properties and an
assignment of the Bon Ton lease. The loan provides for monthly payments of
interest only for three years at an annual interest rate of the London
Inter-bank Offered Rate plus 1.9%. Registrant may elect to convert the loan to a
fixed rate of interest based on the five, seven or ten year U.S. Treasury
Security rate in effect at the conversion date plus 1.9% per annum with a
maturity of eight, ten or thirteen years, respectively, and would commence
paying principal installments based on a 20-year amortization schedule.

            On June 13, 1997, Registrant purchased land and buildings in
Menomonie and Oconomowoc, Wisconsin for $8,515,000 and entered into a net lease
agreement with Silgan. The lease has an initial term of 15 years with three
five-year renewal terms. Annual rent is $893,200 with increases every five years
based on increases to the CPI.

            On July 8, 1997, Registrant purchased land and building in Milford,
Massachusetts for $5,549,378 and entered into a net lease agreement with PAGG.
The lease has an initial term of 12 years with two five-year renewal terms at
the option of the lessee. Annual rent is $590,000 with rent increases every
three years with such increases based on increases to the CPI, with any increase
limited to 12.55%. Registrant subsequently obtained a $3,200,000 limited
recourse mortgage loan collateralized by the PAGG property. The loan provides
for an annual interest rate of 7.7% with monthly principal and interest payments
of $26,171 through November 1, 2007 at which time a balloon payment is
scheduled.

            On July 18, 1997, Registrant purchased land and building in
Shelburne, Vermont for $5,863,874 and entered into a net lease with Vermont
Teddy Bear. The lease has a term of 20 years and provides for three five-year
renewal terms. Annual rent is $652,400 with rent increases every three years
based on increases to the CPI, capped at 4% for any lease year. In connection
with the purchase, Registrant obtained a $3,311,509 limited recourse mortgage
loan collateralized by the Vermont Teddy Bear property and an assignment of the
Vermont Teddy Bear lease. The loan initially provides for monthly payments of
interest and principal of $29,264 at an annual interest rate of 8.75% and is
based on a 20-year amortization schedule. Vermont Teddy Bear granted Registrant
warrants to purchase up to 150,000 shares of its common stock at an exercise
price of $1.31 per share.

            On September 23, 1997, Registrant purchased land and a building in
San Diego, California for $12,748,000 and assumed an existing net lease, as
lessor, with GDE, as lessee. The lease has a remaining term of nine years and
five months through January 2007. Annual rent is currently $1,153,548 with
annual rent increases. The annual rent increases will be the greater of (a)
$22,500 and (b) an amount based on increases to the CPI.

            On September 23, 1997, Registrant purchased land in Dallas, Texas
for $1,644,289 upon which a cold storage warehouse is being constructed pursuant
to a construction agency and lease agreement with Texas Freezer. Total purchase
and project costs for the property are expected to be $8,900,000 with Texas
Freezer having the obligation to fund any excess costs needed to complete the
project. During the construction period, Texas Freezer will pay monthly rent
based on project costs advanced by Registrant. Upon the earlier of the
completion and January 1, 1999, Texas Freezer's initial annual rental obligation
will be 10.95% of total project costs. The lease provides for rent increases
commencing January 1, 2002 and every year thereafter with such increases based
on increases to the CPI. Registrant received warrants to purchase 30,390 shares
of common stock of Texas Freezer at an exercise price of $5.30 per share, and
are exercisable through September 2007.

            On September 29, 1997, Registrant purchased land and a building in
Aurora, Illinois for $17,435,000 and entered into a net lease with Westell.
Westell's parent company, Westell Technologies, Inc., has unconditionally
guaranteed the lease obligations. The lease has a term of 20 years and provides
two five-year renewal terms. Annual rent is $1,748,250 with stated increases
every two years.

            Since September 30, 1997, Registrant has purchased properties and
entered into leases with Randall International, Inc., Career Education
Corporation, Perry Graphic Communications, Inc. and Judd's Incorporated and
Sandwich Bancorp, Inc. These transactions are described in Note 9 to the
Consolidated Financial Statement in Item 8.


                                     - 4 -
<PAGE>   6
Item 2.  Properties.

   Registrant, through certain subsidiaries and partnerships holds fee simple
title to the following properties. The following table provides certain
information with respect to the properties.

<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>
BEST BUY CO., INC.
  Denver, CO....................           23,987                                  37% interest;
  Fort Collins, CO..............           28,520                                  remaining interest
  Bloomingdale, IL..............           27,280                                  owned by CIP(TM)
  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.......................          593,146     $1,835,014      $ 8.36 (2)                              2018

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

GENSIA, INC.(4)
  San Diego, CA.................          144,311      1,309,000       18.14 (2)   50% interest;              2009
                                                                                   remaining interest
                                                                                   owned by CIP(TM)
ETEC SYSTEMS, INC.
  Hayward, CA...................          153,531      1,023,036        6.66                100%              2011
WAL-MART STORES, INC.(3)
  Greenfield, IN................           82,620        397,226        4.81                100%              2005

Q CLUBS, INC.
  Austin, TX (3)................           43,935        686,637       15.63                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(TM)
  Yakima, WA....................           11,165
                                          -------
    TOTAL.......................          735,765      1,286,250        3.50 (2)                              2016

APPLIED BIOSCIENCE
  INTERNATIONAL, INC.
  Austin, TX (3)................          173,000      1,302,000        7.53                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(TM)
</TABLE>


                                     - 5 -
<PAGE>   7
<TABLE>
<CAPTION>
                                                                                                             Initial
        Tenant/Guarantor                   Square         Annual       Rent Per           Ownership           Lease
     Location of Properties               Footage         Rent (2)     Square Ft.         Interest            Term
--------------------------------          -------     -------------   ------------        --------          ------
<S>                                       <C>         <C>             <C>                 <C>               <C>
RHEOMETRIC SCIENTIFIC, INC.
  Piscataway, NJ................          104,000        805,361        7.74                100%              2011
TELOS CORPORATION
Loudon County, VA. (4)..........          192,775      1,447,000        7.51                100%              2016
LANXIDE CORPORATION
  Newark, DE (4)................          162,220      1,030,000        6.35                100%              2016
CELADON GROUP, INC.
  Indianapolis, IN..............           60,900        700,000       11.49                100%              2016

SPECTRIAN CORPORATION
  Sunnyvale, CA (4).............           91,476     $1,925,000      $21.04                100%              2011
GARDEN RIDGE CORPORATION
  Tulsa, OK (4).................          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 (4)...........          270,000      1,945,850        7.21                100%              2017
QMS, INC.
  Mobile, AL (4)................          277,000      1,689,375        6.10                100%              2012
CHILDTIME CHILDCARE, INC. (4)
  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
                                          -------     ----------
                                           33,694        440,110       13.06                100%              2018

THE BON-TON STORES, INC.
  Allentown, PA (4).............          399,175
  Johnstown, PA (4).............           80,884
                                          -------
                                          480,059      1,270,750        2.65                100%              2017

SILGAN CONTAINERS
CORPORATION
  Menomonie and
  Oconomowoc, WI................          228,381        893,200        3.91                100%              2012

PAGG CORPORATION
  Milford, MA (4)...............          108,125        590,000        5.46                100%              2009

VERMONT TEDDY BEAR CO, INC.
  Shelburne, VT (4).............           55,446        652,400       11.77                100%              2017

GDE SYSTEMS, INC.
  San Diego, CA.................          123,200      1,174,173        9.53                100%              2007

TEXAS FREEZER COMPANY, INC.
  (under construction)
  Dallas, TX....................                                                            100%

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

RANDALL INTERNATIONAL, INC.
  (under construction)
  Carlsbad, CA                                                                              100%

CAREER EDUCATION CORPORATION
  Mendora Heights, MN............         118,241      1,115,100        9.43                100%              2009
</TABLE>


                                     - 6 -
<PAGE>   8
<TABLE>
<CAPTION>
                                                                                                             Initial
        Tenant/Guarantor                   Square         Annual       Rent Per           Ownership           Lease
     Location of Properties               Footage         Rent (2)     Square Ft.         Interest            Term
--------------------------------          -------     --- ---------   ------------        --------          ------
<S>                                       <C>         <C>              <C>                <C>               <C>
PERRY GRAPHIC
COMMUNICATIONS and JUDD'S
INCORPORATED
  Baraboo, WI....................         433,560
  Waterloo, WI...................         461,796
                                          -------
                                          895,356      1,888,875        2.11                100%              2017

SANDWICH BANCORP, INC.
  Bourne, MA.....................           2,083
  Sandwich, MA...................          16,500
  Wareham, MA....................           3,223
                                          -------
                                           21,806        182,490        8.37                100%              2018
</TABLE>

(1)   Annual rent on a cash basis.

(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.

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, 1997 to a vote of security holders, through the solicitation of
proxies or otherwise.


                                     - 7 -
<PAGE>   9
                                     PART II


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

            Information with respect to Registrant's common equity is hereby
incorporated by reference to page 24 of Registrant's Annual Report contained in
Appendix A.


Item 6.  Selected Financial Data.

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


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

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


Item 8.  Consolidated Financial Statements and Supplementary Data.

            The following consolidated financial statements and supplementary
data of Registrant are hereby incorporated by reference to pages 5 to 20 of
Registrant's Annual Report contained in Appendix A:

(i)   Report of Independent Accountants.

(ii)  Consolidated Balance Sheets as of December 31, 1995, 1996 and 1997

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

(iv)  Consolidated Statements of Shareholders' Equity for the years ended
      December 31, 1995, 1996 and 1997.

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

(vi)  Notes to Consolidated Financial Statements.



Item 9.  Disagreements on Accounting and Financial Disclosure.

            NONE


                                     - 8 -
<PAGE>   10
                                    PART III



Item 10. Directors and Executive Officers of the Registrant.


            The directors and senior officers of Registrant and members of the
Investment Committee of the Board of Directors of the Advisor are as follows:

<TABLE>
<CAPTION>
                                                                       Has Served as a
                                                                       Director and/or
      Name                  Age         Positions Held                 Officer Since
      ----                  ---         --------------                 -------------
<S>                         <C>    <C>                                  <C>
William P. Carey            67     Chairman of the Board                     7/93
                                   Director
Ralph G. Coburn (1)         88     Director                                  7/93
William Ruder               76     Director                                  7/93
George E. Stoddard          81     Director                                  7/93
Thomas E. Zacharias (1)     43     Director                                 10/97
Barclay G. Jones III        37     President                                 7/93
Steven M. Berzin            47     Executive Vice President                  7/97
                                   Chief Financial Officer
                                   Chief Legal Officer
Gordon F. DuGan             31     Executive Vice President                  2/97
Claude Fernandez            45     Executive Vice President                  7/93
                                   Chief Administrative Officer
H. Augustus Carey           40     Senior Vice President                     7/93
                                   National Marketing Director
                                   Secretary
Anthony S. Mohl             35     Senior Vice President                     7/93
                                   Director of Portfolio Management
John J. Park                33     Senior Vice President                     7/93
                                   Director of Research
                                   Treasurer
</TABLE>

(1)  Independent Director of Registrant.


            H. Augustus Carey is the nephew of William Polk Carey.

            A description of the business experience of each director of
Registrant is set forth below:

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


                                     - 9 -
<PAGE>   11
Oxford University and other educational and philanthropic institutions. He
founded the Visiting Committee to the Economics Department of the University of
Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research
Institute at that University. Mr. Carey is also Chairman of the Board and
Director of Corporate Property Associates 10 Incorporated ("CPA(R):10"), Carey
Institutional Properties Incorporated ("CIP(TM)") and Corporate Property
Associates 14 Incorporated ("CPA(R):14"), and a Director of Carey Diversified
LLC ("Carey Diversified").

            Ralph G. Coburn, Rear Admiral USNR (Ret.), is former President and
Chief Executive Officer of Hubbard Real Estate Investments (now HRE Properties),
a $100,000,000 NYSE equity REIT, sponsored by Merrill Lynch. Admiral Coburn had
been engaged in a variety of real estate activities for over 30 years. A
graduate of Harvard College, Harvard Law School and the Naval War College,
Admiral Coburn previously served as Chief Executive Officer of the National
Association of Real Estate Investment Trusts (NAREIT), representing the
multi-billion dollar REIT industry. Admiral Coburn is also an Independent
Director of CPA(R):10 and CIP(TM).

            William Ruder, Independent Director of CPA(R):10 and CIP(TM), is
Chairman of the Board of William Ruder Incorporated, a consulting firm founded
in 1981. From 1948 to 1981, Mr. Ruder was Chairman of Ruder & Finn, an
international public relations company which he co-founded. He is a former
Assistant Secretary of Commerce of the United States and is on the Board of
Directors of the United Nations Association of the United States of America,
Junior Achievement and the Council on Economic Priorities. A member of the Board
of Overseers of the Wharton School at the University of Pennsylvania for a
number years, he has also served as a consultant to the Communications Advisory
Board to the White House Press Secretary, the Committee for Economic Development
and the Office of Overseas Schools for the U.S. State Department. Mr. Ruder is a
lecturer at Harvard Graduate School of Business and is associated with several
other business, civic and cultural organizations.

            George E. Stoddard, Chief Investment Officer and Director, was until
1979 head of the bond department of The Equitable Life Assurance Society of the
United States, with responsibility for all activities related to Equitable's
portfolio of corporate investments acquired through direct negotiation.  Mr.
Stoddard was associated with Equitable for over 30 years.  He holds an A.B.
degree from Brigham Young University, an M.B.A. from Harvard Business School and
an LL.B. from Fordham University Law School.  Mr. Stoddard is also a Director of
CPA(R):10, CIP(TM) and CPA(R):14.

            Thomas E. Zacharias, Independent Director of CIP(TM) and CPA(R):14,
is currently a Vice President of Corporate Property Investors ("CPI") and a Vice
President of Corporate Realty Consultants. Mr. Zacharias, who joined CPI in
1981, is responsible for the asset management of $1.2 billion of real estate
assets. In addition, Mr. Zacharias is the Managing Member of the Mall of
Georgia, LLC, the largest regional mall development in the Southeastern U.S.
that is scheduled to open in August 1999. Prior to joining CPI in 1981, Mr.
Zacharias worked for the New York State Urban Development Corporation between
1979 and 1981 as Project Director for a number of economic development projects
and Assistant to the Chief Operating Officer. Mr. Zacharias graduated from
Princeton University in 1976 and received a Master in Public and Private
Management from the Yale School of Management in 1979. He is a member of The
National Association of Real Estate Investment Trusts, Urban Land Institute and
International Council of Shopping Centers.

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

            Steven M. Berzin, Executive Vice President, Chief Financial Officer
and Chief Legal Officer, was elected Executive Vice President, Chief Financial
Officer, Chief Legal Officer and a Managing Director of W.P. Carey & Co. in July
1997. From 1993 to 1997, Mr. Berzin was Vice President - Business Development of
General Electric Capital Corporation in the office of the Executive Vice
President and, more recently, in the office of the President, where he was
responsible for business development activities and acquisitions. From 1985 to
1992, Mr. Berzin held various positions with Financial Guaranty Insurance
Company, the last two being Managing Director, Corporate Development and Senior
Vice President and Chief Financial Officer. Mr. Berzin associated with the law
firm of Cravath, Swaine & Moore from 1978 to 1985 and from 1976 to 1977, he


                                     - 10 -
<PAGE>   12
served as law clerk to the Honorable Anthony M. Kennedy, then a United States
Circuit Judge.  Mr. Berzin received a B.A. and M.A. in Applied Mathematics from
Harvard University, a B.A. in Jurisprudence and an M.A. from Oxford University
and a J.D. from Harvard Law School.  Mr. Berzin is also Vice Chairman, Chief
Legal Officer and a Director of Carey Diversified.

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

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

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

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

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


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.


                                     - 11 -
<PAGE>   13
                                     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, 1996 and 1997.

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

   Consolidated Statements of Shareholders' Equity for the years ended December
   31, 1995, 1996 and 1997.

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

   Notes to Consolidated Financial Statements.


   The consolidated financial statements are hereby incorporated by reference to
   pages 5 to 20 of Registrant's Annual Report contained in Appendix A.




   (a)      3.    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,
1997.

                  Schedule III of Registrant is contained on pages 20 to 24 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.


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

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

<TABLE>
<CAPTION>
Exhibit                                                                         Method of
  No.       Description                                                          Filing
  ---       -----------                                                          ------
<S>       <C>                                                                   <C>
   3.1    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                      Filed as Exhibit 10.3
          by 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>


                                     - 13 -
<PAGE>   15
<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>


                                     - 14 -
<PAGE>   16
<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>


                                     - 15 -
<PAGE>   17
<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>


                                     - 16 -
<PAGE>   18
<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, 1998.                      Filed herewith
</TABLE>


                                     - 17 -
<PAGE>   19
<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>


                                     - 18 -
<PAGE>   20
   (b)  Reports on Form 8-K

            During the quarter ended December 31, 1997 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, 1997 from the Company's offering of common stock which commenced
February 2, 1996 (File # 33-99994) is as follows:

<TABLE>
<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:                             $117,149,832

            Working capital reserves:                             $  2,019,846

            Temporary investments in cash and cash
              equivalents:                                        $ 67,058,177
</TABLE>


                                     - 19 -
<PAGE>   21
                                   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


     04/06 /98          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


   04/06/98           BY:   /s/ William P. Carey
---------------             ----------------------------------
     Date                   William P. Carey
                            Chairman of the Board
                            and Director
                            (Principal Executive Officer)

   04/06/98           BY:   /s/ Barclay G. Jones, III
---------------             ----------------------------------
     Date                   Barclay G. Jones, III
                            President

   04/06/98           BY:   /s/ Ralph G. Coburn
---------------             ----------------------------------
     Date                   Ralph G. Coburn
                            Director

   04/06/98           BY:   /s/ William Ruder
---------------             ----------------------------------
     Date                   William Ruder
                            Director

   04/06/98           BY:   /s/ George E. Stoddard
---------------             ----------------------------------
     Date                   George E. Stoddard
                            Director

   04/06/98           BY:   /s/ Thomas E. Zacharias
---------------             ----------------------------------
     Date                   Thomas E. Zacharias
                            Director

   04/06/98           BY:   /s/ Steven M. Berzin
---------------             ----------------------------------
     Date                   Steven M. Berzin
                            Executive Vice President, Chief Legal
                            Officer and Chief Financial Officer
                            (Principal Financial Officer)

   04/06/98           BY:   /s/ Claude Fernandez
---------------             ----------------------------------
     Date                   Claude Fernandez
                            Executive Vice President and
                            Chief Administrative Officer
                            (Principal Accounting Officer)


                                     - 20 -
<PAGE>   22
                        REPORT of INDEPENDENT ACCOUNTANTS


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


            Our report on the consolidated financial statements of Corporate
Property Associates 12 Incorporated and Subsidiaries has been incorporated by
reference in this Form 10-K from page 5 of the 1997 Annual Report to
Shareholders of Corporate Property Associates 12 Incorporated and Subsidiaries.
In connection with our audits of such financial statements, we have also audited
the related financial statement schedule on pages 21 to 24 of this Form 10-K.

            In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.




                                                     /s/Coopers & Lybrand L.L.P.
New York, New York
April 6, 1998


                                     - 21 -
<PAGE>   23
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                           SCHEDULE III - REAL ESTATE
                          and ACCUMULATED DEPRECIATION

                             as of December 31, 1997

<TABLE>
<CAPTION>
                                                           Initial Cost to                  Cost            
                                                              Company                    Capitalized        
                                                   ------------------------------       Subsequent to       
         Description             Encumbrances         Land              Buildings       Acquisition (a)     
         -----------            -------------      ----------           ---------       ---------------     
<S>                             <C>                <C>                <C>               <C>                 
Direct Financing Method:                                                              
 Supermarkets                                                                         
  leased to                                                                           
  Big V Holding Corp.           $ 3,277,933        $1,157,294         $ 5,254,309           $58,940         
 Manufacturing                                                                                              
  facility leased to                                                                                        
  The Garden                                                                                                
  Companies, Inc.                 3,322,423         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            5,990,593         1,549,022          10,597,978             5,500         
 Research and develop-                                                                                      
  ment facility leased to                                                                                   
  Lanxide Corporation             4,200,197         1,390,122           7,281,878             7,421         
                                -----------        ----------         -----------           -------         
                                $16,791,146        $7,151,494         $33,354,109           $76,361         
                                ===========        ==========         ===========           =======         
</TABLE>


<TABLE>                                                        
<CAPTION>
                                                         Gross Amount at which Carried  
                                                              at Close of Period  (e)
                                 Increase in            --------------------------------
         Description           Net Investment (c)                      Total                     Date Acquired
         -----------           ------------------       --------------------------------         -------------
<S>                            <C>                      <C>                                      <C>
Direct Financing Method:
 Supermarkets
  leased to
  Big V Holding Corp.               $384,701                       $ 6,855,244                   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 develop-                                                                          
  ment facility leased to                                                                       
  Lanxide Corporation                                                8,679,421                   March 28, 1996
                                    --------                       -----------                  
                                    $384,701                       $40,966,665                  
                                    ========                       ===========                  
</TABLE>

See accompanying notes to Schedule.


                                     - 22 -
<PAGE>   24
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                           SCHEDULE III - REAL ESTATE
                          and ACCUMULATED DEPRECIATION

                             as of December 31, 1997

<TABLE>
<CAPTION> 
                                                                                                         
                                                                                                        
                                                          Initial Cost to              Cost
                                                            Company                Capitalized         Decrease in    
                                                   -------------------------       Subsequent to          Net        
         Description              Encumbrances        Land        Buildings       Acquisition (a)     Investment(b)
         -----------             --------------    ----------     ----------      ---------------     -------------  
<S>                               <C>             <C>            <C>              <C>                 <C>            
Operating Method:                                                                                    
                                                                                                  
 Distribution facility leased                                                                                        
  to Wal-Mart Stores, Inc.        $ 2,356,025      $  452,871     $ 3,325,910        $   12,921                      
 Office/Manufacturing                                                                                                
  facility leased to                                                                                                 
  Etec Systems, Inc.                7,983,279       1,272,418      10,588,221         5,241,343       $(2,633,473)   
 Health club facilities                                                                                              
  leased to Q Clubs, Inc.           2,539,785       3,152,874       8,524,126                                        
 Warehouses and special                                                                                              
  purpose facility leased                                                                                            
  to Del Monte Corporation          5,834,640         305,733                        10,065,326                      
 Warehouse/office/                                                                                                   
  research facility leased                                                                                           
  to Applied Bioscience                                                                                              
  International, Inc.               7,207,938       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             9,875,018       5,570,775      12,073,204             4,119                      
 Retail store leased                                                                                                 
  to Garden Ridge                                                                                                    
  Corporation                       4,546,309       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.         10,192,006       5,734,782      12,175,218             5,356                      
 Child care centers leased                                                                                           
  to Childtime Childcare, Inc.      2,500,000       1,807,904                         4,093,207                      
 Office/research facility                                                                                            
  leased to QMS, Inc.               5,681,273       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                                        
</TABLE>


<TABLE>                          
<CAPTION>                        
                                                                                                                    Life on which
                                                                                                                    Depreciation 
                                      Gross Amount at which Carried                                                  in Latest
                                          at Close of Period (d)(e)                                                 Statement of
                                    -------------------------------------    Accumulated                            Operations
         Description                 Land       Buildings       Total      Depreciation (e)      Date Acquired      is Computed
         -----------               ---------    ---------    -----------   ------------------     -------------     ------------
<S>                                <C>          <C>           <C>          <C>                    <C>               <C>           
Operating Method:                
                                 
 Distribution facility leased                                                                      February 10,
  to Wal-Mart Stores, Inc.         $  454,420   $ 3,337,282   $ 3,791,702   $  239,867                 1995             40 yrs.
 Office/Manufacturing                                                                                                  
  facility leased to                                                                               February 16,        
  Etec Systems, Inc.                1,272,444    13,196,065    14,468,509      768,789                 1995             40 yrs.
 Health club facilities                                                                            June 8, 1995 and    
  leased to Q Clubs, Inc.           3,152,874     8,524,126    11,677,000      413,277             July 25, 1996        40 yrs.
 Warehouses and special                                                                                                
  purpose facility leased                                                                                              
  to Del Monte Corporation            376,360     9,994,699    10,371,059      359,429             November 9, 1995     40 yrs.
 Warehouse/office/                                                                                                     
  research facility leased                                                                                             
  to Applied Bioscience                                                                            November 13,         40 yrs.
  International, Inc.               1,550,985    11,045,166    12,596,151      586,204                 1995            
 Distribution/warehouse                                                                                                
  facility leased to                                                                               September 19,        40 yrs.
  Celadon, Inc.                     1,480,600     5,360,400     6,841,000      172,805                 1996            
 Office/research                                                                                                       
  facility leased to                                                                               November 19,         40 yrs.
  Spectrian Corporation             5,570,775    12,077,323    17,648,098      339,559                 1996            
 Retail store leased                                                                                                   
  to Garden Ridge                                                                                  December 16,         40 yrs.
  Corporation                       1,857,607     6,204,923     8,062,530      161,586                 1996            
 Office/distribution                                                                                                   
  facility leased to Knogo                                                                         December 24,         40 yrs.
  North America, Inc.               1,603,488     3,321,512     4,925,000       86,497                 1996
 Office/research facility leased                                                                   January 23,          40 yrs.
  to Scott Companies, Inc.          5,734,782    12,180,574    17,915,356      291,826                 1997            
 Child care centers leased                                                                         January 29,          40 yrs.
  to Childtime Childcare, Inc.      1,807,904     4,093,207     5,901,111       49,312                 1997            
 Office/research facility                                                                          February 18,         40 yrs.
  leased to QMS, Inc.               1,361,073    12,513,273    13,874,346      273,728                 1997            
 Retail/distribution facility                                                                                          
  leased to The Bon-Ton                                                                            April 10,            40 yrs.
  Stores, Inc.                      1,780,000    10,261,885    12,041,885      181,721                 1997            
</TABLE>


                                  (Continued)

                                     - 23 -
<PAGE>   25
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                           SCHEDULE III - REAL ESTATE
                          and ACCUMULATED DEPRECIATION

                             as of December 31, 1997

<TABLE>
<CAPTION> 
                                                                                                        
                                                                 
                                                         Initial Cost to            Cost
                                                            Company             Capitalized        Decrease in   
                                                   -------------------------    Subsequent to         Net       
         Description              Encumbrances        Land        Buildings     Acquisition (a)    Investment(b) 
         -----------             --------------    ----------     ----------    ---------------    ------------- 
<S>                               <C>             <C>            <C>            <C>                <C>           
Operating Method                                                                                                 
(continued):                                                                                                     
                                                                                                                 
 Technology/manufacturing                                                                                        
  facility leased to Silgan                                                                                      
  Containers Corporation                              570,670       7,944,330
 Office/research                                                                                                 
  facility leased                                                                                                
  to Pagg Corporation               3,200,000       1,080,000       4,469,738                                    
 Office/manufacturing                                                                                            
  facility leased                                                                                                
  to Vermont Teddy                                                                                               
  Bear Co., Inc.                    3,286,273       1,465,000       4,398,874           1,640                    
 Warehouse/special facility                                                                                      
  leased to Texas Freezer                                                                                        
  Company, Inc.                                       257,458                       3,092,965                    
 Research facility                                                                                               
  to GDE Systems, Inc.                              3,025,000       9,741,810           9,225                    
 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                                    
 Administration/classroom                                                                                        
  facility leased to Career                                                                                      
  Education Corporation                             1,150,000       8,840,486                                    
 Printing facility leased to                                                                                     
  Perry Graphic Commun-                                                                                          
  ications, Inc. and Judd's                                                                                      
  Incorporated                                        642,000      18,467,948                                    
 Office/banking facility leased                                                                                  
  to Sandwich Bancorp, Inc.                           300,000       1,520,000                                    
                                  -----------     -----------    ------------     -----------      -----------   
                                  $72,102,546     $40,921,181    $166,132,734     $22,593,958      $(2,633,473)  
                                  ===========     ===========    ============     ===========      ===========   
</TABLE>

<TABLE>
<CAPTION>
                                                                                                                    Life on which
                                                                                                                    Depreciation 
                                      Gross Amount at which Carried                                                  in Latest
                                          at Close of Period (d)(e)                                                 Statement of
                                    -------------------------------------    Accumulated                            Operations
         Description                 Land       Buildings       Total      Depreciation (e)      Date Acquired      is Computed
         -----------               ---------    ---------    -----------   ------------------     -------------     ------------
<S>                                <C>          <C>           <C>          <C>                    <C>               <C>           
Operating Method                                                                                                       
(continued):                                                                                                           
                                                                                                                       
 Technology/manufacturing                                                                                              
  facility leased to Silgan                                                                                            
  Containers Corporation              570,670     7,944,330     8,515,000      107,579             June 13, 1997        40 yrs.
 Office/research                                                                                                       
  facility leased                                                                                                      
  to Pagg Corporation               1,080,000     4,469,738     5,549,738       50,676             July 8, 1997         40 yrs.
 Office/manufacturing                                                                                                  
  facility leased                                                                                                      
  to Vermont Teddy                                                                                                     
  Bear Co., Inc.                    1,465,000     4,400,514     5,865,514       50,404             July 18 1997         40 yrs.
 Warehouse/special facility                                                                                            
  leased to Texas Freezer                                                                          September 23,        40 yrs.
  Company, Inc.                       257,458     3,092,965     3,350,423                              1997            
 Research facility                                                                                 September 28,        40 yrs.
  to GDE Systems, Inc.              3,025,000     9,751,035    12,776,035       71,047                1997             
 Office/manufacturing                                                                                                  
  facility leased to Westell                                                                       September 29,        40 yrs.
  Technologies, Inc.                2,500,000    14,952,055    17,452,055      109,026                 1997            
 Office/manufacturing                                                                                                  
  facility leased to                                                                               October 17,          40 yrs.
  Randall International, Inc.       2,000,000       471,454     2,471,454                              1997            
 Administration/classroom                                                                                              
  facility leased to Career                                                                        November 12,         40 yrs.
  Education Corporation             1,150,000     8,840,486     9,990,486       27,627                 1997            
 Printing facility leased to                                                                                           
  Perry Graphic Commun-                                                                                                
  ications, Inc. and Judd's                                                                        December 16,         40 yrs.
  Incorporated                        642,000    18,467,948    19,109,948       19,237                 1997            
 Office/banking facility leased                                                                    December 30,         40 yrs.
  to Sandwich Bancorp, Inc.           300,000     1,520,000     1,820,000                              1997          
                                  -----------  ------------  ------------   ----------     
                                  $40,993,440  $186,020,960  $227,014,400   $4,360,196
                                  ===========  ============  ============   ==========
</TABLE>


See accompanying notes to Schedule.


                                     - 24 -
<PAGE>   26
                  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 (decrease) in net investment is due to the amortization
            of unearned income producing a constant periodic rate of return on
            the net investment which is more (less) than lease payments
            received.

   (d)      At December 31, 1997, the aggregate cost of real estate owned by
            Registrant and its subsidiaries for Federal income tax purposes is
            $255,279,488.

   (e)

                     Reconciliation of Real Estate Accounted
                         for Under the Operating Method

<TABLE>
<CAPTION>
                                                 December 31,
                                      ---------------------------------
                                           1996                 1997
                                      ------------        -------------
<S>                                   <C>                 <C>          
      Balance at beginning
            of year                   $ 35,449,139        $  84,999,148

      Purchase price adjustment         (2,633,473)

      Additions                         52,183,482          142,021,252

      Dispositions                              --               (6,000)
                                      ------------        -------------

      Balance at close of year        $ 84,999,148        $ 227,014,400
                                      ============        =============
</TABLE>


                   Reconciliation of Accumulated Depreciation


<TABLE>
<CAPTION>
                                             December 31,
                                     ---------------------------
                                         1996             1997
                                     ----------       ----------
<S>                                  <C>              <C>       
      Balance at beginning
            of year                  $  390,307       $1,337,513

      Depreciation expense              947,206        3,022,683
                                     ----------       ----------

      Balance at close of year       $1,337,513       $4,360,196
                                     ==========       ==========
</TABLE>


                                     - 25 -
<PAGE>   27
                                                                    EXHIBIT 21.3
<PAGE>   28
                           SUBSIDIARIES OF REGISTRANT


            GENA (CA) QRS 12-1, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA AND DOING BUSINESS UNDER
THE NAME GENA (CA) QRS 12-1, INC.

            BBC (NE) QRS 12-2, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF NEBRASKA AND DOING BUSINESS UNDER
THE NAME BBC (NE) QRS 12-2, INC.

            ELWA-BV (NY) QRS 12-3, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF NEW YORK AND DOING BUSINESS UNDER
THE NAME ELWA-BV (NY) QRS 12-3, INC.

            ADS (CA) QRS 12-4, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA AND DOING BUSINESS UNDER
THE NAME OF ADS (CA) QRS 12-4, INC.

            WALS (IN) QRS 12-5, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA AND DOING BUSINESS UNDER
THE WALS (IN) QRS 12-5, INC.

            ESI (CA) QRS 12-6, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA AND DOING BUSINESS UNDER
THE NAME OF ESI (CA) QRS 12-6, INC.

            SFC (TX) QRS 12-7, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS AND DOING BUSINESS UNDER THE
NAME SFC (TX) QRS 12-7, INC.

            SEEDS (TN) QRS 12-9, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF TENNESSEE AND DOING BUSINESS UNDER
THE NAME SEEDS (TN) QRS 12-9, INC.

            DELMO (PA) QRS 12-10, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF PENNSYLVANIA AND DOING BUSINESS
UNDER THE NAME DELMO (PA) QRS 12-10, INC.

            ABI (TX) QRS 12-11, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS AND DOING BUSINESS UNDER THE
NAME ABI (TX) QRS 12-11, INC.

            CARDS (CA) QRS 12-12, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA AND DOING BUSINESS UNDER
THE NAME CARDS (CA) QRS 12-12, INC.

            RSI (NJ) QRS 12-13, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF NEW JERSEY AND DOING BUSINESS UNDER
THE NAME RSI (NJ) QRS 12-13, INC.

            TEL (VA) QRS 12-15, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF VIRGINIA AND DOING BUSINESS UNDER
THE NAME TEL (VA) QRS 12-15, INC.

            LAX (DE) QRS 12-16, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER
THE NAME LAX (DE) QRS 12-16, INC.

            CEL (IN) QRS 12-17, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF INDIANA AND DOING BUSINESS UNDER THE
NAME CEL (IN) QRS 12-17, INC.

            SFC (TX) QRS 12-18, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS AND DOING BUSINESS UNDER THE
NAME SFC (TX) QRS 12-18, INC.

            CTC (MD) QRS 12-19, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND AND DOING BUSINESS UNDER
THE NAME CTC (MD) QRS 12-19, INC.
<PAGE>   29
            SPEC (CA) QRS 12-20, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA AND DOING BUSINESS UNDER
THE NAME SPEC (CA) QRS 12-20, INC.
<PAGE>   30
                           SUBSIDIARIES OF REGISTRANT

                                   (CONTINUED)

            INK (AL) QRS 12-21, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF ALABAMA AND DOING BUSINESS UNDER THE
NAME INK (AL) QRS 12-21, INC.

            WEEDS (OK) QRS 12-22, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF OKLAHOMA AND DOING BUSINESS UNDER
THE NAME WEEDS (OK) QRS 12-22, INC.

            NOG (NY) QRS 12-23, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF NEW YORK AND DOING BUSINESS UNDER
THE NAME NOG (NY) QRS 12-23, INC.

            BUILD (CA) QRS 12-24, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA AND DOING BUSINESS UNDER
THE NAME BUILD (CA) QRS 12-24, INC.

            BT (PA) QRS 12-25, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF PENNSYLVANIA AND DOING BUSINESS
UNDER THE NAME BT (PA) QRS 12-25, INC.

            RSI LOAN (NJ) QRS 12-26, INC., A WHOLLY-OWNED SUBSIDIARY OF
REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF NEW JERSEY AND DOING
BUSINESS UNDER THE NAME RSI LOAN (NJ) QRS 12-26, INC.

            BAKE (TX) QRS 12-28, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS AND DOING BUSINESS UNDER THE
NAME BAKE (TX) QRS 12-28, INC.

            ICE (TX) QRS 12-29, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS AND DOING BUSINESS UNDER THE
NAME ICE (TX) QRS 12-29, INC.

            URSA (VT) QRS 12-30, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF VERMONT AND DOING BUSINESS UNDER THE
NAME URSA (VT) QRS 12-30, INC.

            GGAP (MA) QRS 12-31, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF MASSACHUSETTS AND DOING BUSINESS
UNDER THE NAME GGAP (MA) QRS 12-31, INC.

            CAN (WI) QRS 12-34, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF WISCONSIN AND DOING BUSINESS UNDER
THE NAME CAN (WI) QRS 12-34, INC.

            INFO (CA) QRS 12-35, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA AND DOING BUSINESS UNDER
THE NAME INFO (CA) QRS 12-35, INC.

            WTI (IL) QRS 12-36, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF ILLINOIS AND DOING BUSINESS UNDER
THE NAME WTI (CA) QRS 12-36, INC.

            SOAP (CA) QRS 12-37, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA AND DOING BUSINESS UNDER
THE NAME SOAP (CA) QRS 12-37, INC.

            BROWN (MN) QRS 12-38, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA AND DOING BUSINESS UNDER
THE NAME BROWN (MN) QRS 12-38, INC.

            NUTRA (TX) QRS 12-39, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS AND DOING BUSINESS UNDER THE
NAME NUTRA (TX) QRS 12-39, INC.

            PRINT (WI) QRS 12-40, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF WISCONSIN AND DOING BUSINESS UNDER
THE NAME PRINT (WI) QRS 12-40, INC.
<PAGE>   31
            CASH (MA) QRS 12-41, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF MASSACHUSETTS AND DOING BUSINESS
UNDER THE NAME CASH (MA) QRS 12-41, INC.

            QRS 12-PAYING AGENT, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT
INCORPORATED UNDER THE LAWS OF THE STATE OF NEW YORK AND DOING BUSINESS UNDER
THE NAME QRS 12-PAYING AGENT, INC.
<PAGE>   32
                                                         APPENDIX A TO FORM 10-K



                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED

                                AND SUBSIDIARIES



                                                     1997 ANNUAL REPORT
<PAGE>   33
SELECTED FINANCIAL DATA




(In thousands except share amounts)


<TABLE>
<CAPTION>
                                          1993 (1)           1994               1995              1996          1997
                                     ---------        -----------        -----------       -----------       -------
<S>                                  <C>              <C>                <C>               <C>               <C>    
OPERATING DATA:

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

  Net (loss) income                         (3)               (28)             2,115             6,210        12,804

  Basic earnings (loss)
   per share (2)(3)                       (.13)              (.03)               .53               .60           .57


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

  Dividends paid (4)                                          289              2,351             6,780        15,082

  Dividends paid per share                                    .30                .76               .80           .81

  Payments of mortgage
   principal (5)                                                6                262             1,192         1,708




BALANCE SHEET DATA:

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

  Long-term obligations (6)                                 3,267             19,016            47,734        84,745
</TABLE>



(1)  For the period from inception (July 30, 1993) to December 31, 1993.

(2)  The Company has a simple capital structure, that is, one with only common
     stock outstanding. As a result, the Company has presented basic per share
     amounts only.

(3)  Based on weighted average number of Shares outstanding.

(4)  The Company paid two dividends in 1994 applicable to the quarters ended 
     June 30, 1994 and September 30, 1994.

(5)  Represents scheduled mortgage principal amortization paid.

(6)  Represents mortgage obligations and deferred acquisition fees due after 
     more than one year.


                                     - 1 -
<PAGE>   34
MANAGEMENT'S DISCUSSION AND ANALYSIS


            The Company 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, the Company commenced a public offering of common stock at $10
per share on a "best efforts" basis. Between May 1994 and January 1996, when the
offering concluded, the Company had sold 8,135,992 shares ($81,359,020). In
February 1996, the Company commenced a second public offering of common stock at
$10 per share on a "best efforts" basis, which concluded in September 1997. For
this second offering, the Company issued 20,198,459 Shares ($201,984,590),
including 12,666,048 shares ($126,660,480) in 1997. The Company is using the net
offering proceeds (except for 1% of proceeds used to maintain a working capital
reserve) of this second offering along with limited recourse mortgage financing
to acquire additional real estate investments and further diversify the
Company's portfolio of real estate investments.

            The Company'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. The Company intends to meet
this objective by entering into long-term net leases with corporate lessees. The
Company's leases, which usually have initial lease terms of 15 to 25 years,
typically include rent increase provisions that are either fixed, based upon
increases in the Consumer Price Index or, commonly for leases for retail stores,
based upon a percentage of sales. Under a net lease, the tenants are generally
required to pay substantially all operating expenses related to the leased
property, thereby limiting the Company's exposure to the effects of increases in
real estate taxes, property maintenance and insurance costs. The Company also
negotiates lease covenants that serve to protect its interest in the event of a
lessee's reorganization or restructuring. While there is no assurance that the
Company will realize its objectives, Management believes that its ability to
structure leases with rent escalations and protective covenants are important to
meeting the Company's objectives. In addition, the Company has successfully
negotiated grants of common stock warrants from selected tenants with the
objective of realizing the benefits of appreciation from those grants. During
1997, the Company exercised warrants granted by Etec Systems, Inc. for Etec
common stock. Subsequent to the Company's initial transaction with Etec, Etec
completed an initial public offering. The fair value of the Etec stock as of
December 31, 1997 as reflected in the accompanying consolidated financial
statements was approximately $3,174,000. The Company contributed $5,609,000 of
equity in its initial transaction with Etec.

            Through December 31, 1997, the Company had invested approximately
$279,000,000 of which approximately $179,900,000 was from the proceeds of the
offerings and approximately $99,100,000 from limited recourse mortgage
financing. The Company has commitments totaling approximately $57,870,000 to
complete build-to-suit projects with Randall International, Inc., Texas Freezer
and Childtime Childcare, Inc. and an expansion at the Etec property. As of March
31, 1998, the Company has $35,670,000 of cash available for investment. The
Company has, since its inception, purchased properties as follows:

<TABLE>
<CAPTION>
            Date Acquired                         Lease Obligor
            -------------                         -------------
<S>                                               <C>                                             
            May 13, 1994                          Best Buy Co., Inc.
            July 15, 1994                         Big V Holding Corporation
            October 14, 1994                      Gensia, Inc.
            February 10, 1995                     Wal-Mart Stores, Inc.
            February 16, 1995                     Etec Systems, Inc.
            June 8, 1995 and July 25, 1996        Q Clubs, Inc.
            June 20, 1995                         The Garden Companies, Inc.
            November 9, 1995                      Del Monte Corporation
            November 13, 1995                     Applied Bioscience International, Inc.
            January 4, 1996                       The Upper Deck Company
            February 23, 1996                     Rheometric Scientific, Inc.
            March 11, 1996                        Telos Corporation
</TABLE>


                                     - 2 -
<PAGE>   35
<TABLE>
<CAPTION>
            Date Acquired                 Lease Obligor
            -------------                 -------------
<S>                                       <C>
            March 28, 1996                Lanxide Corporation
            September 19, 1996            Celadon Group, Inc.
            November 19, 1996             Spectrian Corporation
            December 16, 1996             Garden Ridge Corporation
            December 24, 1996             Knogo North America, Inc.
            January 23, 1997              Scott Companies, Inc.
            January 29, 1997              Childtime Childcare, Inc.
            February 18, 1997             QMS, Inc.
            April 10, 1997                The Bob-Ton Stores, Inc.
            June 13, 1997                 Silgan Containers Corporation
            July 8, 1997                  Pagg Corporation
            July 18, 1997                 Vermont Teddy Bear Co., Inc.
            September 23, 1997            GDE Systems, Inc.
            September 23, 1997            Texas Freezer Company, Inc.
            September 29, 1997            Westell Technologies, Inc.
            October 17, 1997              Randall International, Inc.
            November 12, 1997             Career Education Corporation
            December 16 ,1997             Perry Graphic Communications, Inc.
                                          and Judd's Incorporated.
            December 30, 1997             Sandwich Bancorp, Inc.
            March 23, 1998                NutraMax Products, Inc.
</TABLE>


            All of the Company's debt is limited recourse mortgage financing.
This means that the Company's mortgage lenders must look solely to the specific
properties encumbered by the mortgage and to the tenant obligations on those
same properties, that are also generally assigned to the lender as collateral.
In the case of mortgage financing that does not fully amortize over its term,
the Company would be responsible for the balloon payment only to the extent of
its interest in the encumbered property because the holder of each such
obligation has recourse only to the collateral. In the event that a balloon
payment comes due, the Company would seek to refinance the loans, restructure
the debt with the existing lenders, evaluate its ability to satisfy the
obligations from its existing resources or sell the property and use the sale
proceeds to satisfy the mortgage debt. The Company believes that the ability to
refinance balloon payment obligations is enhanced if the long-term lease for the
property remains in effect. The Company also evaluates all of its outstanding
loans for refinancing opportunities. These opportunities whereby it can lower
interest rates on debt may occur as the result of changing market rates or
improvements in the credit rating of tenants. No balloon payments on the
Company's mortgages are scheduled until 2000. During 1997, the Company obtained
$48,412,000 of limited recourse mortgage financing. Because of the high level of
uninvested cash held by the Company, mortgage financing has not always been
obtained at the time of the purchase of property. Management intends to leverage
many of its properties. The Company has received a commitment of $45,000,000 of
limited recourse mortgage financing on the Etec properties. However, given the
low short-term interest rates on univested cash available at this time,
Management has determined that it is more beneficial at present to reduce its
uninvested cash by making all cash purchases before obtaining mortgage
financing.

            During 1997, the Company's cash flow from operations of $19,956,000
was sufficient to fund payments of dividends of $15,082,000 and $1,708,000 of
scheduled debt service principal payments on mortgage debt. The Company's
financing and investing activities in 1997, other than paying dividends and
paying scheduled mortgage principal installments primarily consisted of the
raising of both equity and debt capital and using such funds to purchase
investments in real estate. The Company will use the cash generated by these
investments to meet its objective of using the cash flow provided from
operations to pay quarterly dividends at an increasing rate and increase the
Company's equity in real estate by making regular mortgage principal payments.
While there is no assurance that this objective will be met, Management believes
that with appropriate diversification of real estate investments, its strategy
should enable the Company to meet its objective.


                                     - 3 -
<PAGE>   36
            The Company's results of operations for the year ended December 31,
1997 are not directly comparable to the results for the year ended December 31,
1996, as the purchase of properties and increasing the Company's asset base
continued throughout 1997. The Company's 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. Interest income will decrease as cash
available for investment is utilized for additional real estate purchases. The
cash balances maintained after all funds are invested will be substantially less
than the current cash balances. The Company's earnings increased by $6,953,000.

            A comparison of the results of operations for the year ended
December 31, 1996 with the results of operations for the year ended December 31,
1995 are not directly comparable as real estate investments increased by
approximately 115% between 1995 and 1996. Increases in lease revenues, interest
expense, depreciation and amortization and property expense are attributable to
the increase in real estate assets and related mortgage financing rather than
significant changes in existing operations. The increase in other interest
income was solely attributable to higher cash balances.

            Because of the long-term nature of the Company's net leases,
inflation and changing prices have not unfavorably affected the Company's
revenues and net income. The Company'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 connection with the purchase of its properties, the Company
requires sellers of such properties to perform environmental reviews. Management
believes, based on the results of such reviews, that the Company'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, the Company's
leases generally require tenants to indemnify the Company 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 the Company to extend leases until such time
as a tenant has satisfied its environmental obligations. The Company 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, in the estimation of the Company, 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 the Company's financial condition, liquidity or results of operations.

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

            In June 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in full set general purpose
financial statements. SFAS No. 130 is required to be adopted in 1998. The
Company is currently evaluating the impact, if any, of SFAS No. 130.


                                     - 4 -
<PAGE>   37
                        REPORT of INDEPENDENT ACCOUNTANTS






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


            We have audited the accompanying consolidated balance sheets of
Corporate Property Associates 12 Incorporated and Subsidiaries as of December
31, 1996 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for the years ended December 31, 1995, 1996
and 1997. 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 in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Advisor, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

            In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Corporate Property Associates 12 Incorporated and Subsidiaries as of December
31, 1996 and 1997, and the consolidated results of their operations and their
cash flows for the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.



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


New York, New York
April 6, 1998


                                     - 5 -
<PAGE>   38
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 1996 and 1997

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

Real estate leased to others:
  Accounted for under the
    operating method:
      Land                                                  $  17,325,553        $  40,993,440
      Buildings                                                67,673,595          186,020,960
                                                            -------------        -------------
                                                               84,999,148          227,014,400
      Accumulated depreciation                                  1,337,513            4,360,196
                                                            -------------        -------------
                                                               83,661,635          222,654,204
Net investment in direct financing leases                      40,846,486           40,966,665
                                                            -------------        -------------
  Real estate leased to others                                124,508,121          263,620,869
Equity investments                                             16,091,935           16,635,180
Cash and cash equivalents                                      50,893,314           72,423,221
Marketable equity securities, at fair value                                          3,174,137
Other assets, net of reserve for uncollected
  rents of $162,137                                             1,800,474            2,839,719
                                                            -------------        -------------
        Total assets                                        $ 193,293,844        $ 358,693,126
                                                            =============        =============

      LIABILITIES:

Limited recourse mortgage notes payable                     $  46,286,159        $  88,893,692
Accounts payable to affiliates                                  2,258,581            3,430,059
Accounts payable and accrued expenses                             256,136              259,189
Deferred acquisition fees payable to an affiliate               3,414,097            6,469,146
Dividends payable                                               2,094,191
Accrued interest payable                                          418,035              650,800
Prepaid rental income and security deposits                     1,379,288            5,416,573
                                                            -------------        -------------
        Total liabilities                                      56,106,487          105,119,459
                                                            -------------        -------------

      SHAREHOLDERS' EQUITY:

Common stock, $.001 par value; authorized,
  40,000,000 shares; issued and outstanding,
  15,668,403 and 28,334,451 shares
  at December 31, 1996 and 1997                                    15,668               28,334
Additional paid-in capital                                    139,896,651          253,835,934
Dividends in excess of accumulated earnings                    (2,584,954)          (2,768,966)
Unrealized appreciation, marketable equity securities                  --            3,031,300
                                                            -------------        -------------
                                                              137,327,365          254,126,602

Less, treasury stock at cost, 14,395 and 68,043
  shares at December 31, 1996 and 1997                           (140,008)            (552,935)
                                                            -------------        -------------

        Total shareholders' equity                            137,187,357          253,573,667
                                                            -------------        -------------
        Total liabilities and
          shareholders' equity                              $ 193,293,844        $ 358,693,126
                                                            =============        =============
</TABLE>


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


                                     - 6 -
<PAGE>   39
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                        CONSOLIDATED STATEMENTS of INCOME

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


<TABLE>
<CAPTION>
                                                              1995              1996              1997
                                                          -----------       -----------       -----------
<S>                                                       <C>               <C>               <C>        
Revenues:
  Interest income from direct financing
    leases                                                $ 1,221,026       $ 4,559,544       $16,651,513
  Rental income from operating leases                       2,111,998         5,000,989         4,966,730
  Other interest income                                       660,623         1,873,094         3,695,176
                                                          -----------       -----------       -----------
                                                            3,993,647        11,433,627        25,313,419
                                                          -----------       -----------       -----------

Expenses:
  Interest expense                                          1,260,189         3,525,774         6,499,865
  Depreciation                                                390,307           947,206         3,022,683
  General and administrative                                  942,074         1,488,793         2,209,171
  Property expense                                            596,227         1,269,968         2,786,890
  Amortization                                                 12,797            34,085            78,187
                                                          -----------       -----------       -----------
                                                            3,201,594         7,265,826        14,596,796
                                                          -----------       -----------       -----------


      Income before income from
         equity investments                                   792,053         4,167,801        10,716,623


Income from equity investments                              1,322,990         2,042,400         2,086,993
                                                          -----------       -----------       -----------


       Net income                                         $ 2,115,043       $ 6,210,201       $12,803,616
                                                          ===========       ===========       ===========




Basic earnings per share                                  $       .53       $       .60       $       .57
                                                          ===========       ===========       ===========


Weighted average shares outstanding-basic                   4,016,686        10,365,828        22,387,928
                                                          ===========       ===========       ===========
</TABLE>


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


                                     - 7 -
<PAGE>   40
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                 CONSOLIDATED STATEMENTS of SHAREHOLDERS' EQUITY

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


<TABLE>
<CAPTION>
                                                               Dividends in
                                                Additional      Excess of
                                   Common        Paid-in       Accumulated         Unrealized    Treasury
                                    Stock        Capital         Earnings         Appreciation    Stock         Total
                                   -------    ------------      -----------       ------------   ---------   ------------
<S>                                <C>        <C>               <C>                <C>           <C>         <C>         
Balance at December 31, 1994       $ 2,717     $23,816,551      $   (30,404)                                  $23,788,864

3,837,526 Shares issued
  at $10 per share, net of
  offering costs of $4,430,723       3,838      33,940,699                                                     33,944,537

Common stock subject to
redemption; 526,921 shares            (527)     (5,268,683)                                                    (5,269,210)

Dividends declared                                               (3,194,766)                                   (3,194,766)

Net income                                                        2,115,043                                     2,115,043
                                   -------     -----------      -----------                                   -----------

Balance at December 31, 1995         6,028      52,488,567       (1,110,127)                                   51,384,468

9,117,364 Shares issued
  at $10 per share, net of
  offering costs of $8,988,624       9,117      82,175,899                                                     82,185,016

Dividends declared                                               (7,684,030)                                   (7,684,030)

Net income                                                        6,210,201                                     6,210,201

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

Reclassification of common stock
  subject to redemption at end of
  redemption period, 523,171
  shares                               523       5,232,185             (998)                                    5,231,710
                                   -------    ------------      -----------                       --------   ------------

Balance at December 31, 1996        15,668     139,896,651       (2,584,954)                      (140,008)   137,187,357

12,666,048 Shares issued
  at $10 per share, net of
  offering costs of $12,708,531     12,666     113,939,283                                                    113,951,949

Unrealized appreciation  --
marketable equity securities                                                       $3,031,300                   3,031,300

Dividends declared                                              (12,987,628)                                  (12,987,628)

Net income                                                       12,803,616                                    12,803,616

Repurchase of 53,648 shares                                                                       (412,927)      (412,927)
                                   -------    ------------      -----------        ----------    ---------    ----------- 

Balance at December 31, 1997       $28,334    $253,835,934      $(2,768,966)       $3,031,300    $(552,935)  $253,573,667
                                   =======    ============      ===========        ==========    =========   ============
</TABLE>


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


                                     - 8 -
<PAGE>   41
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS of CASH FLOWS

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

<TABLE>
<CAPTION>
                                                                      1995                      1996                  1997
                                                                 ------------                -----------          ------------
<S>                                                              <C>                         <C>                  <C>         
Cash flows from operating activities:
  Net income                                                     $  2,115,043                $ 6,210,201          $ 12,803,616
  Adjustments to reconcile net income
      to net cash provided by operating activities:
      Depreciation and amortization                                   403,104                    981,291             3,100,870
      Straight-line adjustments and other
        noncash rent adjustments                                      (94,658)                  (164,456)             (491,601)
      Income from equity investments in excess
        of distributions received                                     (71,462)                  (294,055)             (543,245)
      (Increase) decrease in other assets                            (382,325)                   (85,685)           (1,032,332)
      Increase in prepaid rental income
        and security deposits                                         884,581                    494,707             4,037,285
      Provision for uncollected rents                                                                                  162,137
      Increase in accounts payable (a)                                 49,721                     59,859                95,189
      Increase in accounts payable to affiliates (a)                  649,658                    263,293             1,590,907
      Increase in accrued interest payable                            107,425                    281,949               232,765
                                                                 ------------                -----------          ------------

           Net cash provided by operating activities                3,661,087                  7,747,104            19,955,591
                                                                 ------------                -----------          ------------

Cash flows from investing activities:
  Refund of real estate purchase price                                                         2,633,473
  Purchase of stock warrants                                                                    (124,000)
  Capital distributions from (contributions in)
      equity investments                                            1,375,000                 (5,158,908)
  Purchases of real estate and other capitalized
      costs                                                       (41,577,236)               (77,739,925)         (138,960,203)
                                                                 ------------               ------------          ------------ 

           Net cash used in investing activities                  (40,202,236)               (80,389,360)         (138,960,203)
                                                                 ------------               ------------          ------------ 

Cash flows from financing activities:
  Proceeds from stock issuance, net of costs                       33,944,537                 82,185,016           113,951,949
  Dividends paid                                                   (2,350,687)                (6,779,669)          (15,081,819)
  Payments of mortgage principal                                     (262,013)                (1,191,750)           (1,707,976)
  Prepayment of mortgage payable                                   (3,313,866)                (2,949,629)           (4,096,000)
  Proceeds from issuance of mortgages                              18,375,000                 32,300,000            48,411,509
  Deferred financing costs                                           (273,770)                   (90,654)             (530,217)
  Purchase of treasury stock                                                                    (140,008)             (412,927)
  Redemption of stock                                                                            (37,500)
                                                                 ------------               ------------          ------------

           Net cash provided by financing activities               46,119,201                103,295,806           140,534,519
                                                                 ------------               ------------          ------------

           Net increase in cash and cash equivalents                9,578,052                 30,653,550            21,529,907

Cash and cash equivalents, beginning of period                     10,661,712                 20,239,764            50,893,314
                                                                 ------------               ------------          ------------

      Cash and cash equivalents, end of period                   $ 20,239,764               $ 50,893,314          $ 72,423,221
                                                                 ============               ============          ============

Supplemental Disclosure of noncash investing activities:

  Deferred acquisition fee payable to affiliate                  $    865,172               $  1,836,458          $  3,055,049
                                                                 ============               ============          ============
</TABLE>

(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.


                                     - 9 -
<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 and its wholly-owned subsidiaries
          (collectively, the "Company"). All material interentity 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. 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.

               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 in accordance with
          Statement of Financial Accounting Standards No. 67.

        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
                                     - 10 -
<PAGE>   43
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued



          funds. At December 31, 1996 and 1997, the Company's cash and cash
          equivalents were held in the custody of two 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 to shareholders.


      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 until
          realized. As of December 31, 1997, fair value of the Etec common
          stock reflects unrealized appreciation of $3,174,137. The cost basis
          in the Etec common stock is carried on the Company's books at a
          nominal cost at December 31, 1997.

      Equity Investments:

        The Company's interests in three general partnerships 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.

      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 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 income recognized on a straight-line basis.

      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:

        In February 1997, the Financial Accounting Standards Board issued
          Statement of Financial Accounting Standards No. 128 "Earnings Per
          Share" ("SFAS No. 128") which establishes standards for computing and
          presenting earnings per share. The adoption of SFAS No. 128 had no
          impact on the Company's financial statements because the Company has
          a simple capital structure, that is, one with only common stock
          outstanding. As a result, the Company has presented basic per-share
          amounts for all periods presented in the statements of income.


                                   Continued
                                     - 11 -
<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, 1995, 1996 and 1997 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.


      Reclassification:

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


 2.  Organization and Offering:

        The Company was formed on July 30, 1993 under the General Corporation
          Law of Maryland 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.

        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 by Carey
          Financial Corporation ("Carey Financial") and other selected dealers
          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, including
          12,666,048 shares issued in 1997. It is anticipated that
          approximately 87% of the funds raised in the Second Offering will be
          invested in real estate. The remaining funds were used to establish a
          working capital reserve and to pay costs related to the Second
          Offering.

 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. 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.
          Asset management fees were $291,980 in 1995, $631,051 in 1996 and
          $1,202,124 in 1997 with performance fees in like amount. General and
          administrative expense reimbursements were $618,591 in 1995, $747,779
          in 1996 and $1,121,018 in 1997.

        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


                                   Continued
                                     - 12 -
<PAGE>   45
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

          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 1995, 1996, and
          1997, affiliates of the Company received structuring and development
          fees of $605,972, $1,284,619 and $2,156,038, respectively. Fees are
          paid only in connection with completed transactions. The affiliate is
          entitled to receive deferred acquisition fees of $6,469,146 over a
          period of no less than eight years, subject to the 2%/25% Guidelines
          limitation described below.

        In the future, real property may be acquired by limited partnerships,
          REITs or other entities formed by affiliates of the Advisor and,
          accordingly, transactions with related parties may arise between the
          Company and affiliated entities. The Company's interests in
          properties jointly held with affiliates range from 37% to 50%. 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.

        The Advisor shall 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 such 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.

        For the years ended December 31, 1995, 1996 and 1997, fees aggregating
          $35,649, $348,733 and $79,377, 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 1995, 1996 and 1997 were $11,248,
          $26,851 and $69,825, 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 $23,309,000
          in 1998; $23,564,000 in 1999; $23,586,000 in 2000; $23,743,000 in
          2001; $23,820,000 in 2002 and aggregate approximately $391,766,000
          through 2018.

        Contingent rents were approximately $19,000 in 1995, $9,000 in 1996 and
          $32,000 in 1997.

                                   Continued
                                     - 13 -
<PAGE>   46
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

 5.  Net Investment in Direct Financing Leases:

        Net investment in direct financing leases is summarized as follows:

<TABLE>
<CAPTION>
                                                        December 31
                                            ---------------------------------,
                                                1996                  1997
                                            ------------         ------------
<S>                                         <C>                  <C>         
        Minimum lease payments
          receivable                        $ 98,389,173         $ 88,289,457
        Unguaranteed residual value           40,581,966           40,581,966
                                            ------------         ------------
                                             138,971,139          128,871,423
        Less: Unearned income                 98,124,653           87,904,758
                                            ------------         ------------
                                            $ 40,846,486         $ 40,966,665
                                            ============         ============
</TABLE>

        Scheduled future minimum rents, exclusive of renewals, under
           noncancellable direct financing leases are approximately $4,792,000
           in 1998, $4,898,000 in each of the years 1999 through 2002 and
           aggregate approximately $88,289,000 through 2018.


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 gross amount of approximately $174,425,000. As
           of December 31, 1997, mortgage notes payable had interest rates
           ranging from 7.53% to 10.5% per annum.

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

<TABLE>
<CAPTION>
          Year Ending December 31,
          ------------------------
<S>                                            <C>        
            1998                               $ 9,809,963
            1999                                 1,940,171
            2000                                16,637,468
            2001                                 1,949,466
            2002                                 6,524,021
            Thereafter                          52,032,603
                                               -----------
               Total                           $88,893,692
</TABLE>

        Interest paid was $1,152,764 in 1995, $3,243,825 in 1996 and $5,932,311
          in 1997.

        Inconnection with the placement of mortgages, fees of $276,139,
          $513,847 and $862,415 were paid to an affiliate of the Company in
          1995, 1996 and 1997, respectively.


 7.  Dividends:

        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, 1997, dividends paid
          per share reported for tax purposes were as follows:

<TABLE>
<CAPTION>
                                   1995              1996          1997
                                   ----              ----          ----
<S>                                <C>               <C>          <C>  
  Ordinary income                  $0.76             $0.68        $ .81
  Return of capital                                   0.12
                                   -----             -----        -----
                                   $0.76             $0.80        $ .81
                                   =====             =====        =====
</TABLE>


                                   Continued
                                     - 14 -
<PAGE>   47
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

 8.  Industry Segment Information:

        The Company's operations consist of the investment in and the leasing of
           industrial and commercial real estate. The financial reporting
           sources of 1995, 1996 and 1997 lease revenues are as follows:

<TABLE>
<CAPTION>

                                                               1995              1996              1997
                                                           -----------       -----------       -----------
<S>                                                        <C>               <C>               <C>        
      Per Statements of Income:
       Interest income from direct
         financing leases                                  $ 1,221,026       $ 4,559,544       $16,651,513
       Rental income from operating leases                   2,111,998         5,000,989         4,966,730
      Adjustment:
       Share of lease revenues from
         equity investments                                  3,110,209         4,419,078         4,422,114
                                                           -----------       -----------       -----------
                                                           $ 6,443,233       $13,979,611       $26,040,357
                                                           ===========       ===========       ===========
</TABLE>

                                   Continued
                                     - 15 -
<PAGE>   48
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued



        In 1995, 1996 and 1997, 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>
                                                         1995        %              1996          %              1997         %
                                                         ----       ---             ----         --              ----         --
<S>                                                  <C>            <C>         <C>             <C>          <C>            <C> 
         Spectrian Corporation                                                  $   223,704       2%         $ 1,925,000      7%
         Scott Companies, Inc.                                                                                 1,826,069      7
         Best Buy Co., Inc. (a)                      $1,801,209      28%          1,797,435      13            1,793,239      7
         Etec Systems, Inc.                           1,210,652      19           1,208,583       9            1,556,393      6
         QMS, inc.                                                                                             1,454,097      6
         Telos Corporation                                                        1,166,936       8            1,447,000      5
         Q Clubs, Inc.                                  374,263       6             979,795       7            1,390,123      5
         The Upper Deck Company (a)                                               1,312,643       9            1,319,875      5
         Gensia, Inc. (a)                             1,309,000      20           1,309,000       9            1,309,000      5
         Applied Bioscience International, Inc.         173,600       3           1,302,000       9            1,302,000      5
         Del Monte Corporation                                                      643,125       5            1,286,250      5
         Lanxide Corporation                                                        770,086       5            1,030,000      4
         Garden Ridge Corporation                                                    36,738                      995,764      4
         The Bon-Ton Stores, Inc.                                                                                921,294      4
         Rheometric Scientific, Inc.                                              1,005,901       7              859,589      3
         The Garden Companies, Inc.                     432,804       7             816,400       6              816,400      3
         Big V Holding Corporation                      788,222      12             800,221       6              813,741      3
         Celadon Group, Inc.                                                        198,333       2              703,944      3
         Knogo North America, Inc.                                                   11,485                      524,000      2
         Silgan Containers Corporation                                                                           491,260      2
         Westell Technologies, Inc.                                                                              441,853      2
         Wal-Mart Stores, Inc.                          353,483       5             397,226       3              397,226      2
         GDE Systems, Inc.                                                                                       334,734      1
         Vermont Teddy Bear Co., Inc.                                                                            296,857      1
         Pagg Corporation                                                                                        284,628      1
         Childtime Childcare, Inc.                                                                               218,813      1
         Career Education Corporation                                                                            202,701      1
         Perry Graphic Communications, Inc.                                                                                
             and Judd's Incorporated                                                                              82,800   
         Sandwich Bancorp, Inc.                                                                                   15,707   
                                                     ----------     ---         -----------     ---          -----------    --- 
                                                     $6,443,233     100%        $13,979,611     100%         $26,040,357    100%
                                                     ==========     ===         ===========     ===          ===========    ===
</TABLE>


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


                                   Continued
                                     - 16 -
<PAGE>   49
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued



9.   Purchases of Real Estate:


     Randall International, Inc.:

        On October 17, 1997, the Company purchased land in Carlsbad, California
           for $2,000,000 on which an 88,329 square foot manufacturing,
           distribution and warehouse facility is being constructed, pursuant to
           net lease and construction agency agreements with Randall
           International, Inc ("Randall"). The Randall build-to-suit is expected
           to be completed no later than November 30, 1998, with the Company's
           total project costs not to exceed $7,102,000.

        The lease provides for a primary lease term commencing November 1, 1997
           through the completion date, with monthly rent payable based the
           weighted average of the Company's share of project costs advanced.
           The lease provides for a fifteen year initial lease term, commencing
           with the completion date. During the initial lease term, annual rent
           will amount to the sum of (i) the lesser of $693,072 and 10.7%
           multiplied by project costs, plus (ii) 10.7% of amounts advanced, if
           any, from a $250,000 allowance for any necessary changes in plans.


     Career Education Corporation:

        On November 12, 1997, the Company purchased land and building in Mendota
           Heights, Minnesota for $9,985,799 and assumed an existing net lease
           with Brown Institute Ltd., the obligations of which are
           unconditionally guaranteed by its parent company, Career Education
           Corporation.

        The lease provides for a lease term of eleven years and five months with
           two five-year renewal terms with annual rent of $1,115,100 for the
           first three years, subsequent to a free-rent period ending February
           28, 1998. Scheduled rents are as follows: $1,218,940 in lease years
           4-6; $1,331,040 in lease years 7-9; and $1,454,845 in lease years
           10-11.


     Perry Graphic Communications, Inc. and Judd's Incorporated:

        On December 16, 1997, the Company purchased land and six buildings in
           Baraboo and Waterloo, Wisconsin for $19,027,148 and entered into a
           net lease agreement with Perry Graphic Communications, Inc. and
           Judd's Incorporated, as joint tenants. The lease term is for 20 years
           with three five-year renewal terms and initially provides for annual
           rent of $1,888,875, with scheduled rent increases of 10% every five
           years.


                                   Continued
                                     - 17 -
<PAGE>   50
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued


     Sandwich Bancorp, Inc.:

        On December 30, 1997, the Company purchased land and the office
           headquarters and two branch facilities in Bourne, Sandwich and
           Wareham, Massachusetts of Sandwich Co-operative Bank ("Sandwich") for
           $1,820,000 and entered into a net lease agreement with Sandwich. The
           lease provides for a term of 20 years with three five-year renewal
           terms with annual rent of $182,490 and annual increases based on a
           formula indexed to increases in the Consumer Price Index. The lease
           obligations are unconditionally guaranteed by Sandwich's parent
           company, Sandwich Bancorp, Inc.

        In connection with performing services relating to the Company's real
           estate purchases, affiliates of the Company received acquisition fees
           of $242,389, $513,847 and $862,415 in 1995, 1996 and 1997.



10.  Property Leased to QMS, Inc.:

        In February 1997, the Company purchased land and building in Mobile,
           Alabama for $13,874,000 and entered into a net lease agreement with
           QMS, Inc. ("QMS"). The lease has a term of 15 years with six
           five-year renewal terms and provides for annual rent of $1,689,375
           with rent increases scheduled every three years based on a formula
           indexed to increases in the CPI. In connection with the transaction,
           the Company received warrants to purchase 100,000 shares of common
           stock of QMS at a purchase price of $6.50 exercisable at any time
           through December 2001.

        As a result of a restructuring, QMS incurred certain charges that
           resulted in violation of certain financial covenants for tangible net
           worth and fixed charge coverage ratios under the lease agreement. On
           December 8, 1997, the Company agreed to waive QMS's default for
           noncompliance with these financial covenants for a one year period,
           starting October 1997, in consideration for a $1,300,000 prepayment
           of rent and a reduction of the exercise price of the warrants for QMS
           common stock from $6.50 per share to $4.00 per share. The Company
           will pay QMS interest on the $1,300,000 at an interest rate equal to
           it's short term money market rate, starting March 1, 1998.

        The $1,300,000 received from the prepayment of rent has been applied as
           a principal prepayment on the mortgage loan collateralized by the QMS
           property. The lender has reamortized the loan and reduced monthly
           principal payments from $24,303 to $20,645.


                                   Continued
                                     - 18 -
<PAGE>   51
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued



11.  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. and a
          50% interest in Cards Limited Liability Company ("Cards LLC"), a
          general partnership that net leases office and manufacturing
          facilities to The Upper Deck Company. The interest in Cards LLC was
          purchased in January 1996. Summarized financial information of Gena,
          BB Property, and Cards LLC is as follows:


        Summarized financial information of Gena is as follows:

            (In thousands)

<TABLE>
<CAPTION>
                                                1995        1996        1997
                                                ----        ----        ----
<S>                                            <C>         <C>         <C>    
            Assets                             $22,287     $21,826     $21,274
            Liabilities                         12,382      11,832      11,235
            Capital                              9,905       9,994      10,039

            Revenues                             2,618       2,618       2,618
            Expenses                             1,470       1,439       1,387
            Net income                           1,148       1,179       1,231
</TABLE>



        Summarized financial information of BB Property is as follows:

            (In thousands)

<TABLE>
<CAPTION>
                                                1995        1996        1997
                                                ----        ----        ----
<S>                                           <C>         <C>         <C>     
            Assets                            $ 45,841    $ 45,739    $ 45,626
            Liabilities                         31,470      30,755      29,994
            Shareholders' equity                14,371      14,984      15,632
            Revenues                             4,868       4,858       4,846
            Interest and other expenses          2,844       2,786       2,756
            Net income                           2,024       2,072       2,090
</TABLE>

        Summarized financial information of Cards LLC is as follows:

            (In thousands)

<TABLE>
<CAPTION>
                                                            1996        1997
                                                            ----        ----
<S>                                                        <C>         <C>    
            Assets                                         $26,581     $26,729
            Liabilities                                     15,704      15,511
            Capital                                         10,877      11,218

            Revenues                                         2,632       2,640
            Expenses                                         1,259       1,244
            Net income                                       1,373       1,396
</TABLE>


                                   Continued
                                     - 19 -
<PAGE>   52
                  CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
                                and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued


12.  Subsequent Events:

     A.    In February 1995, the Company purchased land and buildings in
           Heyward, California for $11,860,000 and entered into a net lease with
           ETEC Systems, Inc. ("Etec"). In connection with the transaction, the
           Company was granted warrants for 159,314 shares of Etec common stock,
           exercisable at $0.45 share. In August 1996, the Company agreed to
           cancel rights to 90,546 warrants in exchange for a refund of
           approximately $2,634,000 of the original purchase price. At that
           time, the Company entered into a commitment to construct of an
           additional building at the Etec property, and, in January 1997, the
           Company purchased such 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 properties, purchasing 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 (the "Project II Improvements"), amended the existing
           lease with Etec and transferred ownership of the Etec property to a
           limited liability company, ET LLC. In addition, on April 3, 1998, ET
           LLC received a commitment for $45,000,000 of limited recourse
           mortgage financing on the Etec property.

        As amended, the initial term of the Etec lease has been extended through
           May 2014 with three five-year renewal terms at Etec's option. After
           completion of the Project II improvements, which is anticipated for
           May 1999, annual rent, assuming that entire Project II Improvement
           funding commitment is needed, will be approximately $8,622,000 with
           increases every three years based on increases to the CPI.

        Under the ET LLC limited liability company agreement., the Company
           initially has a 99.99% interest in the Project II improvements and a
           100% interest in the existing Etec properties. Corporate Property
           Associates 14 Incorporated ("CPA(R):14"), an affiliate, initially has
           a .01% interest in the Project II improvements with a commitment to
           increase such interest as much as a 49.99% interest in the Project II
           Improvements. CPA(R):14's equity commitment; however, will be limited
           to ten percent of the gross proceeds of its public offering which is
           currently in registration.

        In September 1997, the Company elected to exercise a cashless conversion
           of its remaining 68,768 Etec warrants for 68,261 shares of Etec
           common stock. At December 31, 1997, based on the stock's quoted
           per-share value, the Etec shares have a fair value of approximately
           $3,174,000.


     B.    On March 23, 1998, the company purchased land and building in
           Houston, Texas for $7,199,000 and assumed an existing lease with
           First Aid Products, Inc. ("First Aid"), as lessee. The obligations of
           First Aid are unconditionally guaranteed by its parent company,
           NutraMax Products, Inc. The lease has an initial term through April
           2013 with a five-year renewal term at the option of the lessee.
           Annual rent is $817,773 with annual increases starting in May 1998
           based on increases in the CPI, capped at 5%.


                                   Continued
                                     - 20 -
<PAGE>   53
                  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 at
           December 31, 1996 and 1997 approximates the carrying value of such
           mortgage notes. 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,
           1997. The Company has warrants for 15,500 shares of Lanxide
           Corporation ("Lanxide") common stock, 150,000 shares of Vermont Teddy
           Bear Co., Inc. ("Vermont Teddy Bear") common stock, 100,000 shares of
           QMS common stock and 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 warrant of these companies.
           As of December 31, 1997, the exercise price of the warrants of these
           publicly-traded companies was in excess of the quoted value of the
           common stock. The warrants for Vermont Teddy Bear, Rheometric and QMS
           are carried on the books at a nominal cost. The Lanxide warrants are
           carried on the books for $124,000.


14.  Accounting Pronouncements:

        In June 1997, the FASB issued Statement of Financial Accounting
           Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
           No. 130 establishes standards for reporting and display of
           comprehensive income and its components (revenues, expenses, gains
           and losses) in full set general purpose financial statements. SFAS
           No. 130 is required to be adopted in 1998. The Company is currently
           evaluating the impact, if any, of SFAS No. 130.


                                     - 21 -
<PAGE>   54
PROPERTIES

<TABLE>
<CAPTION>
 NAME OF LEASE                                                                                     TYPE OF OWNERSHIP
   OBLIGOR                        TYPE OF PROPERTY                     LOCATION                        INTEREST
--------------                    ----------------                     --------                    ------------------
<S>                               <C>                                  <C>                         <C>
BEST BUY CO., INC.                Retail Stores                        Denver and                  Ownership of a 37%
                                  -17 locations                        Fort Collins,               interest in a general
                                                                       Colorado; Aurora,           partnership owning land
                                                                       Bedford Park,               and buildings (1)
                                                                       Bloomingdale,
                                                                       Matteson and
                                                                       Schaumburg, Illinois;
                                                                       Omaha, Nebraska;
                                                                       Albuquerque, New Mexico;
                                                                       Arlington, Beaumont,
                                                                       Dallas, El Paso,
                                                                       Fort Worth, Houston,
                                                                       Plano, Texas and
                                                                       Madison, Wisconsin

BIG V HOLDING                     Supermarkets                         Ellenville                  Ownership of a 45% interest in
CORPORATION                       -2 locations                         and Warwick,                land and buildings (1)
                                                                       New York

GENSIA, INC.                      Office/Research and                  San Diego,                  Ownership of a 50%
                                  Development facility                 California                  interest in a general
                                                                                                   partnership owning land
                                                                                                   and buildings (1)

WAL-MART STORES, INC.             Distribution                         Greenfield,                 Ownership of land
                                  Facility                             Indiana                     and building (1)

ETEC SYSTEMS, INC.                Office/Manufacturing                 Hayward,                    Ownership of land
                                  Facilities                           California                  and buildings (1)

Q CLUBS, INC.                     Health Clubs                         Austin, Texas               Ownership of land
                                  -2 locations                         Houston, Texas              and buildings (1)

THE GARDEN                        Manufacturing                        Chattanooga,                Ownership of land
COMPANIES, INC.                   Facility                             Tennessee                   and building (1)

DEL MONTE                         Warehouses and a                     Mendota, Illinois;          Ownership of a 50%
CORPORATION                       Special Purpose Facility             Plover, Wisconsin;          interest in land
                                  -4 locations                         Toppenish and               and buildings (1)
                                                                       Yakima, Washington

APPLIED BIOSCIENCE                Office/Warehouse/                    Austin, Texas               Ownership of land
INTERNATIONAL, INC.               Research Facility                                                and buildings (1)

THE UPPER                         Manufacturing/                       Carlsbad,                   Ownership of a 50%
DECK COMPANY                      Office Buildings                     California                  interest in a limited
                                                                                                   liability company owning
                                                                                                   land and buildings (1)

RHEOMETRIC                        Office/Manufacturing                 Piscataway,                 Ownership of land
SCIENTIFIC, INC.                  and Warehouse Facility               New Jersey                  and buildings
</TABLE>


                                     - 22 -
<PAGE>   55
<TABLE>
<CAPTION>
 NAME OF LEASE                                                                                     TYPE OF OWNERSHIP
   OBLIGOR                        TYPE OF PROPERTY                     LOCATION                        INTEREST
--------------                    ----------------                     --------                    ------------------
<S>                               <C>                                  <C>                         <C>
TELOS                             Office Facility                      Loudon County,              Ownership of land
CORPORATION                                                            Virginia                    and buildings (1)

LANXIDE                           Research and                         Newark,                     Ownership of land
CORPORATION                       Development Facility                 Delaware                    and buildings (1)

CELADON GROUP,                    Distribution/                        Indianapolis,               Ownership of land
INC.                              Warehouse Facility                   Indiana                     and buildings

SPECTRIAN                         Office/Research                      Sunnyvale,                  Ownership of land
CORPORATION                       Facility                             California                  and building (1)

GARDEN RIDGE                      Retail Store                         Tulsa,                      Ownership of land
CORPORATION                                                            Oklahoma                    and building (1)

KNOGO NORTH                       Office/Distribution                  Hauppauge,                  Ownership of land
AMERICA, INC.                     Facility                             New York                    and building (1)

SCOTT COMPANIES, INC.             Office/Research                      San Leandro,                Ownership of land
                                  Facility                             California                  and building (1)

CHILDTIME CHILDCARE,              Childcare Centers                    Chandler, Arizona;          Ownership of land
INC.                              (under construction)                 Fleming Island, Florida;    and building (1)
                                                                       Ackworth, Georgia;
                                                                       Hauppauge, New York;
                                                                       Sugarland and
                                                                       New Territory, Texas
                                                                       and Silverdale, Washington

QMS, INC.                         Office/Research                      Mobile,                     Ownership of land
                                  Facility                             Alabama                     and building (1)

THE BON-TON                       Retail and Distribution              Allentown and               Ownership of land
STORES, INC.                      Facilities                           Johnstown,                  and buildings (1)
                                                                       Pennsylvania

SILGAN CONTAINERS                 Technology/Manufacturing             Menomonie and               Ownership of land
CORPORATION                       Facilities                           Oconomowoc,                 and buildings
                                                                       Wisconsin


PAGG CORPORATION                  Office/Research                      Milford,                    Ownership of land
                                  Facility                             Massachusetts               and building (1)

VERMONT TEDDY                     Office/ Manufacturing                Shelburne,                  Ownership of land
BEAR CO., INC.                    Facility                             Vermont                     and building (1)

GDE SYSTEMS,                      Research Facility                    San Diego,                  Ownership of land
INC.                                                                   California                  and building

TEXAS FREEZER                     Warehouse/Special                    Dallas,                     Ownership of land
COMPANY, INC.                     Purpose Facility                     Texas                       and building
                                  (Under construction)
</TABLE>


                                     - 23 -
<PAGE>   56
<TABLE>
<CAPTION>
 NAME OF LEASE                                                                                     TYPE OF OWNERSHIP
   OBLIGOR                        TYPE OF PROPERTY                     LOCATION                        INTEREST
--------------                    ----------------                     --------                    ------------------
<S>                               <C>                                  <C>                         <C>
WESTELL TECH-                     Office/ Manufacturing                Aurora,                     Ownership of land
NOLOGIES, INC.                    Facility                             Illinois                    and buildings


RANDALL                          Office/Manufacturing                  Carlsbad,                  Ownership of land
INTERNATIONAL, INC.              and Warehouse Facility                California                 and building
                                 (under construction)


CAREER EDUCATION                 Administration/                       Mendota                    Ownership of land
CORPORATION                      Classroom Facility                    Heights,                   and building
                                                                       Minnesota


PERRY GRAPHIC                    Printing Facilities                   Baraboo and                Ownership of land
COMMUNICATIONS, INC.                                                   Waterloo,                  and buildings
and JUDD'S INCORPORATED                                                Wisconsin



SANDWICH BANCORP,                Office/Banking                        Bourne,                    Ownership of land
INC.                             Facilities                            Sandwich and               and buildings (2)
                                                                       Wareham,
                                                                       Massachusetts
</TABLE>


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


                                     - 24 -
<PAGE>   57
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, 1997 there were 14,091 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 since the
Company's inception commencing with the first quarterly dividend in October
1994.

<TABLE>
<CAPTION>
                                       1995              1996                1997
                                     -------           -------             -------
<S>                                  <C>               <C>                 <C>    
                  First quarter      $.18125           $.20050             $. 2015
                  Second quarter      .18750            .20080              . 2017
                  Third quarter       .19375            .20100              . 2019
                  Fourth quarter      .20025            .20125              . 2021
                                     -------           -------             -------
                                     $.76275           $.80355             $. 8072
                                     =======           =======             =======
</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, 1997 as filed with the Securities and Exchange Commission.


                                     - 25 -