NOTES TO COMBINED FINANCIAL STATEMENTS

1. GENERAL

The accompanying financial statements represent the combined results of the registrant, First Union Real Estate Equity and Mortgage Investments (the "Trust"), and First Union Management Inc. (the "Company"). Under a trust agreement, the Common Shares of the Company are held for the benefit of the shareholders of the Trust. Accordingly, the financial statements of the Company and the Trust have been combined.

The combined financial statements included herein have been prepared by the Trust, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Trust believes that the disclosures contained herein are adequate to make the information presented not misleading. These combined financial statements should be read in conjunction with the combined financial statements and the notes thereto included in the Trust's most recent annual report on Form 10-K.

The combined financial statements reflect, in the opinion of the Trust, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the combined financial position, results of operations and cash flows for the respective periods in conformity with accounting principles generally accepted in the United States of America consistently applied.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Such estimates that are particularly susceptible to change relate to management's estimate of the impairment of real estate. In addition, estimates are used when accounting for the allowance for doubtful accounts, potentially excess and obsolete inventory, product warranty reserves, the percentage of completion method and contingencies, among others. Actual results could differ from these estimates.

Real Estate Assets

Real estate assets are stated at cost. Expenditures for repairs and maintenance are expensed as incurred. Significant renovations that extend the useful life of the properties are capitalized. Depreciation for financial reporting purposes is computed using the straight-line method. Buildings are depreciated over their estimated useful lives of 10 to 40 years, based on the property's age, overall physical condition, type of construction materials and intended use. Improvements to the buildings are depreciated over the remaining useful life of the building at the time the improvement

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is completed. Tenant improvements are depreciated over the life of the lease. The Trust annually reviews each of its properties for any impairment losses. The Trust records impairment losses when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the asset's carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount.

Cash and Cash Equivalents

Cash and cash equivalents include checking, money market and restricted cash accounts .

Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Trust's best estimate of the amount of probable credit losses in the Trust's existing accounts receivable. The Trust reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Trust does not have any off-balance-sheet credit exposure related to its customers.

Investments Available for Sale

The Trust holds US government securities with a maturity of less than one year ($44.9 million) and US government securities with one to five year maturities ($10.0 million).

The Company's investments in US government securities are accounted for as available-for-sale. Accordingly, the Company records these investments at fair value, and unrealized gains and losses are recognized through shareholders' equity, as a component of other comprehensive income. Realized gains and losses and changes for other-than-temporary impairments are included in determining net income, with related purchase costs based on specific identification.

Investment in Real Estate Securities

The Trust classifies investments in real estate equity securities with readily determinable fair values on the balance sheet as either available-for-sale or trading, based on the Trust's intent with respect to those securities. Specifically, the Trust classifies investments in equity securities with readily determinable fair values as trading securities if those securities are held principally for the purpose of selling them in the near term. All other investments in equity securities with readily determinable fair values are classified as available-for-sale.

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Inventory

Inventory is valued at the lower of weighted average cost or net realizable value and consists of transit ticketing parts and unbilled revenue recognized under the percentage completion method.

Product Warranty Policy

VenTek International Inc. ("VenTek"), an operating subsidiary of the Trust, provides product warranties for both its parking and transit ticket equipment. The warranty policy for parking equipment generally provided for one year of coverage. The warranty policy for transit ticket equipment generally provides two to two and a half years of coverage. However, with respect to the order received in the fourth quarter of 2003, no extended warranty will be provided with such equipment. VenTek's policy is to accrue the estimated cost of warranty coverage at the time the sale is recorded.

Revenue Recognition

The Trust accounts for its leases with tenants as operating leases on a straight line basis. Tenant leases generally provide for billings of certain operating costs and retail tenant leases generally provide for percentage rentals, in addition to fixed minimum rentals. The Trust accrues the recovery of operating costs based on actual costs incurred. The Company defers recognition of contingent rental income (i.e. percentage/excess rent) in interim periods until the specified target (i.e. breakpoint) that triggers the contingent rental income is achieved.

Revenue from transit ticket vending equipment and maintenance contracts is recognized by either the completed contract method or the percentage completion method as units are delivered. Under the percentage of completion method, revenue in excess of billings represents the difference between revenues recognized and billings issued under the terms of the contracts and is included as part of inventory on the accompanying combined balance sheet. VenTek reviews cost performance and estimates to complete on these contracts at least quarterly. If the estimated cost to complete a contract changes from a previous estimate, VenTek records an adjustment to earnings at that time. Revenues from the sales of parking equipment were recognized upon delivery.

Income Taxes

Deferred income taxes are recorded based on the difference between the financial statement and tax basis of assets and liabilities. Such deferred income taxes are also adjusted to reflect changes in the US tax laws when enacted and changes in blended state tax rates.

                                                                      Three Months Ended
                                                                           March 31,
                                                                -------------------------------
                                                                   2004                 2003
                                                                ----------           ----------
Basic
Net loss                                                        $     (205)              (1,032)
Preferred dividend                                                    (516)                (516)
                                                                ----------           ----------
Net loss applicable to common shares of beneficial interest     $     (721)          $   (1,548)
                                                                ==========           ===========

Basic weighted average common shares                                31,059               34,814
                                                                ==========           ==========
Net loss per share                                              $    (0.02)          $    (0.04)
                                                                ==========           ==========

Diluted
Net loss                                                        $     (205)          $   (1,032)
Preferred dividend                                                    (516)                (516)
                                                                ----------           -----------
Net loss applicable to common shares of beneficial interest     $     (721)          $   (1,548)
                                                                ==========           ===========

Basic weighted average common shares                                31,059               34,814
Convertible preferred shares                                             -                    -
                                                                ----------           ----------

Diluted weighted average common shares                              31,059               34,814
                                                                ==========           ==========
Net loss per share                                              $    (0.02)          $    (0.04)
                                                                ==========           ==========

The convertible preferred shares are not included in the diluted earnings per share calculation for the three months ended March 31, 2004 and 2003 because they are anti-dilutive.

Stock Options

The Trust accounts for stock option awards in accordance with APB No. 25, "Accounting for Stock Issued to Employees" and has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Consequently, compensation cost has not been recognized for the share option plans except for the options granted in 1999 which had an exercise price that was less than the grant date per share market price. Had the Trust applied the expense recognition provisions of SFAS No. 123, there would have been no impact on the results of operations for the periods ended March 31, 2004 and 2003.

Dividends

The Trust declared a dividend of $0.5 million ($0.525 per share) on the Trust's Series A Cumulative Preferred Shares of Beneficial Interest in the first quarter of 2004. The first quarter dividend was paid April 30, 2004 to beneficiaries of record at the close of business on March 31, 2004.

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Recently Issued Accounting Standards

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This Interpretation, as amended, clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of the Interpretation are immediately effective for all variable interests in variable interest entities created after January 31, 2003, and the Trust will need to apply its provisions to any existing variable interests in variable interest entities by no later than December 31, 2004. The Trust does not anticipate that this Interpretation will have an impact on its combined financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The statement improves the accounting for certain financial instruments that under previous guidance, issuers could account for as equity. The new statement requires that those instruments be classified as liabilities in statements of financial position. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This statement had no effect on the Trust's combined financial statements.

3. RELATED PARTY TRANSACTIONS

The affairs of the Trust and its subsidiaries are administered by FUR Advisors LLC ("FUR Advisors") pursuant to the terms of an Advisory Agreement (the "Advisory Agreement") dated December 31, 2003 between the Trust and FUR Advisors, which agreement was negotiated and approved by the Board of Trustees of the Trust prior to the acquisition by FUR Investors LLC of its interest in the Trust. FUR Advisors is controlled by and partially owned by the executive officers of the Trust. Pursuant to the terms of the Advisory Agreement, FUR Advisors is responsible for providing asset management services to the Trust and coordinating with the Trust's shareholder transfer agent and property managers. Pursuant to the terms of the Advisory Agreement, for providing these services, FUR Advisors is entitled to the following fees: (i) an asset management fee of 1% of the gross asset value of the Trust up to $100 million, .75% of the gross asset value of the Trust between $100 million and $250 million, .625% of the gross asset value of the Trust between $250 million and $500 million and .50% of the gross asset value of the Trust in excess of $500 million; (ii) property and construction management fees at commercially reasonable rates as determined by the independent Trustees of the Board; (iii) loan servicing fees (not exceeding commercially reasonable rates approved by a majority of the independent trustees) for providing administrative and clerical services with respect to loans made by the Trust to third parties; and (iv) an incentive fee equal to 20% of all distributions to Beneficiaries after December 31, 2003 in excess of (x) $71.3 million, increased by the net issuance price of all shares issued after December 31, 2003, and decreased by the redemption price of all shares redeemed after December 31, 2003, plus

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(y) a return on the amount, as adjusted, set forth in (x) equal to 7% per annum compounded annually. In addition, FUR Advisors is entitled to be reimbursed for up to $125,000 per annum for the costs associated with the employment of one or more asset managers. During the first quarter 2004 the Trust paid $384,729 for its asset management fee, $1,706 for loan servicing fees and reimbursed FUR Advisors $2,596 for costs associated with the employment of asset managers.

Effective February 1, 2004, Kestrel Management L.P., an affiliate of FUR Advisors and the Trust's executive officers, assumed property management responsibilities for Circle Tower. Pursuant to the terms of the property management agreement, Kestrel Management L.P. receives a fee equal to 3% of the monthly revenues of Circle Tower which amount is less than the amount paid to the prior property management company. During the first quarter of 2004, the Trust paid Kestrel Management L.P. $8,378.

The Trust and First Union Management Inc. ("FUMI") paid fees of $67,726 and $68,722 for the three months ending March 31, 2004 and 2003, respectively, to the Real Estate Systems Implementations Group, LLC ("RE Systems") for financial reporting and advisory services. The managing member of this firm assumed the position of Interim Chief Financial Officer of the Trust on August 18, 2000, and Interim Chief Executive Officer in January 2003. In addition, he became a Trustee of the Trust in June 2003 and resigned as Interim Chief Executive Officer and Interim Chief Financial Officer on December 31, 2003. He resigned as a Trustee of the Trust on April 15, 2004. The Trust continues to retain RE Systems on a month-to-month basis to provide services to FUMI and VenTek at a cost of $10,000 per month.

4. SHARE REPURCHASE

The Trust authorized a share repurchase plan in July 2003. The plan allows for the Trust to purchase up to $10.0 million of its Common and Preferred Shares of beneficial interest in the market or through private transactions. Through May 1, 2004 the Trust repurchased and retired 2,914,215 Common Shares for $5,323,348.

5. TERMINATION OF THE GOTHAM TRANSACTION

On February 13, 2002, the Trust entered into a definitive agreement pursuant to which the Trust agreed to merge with and into Gotham Golf Corp. ("Gotham Golf"), a Delaware corporation controlled by Gotham Partners, L.P. ("Gotham Partners"), at that time the beneficial owner of 16.8% of the Trust's outstanding Common Shares.

The proposed transaction was subject to several conditions, including the approval of the Trust's Common Shareholders and the obtaining of certain third party consents. The Trust's Common Shareholders approved the proposed transaction by the requisite majority vote at a November 27, 2002 meeting of shareholders. However, litigation was brought with respect to the proposed transaction, resulting in the granting of an injunction preventing the proposed transaction from going forward.

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On June 25, 2003 the Trust entered into a Settlement, Termination and Standstill Agreement (the "Agreement") with, among others, Gotham Partners. The Agreement provided for the termination of the merger agreement regarding the merger of the Trust with Gotham Golf, the purchase by the Trust of 5,841,233 Common Shares of the Trust owned by Gotham Partners and its affiliates for approximately $11.1 million and a termination payment to Gotham Partners of $2.4 million. The Agreement also provides that neither Gotham Partners nor any affiliate will enter into or agree to enter into any form of business combination, acquisition or other transaction involving the Trust or any majority-owned affiliate for a period of five years from the date of the Agreement. The termination payment was recognized as a general and administrative expense during the year ended December 31, 2003. See Note 9 for additional information.

6. THE FUR INVESTORS TRANSACTION

On November 26, 2003, the Trust entered into a Stock Purchase Agreement with FUR Investors, LLC, an entity controlled by real estate investor Michael L. Ashner, pursuant to which the Trust agreed to sell to FUR Investors, LLC a minimum of 5,000,000 and a maximum of 5,185,724 newly issued Common Shares at a price of $2.60 per share. As part of the transaction, FUR Investors, LLC was required to, and did, commence a tender offer to purchase up to 5,000,000 Common Shares, at a price of $2.30 per share. Upon consummation of the tender offer, on December 31, 2003, FUR Investors LLC acquired 5,000,000 Common Shares pursuant to the tender offer at a price of $2.30 per share and purchased an additional 5,000,000 newly issued Common Shares pursuant to the terms of the Stock Purchase Agreement for a price of $2.60 per share. As a result of these purchases, FUR Investors LLC acquired a total of 10,000,000 of the outstanding Common Shares representing 32.2% of the total outstanding Common Shares.

In connection with the transactions contemplated by the Stock Purchase Agreement, (i) Michael L. Ashner was appointed as the Chief Executive Officer of the Trust, (ii) the Trust entered into an Advisory Agreement with FUR Advisors, LLC, an affiliate of FUR Investors, LLC, (iii) Mr. Ashner entered into an exclusivity agreement, and (iv) FUR Investors, LLC entered into a covenants agreement pursuant to which it agreed not to take certain action which, among other things, would adversely impact the Trust's status as a real estate investment trust or its listing on the New York Stock Exchange. In addition, Daniel J. Altobello and Jeffrey Citrin resigned as members of the Board of Trustees, and three new trustees were appointed to the Board of Trustees. As a result, the Board of Trustees presently consists of six members.

In January 2004, the Board of Trustees approved a waiver to the ownership limitations set forth in the Trust's By-laws to permit Michael L. Ashner, the Chief Executive Officer of the Trust, to acquire up to 30,000 shares of the Trust's preferred shares so long as the acquisition thereof (i) is not otherwise in violation of the ownership limitations set forth in the Trust's By-laws whose purpose is to protect REIT status of the Trust and (ii) does not reduce the existing viability of the net operating loss benefits available to the Trust.

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NOTES TO COMBINED FINANCIAL STATEMENTS

7. NorthStar Loan

On March 3, 2004, the Trust acquired from Bank of America, N.A. a loan receivable from NorthStar Partnership, L.P. ("NorthStar") in the principal amount of approximately $16.9 million (the "NorthStar Loan"). The NorthStar Loan is evidenced by a Credit Agreement, Promissory Note and collateral documents. The NorthStar Loan is secured by a first priority lien on all or a portion of NorthStar's interest in Morgans Hotel Group LLC, Emmes & Company LLC and Presidio Capital Investment Company, LLC as well as certain other assets of NorthStar. Upon acquisition, the NorthStar Loan was modified to extend the maturity date for one year to May 28, 2005 and provides for an option to NorthStar to further extend the maturity date, upon payment of a one point fee, for up to two optional six-month extensions. The NorthStar Loan was further modified to provide for an initial interest rate of a minimum of 12% per annum, with a yield to maturity of 12.86%, increasing by two percentage points for each six month renewal term. In addition, NorthStar was required to establish a reserve equal to interest for six months and, upon the occurrence of certain events, to increase such reserve to one year's interest. The NorthStar Loan requires payments of interest only, is prepayable at any time, together with a premium, and requires mandatory prepayments from asset sales or refinancings after the first $9 million in proceeds from such sales or refinancings. Further, the Trust entered into an agreement pursuant to which it has an option to invest in certain transactions involving assets of NorthStar which are offered to existing equityholders of NorthStar, or their affiliates.

Due to the nature and amount of the NorthStar Loan, in order to comply with the rules applicable to real estate investment trusts, a portion of the NorthStar Loan was held by a wholly-owned subsidiary of the Trust that elected to be treated as a taxable REIT subsidiary ("TRS"). Accordingly, the portion of income allocated to the amount of the NorthStar Loan held by the taxable REIT subsidiary will be subject to corporate level tax.

In late March 2004, NorthStar indicated that it would be making a prepayment on the loan in the amount of $8.9 million, the amount then held in the TRS. In light of the expected prepayment, the portion of the loan held by the TRS was transferred to the Trust on April 1, 2004. On April 12, 2004, NorthStar made a prepayment of $8.9 million.

8. ATLANTIC REALTY

In January 2004, the Trust acquired 267,000 shares in Atlantic Realty Trust ("Atlantic Realty") (NASD:ATLRS) representing 7.5% of the outstanding shares in Atlantic Realty. The shares are classified in the balance sheet as "Investments available for sale." On January 12, 2004, the Trust contacted Atlantic Realty to discuss a possible business combination between Atlantic Realty and the Trust and made a proposal to the Atlantic Realty which proposal was subsequently modified on April 19, 2004. In general, the proposal seeks to merge Atlantic Realty with and into the Trust, or a subsidiary thereof, with holders of Common Shares in Atlantic Realty receiving either (i) $19.25 per share or (ii) 0.8 shares of the Trust's the Series A cumulative convertible redeemable preferred shares of beneficial interest (the "Preferred

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Shares"). In the event that holders of Atlantic Realty shares holding more than 1,315,000 of such shares in the aggregate elect to receive Preferred Shares, such shareholders will receive (i) a number of Preferred Shares equal to (a) .8 multiplied by (b) a fraction, the numerator of which is 1,315,000 and the denominator of which is the total number of Atlantic Realty shares to be exchanged for Preferred Shares and (ii) cash equal to (x) $19.25 multiplied by
(y) a fraction, the numerator of which is the number of Atlantic Realty shares to be exchanged for Preferred Shares less 1,315,000 and the denominator of which is the number of Atlantic Realty shares to be exchanged for Preferred Shares. The consideration would be subject to upward or downward adjustment, as the case may be, based (i) on a projected post-closing net cash balance of Atlantic Realty of $13,500,000 and (ii) any stock splits, issuances, repurchases, reclassifications and other transactions affecting the value of Atlantic Realty. The proposal also provides that it is subject to, among other things, the satisfactory completion by the Trust of a five-business day due diligence review of Atlantic Realty. In addition, the Trust requested a waiver to acquire in excess of 9.8% of the outstanding shares in Atlantic Realty. The terms proposed by Atlantic Realty in response to the Trust's request for a waiver were rejected by the Trust and no such waiver was obtained. On May 5, 2004, Atlantic Realty issued a press release announcing that it has rejected the Trust's offer.

9. LEGAL PROCEEDINGS

PREFERRED AND COMMON SHAREHOLDER LAWSUITS

Kimeldorf v. First Union Real Estate Equity and Mortgage Investments, et al. In December 2002, the two plaintiffs in previously filed purported class actions brought on behalf of the holders of the Trust's preferred shares of beneficial interest filed a consolidated amended complaint, styled Kimeldorf et al. v. First Union, et al, the Supreme Court of New York, New York County alleging, among others, breach of contract; aiding and abetting breach of contract; tortious interference with the contract; breach of fiduciary duties; aiding and abetting of breach of fiduciary duties; and unconscionability against the defendants.

On June 25, 2003 the Trust entered into a Settlement, Termination and Standstill Agreement (the "Agreement") which provided for the termination of the merger agreement regarding the merger of the Trust with Gotham Golf, the purchase by the Trust of 5,841,233 Common Shares of the Trust owned by Gotham Partners and its affiliates for approximately $11.1 million and a termination payment to Gotham Partners of $2.4 million. The Agreement also provides that neither Gotham Partners nor any affiliate will enter into or agree to enter into any form of business combination, acquisition or other transaction involving the Trust or any majority-owned affiliate for a period of five years from the date of the Agreement.

As of January 23, 2004, the parties to the consolidated Kimeldorf case entered into a Memorandum of Understanding ("MOU") providing for the terms of the resolution of the litigation. Under the terms of the MOU, the consolidated Kimeldorf case will be dismissed with prejudice and no payment of any kind will be made to the plaintiffs or their counsel in connection

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with the dismissal. Each party will bear its own fees, costs, and expenses of the litigation. The parties to the consolidated Kimeldorf case submitted the pleadings to the Court in order to effectuate the terms of the MOU during the first quarter of 2004.

Fink v. First Union Real Estate Equity and Mortgage Investments. On or about January 24, 2003, the Trust was served with a complaint filed in the Supreme Court of New York, New York County on behalf of a purported holder of the Trust's Common Shares, on behalf of himself and the Common Shareholders as a class, which complaint was subsequently amended on or about July 3, 2003. The lawsuit seeks a declaration that the lawsuit is maintainable as a class action and a certification that the plaintiff, Robert Fink, is the representative of the class. Among the allegations asserted are breach of fiduciary duty and aiding and abetting thereof in connection with the transactions contemplated by the Merger Agreement. The relief requested by the plaintiff includes an order permitting the creation of a shareholders' committee composed of the Trust's Common Shareholders and their representatives to manage the affairs of the Trust, compensatory damages, the costs and disbursements of plaintiff's counsel, and the return to the Trust of the termination fee paid to Gotham as well as the consideration paid for Gotham's shares in the Trust. The parties have stipulated that the defendants need not answer or otherwise respond to the amended complaint for an indefinite period of time. The stipulation is revocable by the plaintiff at any time. In light of the rulings and ultimate settlement of the Kimeldorf case and the similarity of the actions alleged in this matter, the Trust expects to file a motion to dismiss during the second quarter of 2004. The Trust does not believe that this matter will have a material impact on its combined financial statements.

PEACH TREE MALL LITIGATION

The Trust, as one plaintiff in a class action composed of numerous businesses and individuals, has pursued legal action against the State of California associated with the 1986 flood of Sutter Buttes Center, formerly Peach Tree Mall. In September 1991, the court ruled in favor of the plaintiffs on the liability portion of the suit, which the State of California appealed. In the third quarter of 1999, the 1991 ruling in favor of the Trust and the other plaintiffs was reversed by the State of California Appeals Court, the case was remanded to the trial court for further proceedings. After the remand to the trial court, the Trust and the other plaintiffs pursued a retrial before the court. The retrial of the litigation commenced February 2001 and was completed July 2001. In November 2001, the trial court issued a decision that generally held in favor of the State of California. In February 2002, the plaintiffs filed a notice of appeal in the California Court of Appeals. The appellate briefing was completed in May 2003. On November 26, 2003, the Court of Appeals issued its decision reversing the decision of the trial court. The Court held that the State was liable for the damages caused by the flood. The Court of Appeals remanded the case to the trial court for a determination of the damages to plaintiffs, including the Trust, and for an award of attorney's fees and costs. The State filed a

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petition for rehearing in the Court of Appeals, which was denied on December 24, 2003. On January 2, 2004, the State filed a petition for review with the California Supreme Court. Plaintiffs, including the Trust, filed an opposition to the petition on January 21, 2004, and the State filed a reply on January 29, 2004. The California Supreme Court ruled in the Trust's favor during the first quarter of 2004 and remanded the case for a new trial solely on the issue of damages.

INDEMNITY TO IMPERIAL PARKING LIMITED

In 1999, Newcourt Financial Ltd. ("Newcourt") brought a claim in Ontario, Canada against an affiliate of the Trust and Imperial Parking Limited alleging a breach of a contract between the Trust's affiliate and Newcourt's predecessors-in-interest, Oracle Credit Corporation and Oracle Corporation Canada, Inc. The Trust's affiliate and Imperial Parking Limited brought a separate action in British Columbia, Canada against Newcourt, Oracle Credit Corporation and Oracle Corporation Canada claiming, among other things, that the contract at issue was not properly authorized by the Trust's Board of Trustees and the Imperial Parking Limited's board of directors. On March 27, 2000, in connection with the spinoff of Imperial Parking Corporation (the successor in interest to Imperial Parking Limited) to the Trust's shareholders, the Trust granted an indemnity to Imperial Parking Corporation in respect to damages arising from the outstanding actions.

Numerous attempts to settle this matter have not been successful. The Trust has reserved $600,000 in its combined financial statements for this claim. The reserved amount consists of the face amount of the contract of $425,000 and estimated costs of $175,000. The amount of Newcourt's claim, $825,000, includes its calculation of interest on the amount due at the default rate under the contract. The trial has been scheduled for the third quarter of 2004. The Trust intends to defend vigorously against the claims brought against the parties that it has indemnified and to pursue their separate claims with respect to this matter.

10. CONTINGENCIES

VenTek

The Trust has provided performance bond guarantees entered into with respect to two contracts of its subsidiary, VenTek, with transit authorities, which contracts are in the amounts of $6.2 million and $5.3 million. These contracts are for the manufacture, installation and maintenance of transit ticket vending equipment by VenTek. The guarantee in the amount of $5.3 million expired in September 2003 and the remaining guarantee in the amount of $6.2 million will expire in September 2004. As of December 31, 2003, VenTek had delivered all equipment required under these contracts and no amounts had been drawn against these guarantees. If a warranty or service claim against VenTek is made or VenTek fails or is unable to perform in accordance with the remaining contract, the Trust may be responsible for payment under the guarantee. In connection with one of the contracts, VenTek settled a claim for liquidated damages for approximately $0.1 million during the year ended December 31, 2003. During the third quarter of 2003, VenTek entered into a new contract with one of the transit authorities for $2.2 million, and received a change order for $0.8 million in the fourth quarter of 2003 from the other transit authority, to manufacture transit ticket vending machines. The contract and change order are

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presently expected to be completed by November 30, 2004. Under the terms of the contract, VenTek was required to secure a letter of credit as required by the bonding company. The Trust provided cash collateral of $1.1 million which is equal to 50 percent of the contract value of $2.2 million to secure the letter of credit.

Park Plaza Mall

Two Dillard's department stores are the anchor stores at Park Plaza Mall. Dillard's owns its facilities in Park Plaza Mall and has a Construction, Operation and Reciprocal Easement Agreement with a subsidiary of the Trust that contains an operating covenant that required Dillard's to operate these facilities continuously as retail department stores until July 2003. Dillard's and its partner, Simon Property Group, own a parcel of land of nearly 100 acres in the western part of Little Rock, Arkansas and previously announced, at various times over the last several years, their intention to build in this new location. However, the building of a mall on such location requires a zoning law change and in December 2003, the Supreme Court of Arkansas determined that any zoning changes needed to be approved by voters through a referendum. Simon Property Group announced in February 2004 that it was no longer proceeding with the proposed development.

In April 2004, RED Development announced its plans to develop a new 485,000 square foot shopping center in West Little Rock, Arkansas, which is to be anchored by Dillard's. In the event that a large-scale facility is built, Dillard's may cease operating its stores at Park Plaza Mall. Regardless of whether the proposed new shopping center is built, under the terms of the operating covenant, Dillard's has no obligation to maintain its operations at Park Plaza Mall beyond July 2003 but may continue operations at Park Plaza Mall through 2031. The Trust had approached Dillard's to extend this covenant and continues to explore options with Dillard's; however, to date, no agreement with Dillard's has been reached. In the event Dillard's closes one or both of its stores at the Park Plaza Mall, it is unlikely that it would sell or lease its two stores to comparable anchor tenants. Accordingly, the value of the Park Plaza Mall would be materially and adversely affected due to the decline in traffic and sales volume at Park Plaza Mall, and the rights of many of the tenants to terminate their leases or to pay less rent triggered by the closure of one or both of the anchor stores. The Park Plaza Mall is financed by a mortgage loan. The loss of one or both of the Dillard's stores or a significant number of other mall tenants could result in an event of default under this mortgage.

In March 2004, the Trust engaged a real estate broker to begin marketing the Park Plaza Mall property for sale. On May 10, 2004, the Trust entered into an agreement to sell the property to an unaffiliated third-party for a gross purchase price of $77,500,000. The sale, which is tentatively scheduled to close in the second or third quarter of 2004, is subject to the purchaser's due diligence review of the property and the assumption of existing loan encumbering the property by the purchaser. Accordingly there can be no assurance that the sale will be consummated or, if consummated, at the current purchase price.

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NOTES TO COMBINED FINANCIAL STATEMENTS

Other Contingency

Revenue Canada has commenced a tax audit of Imperial Parking Corp. of Canada ("Imperial Parking"). Imperial Parking has communicated to the Trust that it expects that Revenue Canada will disallow deductions previously taken by Imperial Parking. The Trust has accrued, as its best estimate, $700,000 for financial reporting purposes related to this matter, although there can be no assurance as to the ultimate outcome.

11. CIRCLE TOWER

The Trust's ownership interest in the Circle Tower office property in Indianapolis, Indiana, includes a leasehold interest in a ground lease. The original ground lease was entered into in 1910, expires in 2009 with an option for an additional 99 years which has been exercised, and contains a "gold clause" provision that may result in a rent increase if the leasehold interest is sold. The resulting rent increase could be substantial. In addition, the marketability of Circle Tower is also adversely affected by the uncertainty of the rent rate for the renewal term of the ground lease. Until the rental rates are finalized (which is not expected to occur until the period within 90 days prior to the expiration of the original term) or the Trust obtains ownership of the ground, it may be difficult to sell Circle Tower. In December 2003, the Trust deposited with an escrow agent the sum of $700,000 which amount is to be applied to the purchase of the land underlying the Indianapolis property and the expenses associated therewith. At the time the funds were deposited with the escrow agent, the Trust offered to purchase from each owner of the land their respective interests in the land at any time prior to May 31, 2004 for a price equal to such owner's allocable share of the amount placed in escrow. At May 1, 2004, the Trust had acquired interests in the land representing approximately a 75% interest in the land. The remaining balance held by the escrow agent at May 1, 2004 was $209,000.

12. BUSINESS SEGMENTS

The Trust's and Company's business segments include ownership of a shopping center, an office building, and a transit ticket equipment manufacturing company. Management evaluates performance based upon net operating income. With respect to property assets, net operating income is property rent less property operating expense, and real estate taxes. With respect to VenTek, which was a manufacturer of transit and parking ticketing equipment, net operating income is sales revenue less cost of goods sold. Corporate assets consist of cash and cash equivalents, the NorthStar loan, real estate securities and investments in US Treasury Bill and Federal Home Loan Bank Discount Notes. The parking ticket equipment business was sold on August 1, 2003. All intercompany transactions between segments have been eliminated (see table of business segments).

Business Segments (in thousands)
                                              Three Months Ended March 31,
                                              2004                   2003
                                       -----------------      -----------------
Rents and Sales
     Shopping Centers                  $          2,921       $          3,105
     Office Buildings                               370                    340
     VenTek                                       1,309                    726
                                       -----------------      -----------------
                                                  4,600                  4,171
Less - Operating Expenses and
  Costs of Goods Sold
     Shopping Centers                               960                    968
     Office Buildings                               194                    200
     VenTek                                         934                  1,087
     Corporate                                        -                     13
                                       -----------------      -----------------
                                                  2,088                  2,268
Less - Real Estate Taxes
     Shopping Centers                               203                    202
     Office Buildings                                16                     23
                                       -----------------      -----------------
                                                    219                    225
Net Operating Income (Loss)
    Shopping Centers                              1,758                  1,935
    Office Buildings                                160                    117
    VenTek                                          375                   (361)
    Corporate                                         -                    (13)
                                       -----------------      -----------------
                                                  2,293                  1,678

Business Segments (Continued)
                                             Three Months Ended March 31,
                                             2004                    2003
                                       -----------------      -----------------
Less - Depreciation and Amortization              499                    535

Less - Interest Expense                           943                  1,272

Corporate Income (Expense)
    Interest and Dividends                        254                    259
    General and administrative                 (1,310)                (1,162)
                                       -----------------      -----------------

Net Loss before Preferred Dividend       $       (205)           $    (1,032)
                                       =================      =================
Capital Expenditures
    Shopping Centers                     $         23            $         4
    Office Buildings                              627                     32
    VenTek                                          -                      2
                                       -----------------      -----------------
                                         $        650            $        38
                                       =================      =================

                                                       March 31,
                                       ----------------------------------------
                                             2004                    2003
                                       -----------------      -----------------
Identifiable Assets
    Shopping Centers                     $     57,362            $    59,529
    Office Buildings                            2,295                  2,351
    VenTek                                      1,171                  3,330
    Corporate                                  85,585                118,176
                                       -----------------      -----------------
Total Assets                             $    146,413            $   183,386
                                       =================      =================