FIRST UNION REAL ESTATE EQUITY & MORTGAGE INVESTMENTS - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

Commission file number 0-16249
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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
(Exact name of registrant as specified in its charter)

Ohio 34-6513657
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

P.O. Box 9507, 7 Bulfinch Place, Suite 500, Boston, Massachusetts 02114
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(Address of principal executive offices)

(617) 570-4614
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(Registrant's telephone number, including area code)

Indicate by check 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. Yes X No
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Indicated by check whether registrant is an accelerated filer (as identified in
Rule 12b-2 of the Exchange Act). Yes X No
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As of May 1, 2004, there were 31,058,913 shares of common stock outstanding.

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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

INDEX

Page
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Part I. Financial Information

Item 1. Combined Financial Statements:

Combined Balance Sheets as of March 31, 2004
and December 31, 2003................................................ 3

Combined Statements of Operations and Comprehensive Loss
for the Three Months Ended March 31, 2004 and March 31, 2003......... 4

Combined Statements of Cash Flows for the Three Months Ended
March 31, 2004 and March 31, 2003.................................... 5

Notes to Combined Financial Statements............................... 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 21

Item 3. Quantitative and Qualitative Disclosure about Market Risk............ 28

Item 4. Controls and Procedures.............................................. 28

Part II. Other Information:

Item 1. Legal Proceedings.................................................... 29

Item 4. Submission of Matters to a Vote of Security Holders.................. 31

Item 6. Exhibits and Reports on Form 8-K..................................... 32

Signatures ................................................................. 33

Exhibit Index ................................................................. 34

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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

COMBINED BALANCE SHEETS

(In thousands, except share data) MARCH 31, 2004
(UNAUDITED) DECEMBER 31, 2003
---------------------------- -----------------------

ASSETS
Investments in real estate, at cost
Land $ 6,680 $ 6,086
Buildings and improvements 65,940 65,897
---------------------------- -----------------------
72,620 71,983
Less - Accumulated depreciation (14,571) (14,102)
---------------------------- -----------------------
Investments in real estate, net 58,049 57,881

Cash and cash equivalents - unrestricted 5,618 14,924
- restricted 2,616 2,818

Loan receivable 16,944 -
Accounts receivable and prepayments, net of allowances
of $519 and $223, respectively 379 1,291

Investments - available for sale 54,881 68,986
Real estate securities - available for sale 6,470 -

Inventory, net of reserve 613 591

Unamortized debt issue costs, net 206 214

Other 637 133
---------------------------- -----------------------
Total Assets $ 146,413 $ 146,838
============================ =======================

LIABILITIES
Mortgage loan $ 41,370 $ 41,457
Note payable 58 64
Accounts payable and accrued liabilities 7,544 7,654
Dividends payable 516 516
Deferred items 530 427
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Total Liabilities 50,018 50,118
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CONTINGENCIES (Note 10)

SHAREHOLDERS' EQUITY

Convertible preferred shares of beneficial interest, $25 per share
liquidation preference, 2,300,000 shares authorized, 983,082 shares
outstanding at March 31, 2004 and December 31, 2003 23,131 23,131
Common Shares of beneficial interest, $1 par, unlimited authorized,
31,058,913 outstanding at March 31, 2004 and December 31, 2003 31,059 31,059
Additional paid-in capital 207,968 207,968
Accumulated other comprehensive income 396 -
Accumulated distributions in excess of net income (166,159) (165,438)
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Total Shareholders' Equity 96,395 96,720
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Total Liabilities and Shareholders' Equity $ 146,413 $ 146,838
============================ =======================

See Notes to Combined Financial Statements.

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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)

(In thousands, except per share data) FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
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REVENUES
Rents $ 3,291 $ 3,445
Sales 1,309 726
Interest and dividends 254 259
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4,854 4,430
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EXPENSES
Property operating 1,154 1,181
Cost of goods sold 934 1,087
Real estate taxes 219 225
Depreciation and amortization 499 535
Interest 943 1,272
General and administrative 1,310 1,162
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5,059 5,462
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NET LOSS BEFORE PREFERRED DIVIDENDS (205) (1,032)
Preferred dividend (516) (516)
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NET LOSS (721) (1,548)

OTHER COMPREHENSIVE INCOME
Unrealized gain on securities 396 -
-------------------------- ----------------------
Comprehensive loss $ (325) $ (1,548)
========================== ======================

PER SHARE DATA

BASIC AND DILUTED:
Net loss applicable to common shares of
beneficial interest $ (0.02) $ (0.04)
========================== ======================

BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES 31,059 34,814
========================== ======================

See Notes to Combined Financial Statements.

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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)

(In thousands) FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------------------------
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss before preferred dividends $ (205) $ (1,032)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization 499 535
Decrease in deferred items 103 138
Net changes in other operating assets and liabilities 267 392
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Net cash provided by operating activities 664 33
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (240,087) (335,812)
Purchase of real estate securities available for sale (6,054) -
Proceeds from maturity of investments 254,173 335,793
Purchase of loan receivable (16,944) -
Investments in real estate (650) (38)
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Net cash used in investing activities (9,562) (57)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note payable (6) (4)
Repayment of mortgage loan (88) (91)
Dividends paid on preferred shares of beneficial interest (516) (516)
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Net cash used in financing activities (610) (611)
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Decrease in cash and cash equivalents (9,508) (635)
Cash and cash equivalents at beginning of period 17,742 5,865
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Cash and cash equivalents at end of period $ 8,234 $ 5,230
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 943 $ 994
=================== ====================

See Notes to Combined Financial Statements.

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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

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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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

NOTES TO COMBINED FINANCIAL STATEMENTS

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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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

NOTES TO COMBINED FINANCIAL STATEMENTS

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.

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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

NOTES TO COMBINED FINANCIAL STATEMENTS

Earnings Per Share

The computation of basic and diluted earnings per common share is as
follows (in thousands, except per share data):

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

Basic weighted average common shares 31,059 34,814
Convertible preferred shares - -
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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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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

NOTES TO COMBINED FINANCIAL STATEMENTS

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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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

NOTES TO COMBINED FINANCIAL STATEMENTS

(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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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
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NOTES TO COMBINED FINANCIAL STATEMENTS

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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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
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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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NOTES TO COMBINED FINANCIAL STATEMENTS
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

14

FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

NOTES TO COMBINED FINANCIAL STATEMENTS

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

15

FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

NOTES TO COMBINED FINANCIAL STATEMENTS

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

16

FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

NOTES TO COMBINED FINANCIAL STATEMENTS

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.

17

FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

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).

18

FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

NOTES TO COMBINED FINANCIAL STATEMENTS

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

19

FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q - MARCH 31, 2004

NOTES TO COMBINED FINANCIAL STATEMENTS

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
================= =================

20

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995.

Statements contained herein may constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Any statements
contained herein which are not statements of historical facts and that address
activities, events or developments that First Union Real Estate Equity and
Mortgage Investments expects, believes or anticipates will or may occur in the
future shall be deemed to be forward-looking statements. Forward-looking
statements are inherently subject to risks and uncertainties, many of which
cannot be predicted with accuracy and some of which might not even be
anticipated. Future events, actual results and performance financial and
otherwise, could differ materially from those set forth in or contemplated by
the forward-looking statements herein. Factors that could cause actual results
to differ materially from those in forward-looking statements include the terms
of future property sales, investments and financings, general economic and
business conditions and various other risk factors listed in the registration
statement of First Union Real Estate Equity and Mortgage Investments filed with
the Securities and Exchange Commission.

This item should be read in conjunction with the financial statements, footnotes
thereto and other items contained elsewhere in the report.

GENERAL

In addition to its cash reserves, at March 31, 2004, the Trust owned the
following assets: 1) two properties, the Park Plaza Mall located in Little Rock,
Arkansas and Circle Tower, an office building located in Indianapolis, Indiana;
2) a loan, referred to as the NorthStar Loan, with a principal balance of $16.9
million, which is described below; 3) real estate securities available for sale,
primarily shares in Atlantic Realty Trust, as described below; and 4) U.S.
Treasury Bills and Federal National Mortgage Association Notes.

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

21

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 is held by a wholly-owned subsidiary of the Trust that has
elected to be treated as a taxable REIT subsidiary. 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, the borrower under the loan 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.

ATLANTIC REALTY

In January 2004, the Trust acquired 267,000 shares in Atlantic Realty Trust
(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 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

22

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.

INVESTMENT POLICY

Rather than focus on a particular type of real estate asset or a specific
geographic sector, the Trust's investments will be based, at least for the
foreseeable future, on its assessment that a potential investment is
significantly undervalued or has a greater value on a risk adjusted basis than
current opportunities in the marketplace. Additionally, the Trust will make
investments in assets believed to be underperforming and in which it believes
through an infusion of capital and improved management an appropriate return on
investment can be realized. Consequently, with certain limitations, the Trust
will seek to invest or acquire most any type of real estate asset or security.
Moreover, except as limited by the restrictions placed on the Trust in order to
meet its requirements to maintain REIT status, the Trust's investment decisions
are not materially affected by the nature of an investment or where that
investment falls in an entity's capital structure. The Trust will acquire
entities that own real estate, invest directly in the equity of a real estate
asset exclusively or through a venture, acquire preferred equity, mezzanine debt
or, if priced appropriately, the first mortgage debt of a real estate asset. At
present, it is not expected that the Trust will invest in an entity in which the
Trust does not own 100% of the equity unless the Trust has the means to acquire
control of the investment or has a contractual mechanism in place to exit the
investment for a price consistent with fair value.

In view of the foregoing, the Trust's near-term investment strategy will be to
identify and invest in discrete real estate investments consistent with the
foregoing criteria. As appropriate investment opportunities arise, the Trust
will aggressively pursue such opportunities. For the long-term, as investments
mature in value to the point where the Trust is unlikely to achieve better than
a market return on their then enhanced value, it is likely the Trust will exit
the investment and redeploy the capital to higher yielding opportunities.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Liquidity is a measurement of our ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund and
maintain investments and other general business needs. Additionally, to maintain
our status as a REIT under the Internal Revenue Code, we must distribute
annually at least 90% of our REIT taxable income. However, due to significant
tax basis net operating losses, the Trust does not anticipate that any
distributions will be required in the foreseeable future.

Our primary sources of funds for liquidity consist of cash reserves, net
cash provided by operating activities, payments received on the NorthStar Loan
and the maturities of U.S. Treasury Bills and Federal Home Loan Bank Discount
Notes.

23

Our ability to execute our business strategy, particularly the growth of
our investment portfolio, depends to a significant degree on our ability to
implement our investment policy as described above. We compete with several
other companies for investments, including other REITs, insurance companies and
other investors. Some of our competitors have greater resources than we do and
for this and other reasons, we may not be able to compete successfully for
investments.

Unrestricted and restricted cash and cash equivalents decreased by
approximately $9.0 million (to $8.7 million from $17.7 million) when comparing
the balance at March 31, 2004 to the balance at December 31, 2003.

During the first quarter of 2004, the Trust used $9.5 million for investing
activities. This consisted of $16.9 million expended to purchase the NorthStar
Loan, the purchase of real estate securities, including shares of Atlantic
Realty Trust for a price of $6.0 million, and improvements to the Trust's
properties of $0.1 million, all of which were partially offset by the excess of
maturities over purchases of U.S. government securities and commercial paper.
Operating activities for the first quarter provided cash of $0.6 million. Net
cash used for financing activities during this period was $0.6 million. Cash
used for financing activities included $.5 million in cash dividends to
preferred shareholders and $0.1 million of mortgage and note payable
amortization

The Trust declared a dividend of $0.5 million ($0.525 per share) to Series
A Cumulative Preferred Shareholders (the "Preferred Shareholders") in the first
quarter of 2004. The dividend was paid April 30, 2004 to shareholders of record
at the close of business on March 31, 2004. No cash dividend for the first
quarter was declared with respect to the Common Shares.

At March 31, 2004, the Trust owned $54.9 million in face value of U.S.
Treasury Bills and Federal National Mortgage Association Discount Notes. The
U.S. Treasury Bills and Federal National Mortgage Association Discount Notes are
of maturities of less than 90 days and classified as held to maturity. The
average yields for the three months ended March 31, 2004 and 2003 were 0.98% and
1.17%, respectively.

A summary of the Trust's borrowings and repayment timing is as follows (in
millions):

Payments Due by Period
----------------------

Less than 1 After 5
Contractual Obligations Total Year 1-3 Years 4-5 Years Years
- ----------------------- ----------- -------------- ----------- ----------- ------------

Mortgage loan payable $ 41.4 $ 0.4 $ 0.8 $ 1.0 $ 39.2
----------- -------------- ----------- ----------- ------------
Total $ 41.4 $ 0.4 $ 0.8 $ 1.0 $ 39.2
=========== ============== =========== =========== ============

The only lease with respect to which the Trust has an obligation for
payment of rent is for space occupied by VenTek, which is month to month.

24

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.

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

25

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
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.

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.

RESULTS OF OPERATIONS

Net loss applicable to common shares of beneficial interest for the three
months ended March 31, 2004 was $0.7 million as compared to net loss of $1.5
million for the three months ended March 31, 2003.

The Company's manufacturing facility, VenTek, generated a net income of
$0.4 million for the quarter ended March 31, 2004, as compared to a net loss of
approximately $0.4 million for the quarter ended March 31, 2003. Revenue
increased for the three months ended March 31, 2004 to $1.3 million from $0.7
million in 2003 and cost of goods sold decreased to $0.9 million from $1.1
million for the same period. There was no backlog for VenTek at March 31, 2004
besides the one contract and change order. Backlog represents products or
services that VenTek's customers have committed by contract to purchase. VenTek
is not actively seeking new contracts.

Property net operating income, which is rent less property operating
expenses and real estate taxes, decreased for the three months ended March 31,
2004 to $1.9 million from $2.0 million in 2003. The decrease was attributable to
a decrease in rental revenues of $154,000 due to the vacancy during 2003 by the
movie theater operator at the Park Plaza Mall. The Trust's management company is
actively seeking one or more replacement tenants. The decrease in revenue was
partially offset by a decrease in operating expenses and real estate taxes of
$27,000 and $6,000 respectively.

26

Interest income decreased by $5,000 during the three months ended March 31,
2004, as compared to 2003. The decrease is primarily the result of lower yields
available on the cash invested.

General and administrative expenses for the first quarter 2004 increased by
approximately $0.15 million when compared to the same period in 2003. During the
first three months of 2003, the largest components of the Trust's general and
administrative expenses were legal fees relating to the preferred shareholder
litigation ($0.2 million), legal fees related to the Gotham transaction ($0.2
million), other legal and accounting fees ($0.4 million), and directors and
officers insurance ($0.1 million). The balance of the first quarter 2003 general
and administrative costs ($0.3 million) related to management fees, costs
associated with shareholder relations and communications, trustee fees, and
other administrative costs incurred in connection with the operation and
management of the Trust. During the first quarter of 2004 the largest components
of the Trust's general and administrative expenses were legal and accounting
fees ($0.4 million), directors and officers insurance ($0.2 million), a
termination fee paid to the Trust's former asset management provider, Radiant
Partners LLC ($0.1 million), the asset management fee that is charged by FUR
Advisors LLC ($0.385 million) which, as described further in the footnotes to
the combined financial statements included in this report, is based upon a
percentage of the Trust's Gross Asset Value (as defined in the agreement). Also
included in the first quarter 2004 general and administrative expenses were
federal and state tax expenses incurred by the TRS described above ($.04
million) for its share of the income earned on the NorthStar Loan. The balance
of the general and administrative expenses ($0.25 million) was for costs
associated with shareholder relations and communications, trustee fees, and
other miscellaneous costs associated with the operations of the Trust.

Depreciation and amortization declined slightly to $0.5 million for the
first quarter 2004 from $0.54 million from the same period in 2003.

Interest expense declined from $1.3 million during the three months ended
March 31, 2003 to $0.9 million for the same period in 2004 due to the full
satisfaction of the senior notes on October 1, 2003.

27

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK

INTEREST RATE RISK

All of the Trust's debt outstanding at March 31, 2004 has fixed interest
rates. The Trust's investments in U.S. Treasury Bills mature in less than 90
days and therefore are not subject to significant interest rate risk.

ITEM 4. CONTROLS AND PROCEDURES

The registrant's principal executive and financial officer have, within 90
days of the filing date of this quarterly report, evaluated the effectiveness of
the registrant's disclosure controls and procedures (as defined in Exchange Act
Rules 13a - 14(c)) and has determined that such disclosure controls and
procedures are adequate to ensure that information required to be disclosed by
the registrant in the reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the Securities and Exchange Commission. There have been no significant
changes in the registrant's internal controls or in other factors that could
significantly affect such internal controls since the date of evaluation.
Accordingly, no corrective actions have been taken with regard to significant
deficiencies or material weaknesses.

28

PART II - OTHER INFORMATION

ITEM 1. 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 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
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

29

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 the operations of the Trust.

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 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.

30

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.

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

On March 15, 2004, the Trust solicited the vote from its holders of its
Common Shares of beneficial interest for the vote of two Class II Trustees, the
ratification of Deloitte & Touche LLP as the Trust's independent auditors for
2004 and amendment to the Trust's Declaration of Trust to (i) eliminate the
staggered terms of the trustees of the Trust, (ii) modify the limitations on
outside business activities placed on persons in order to be eligible to be
trustees of the Trust and (iii) eliminate the need to obtain an appraisal before
investing in any real property. The meeting to vote on these matters was held on
April 15, 2004 at which time (i) Bruce Berkowitz and Arthur Queler were elected
to as Class II Trustees of the Trust, (ii) Deloitte & Touche LLP was ratified as
the Trust's independent auditors and (ii) each of the amendments to the
Declaration of Trust were approved. As indicated in the proxy statement,
immediately following the meeting of beneficiaries, Neil Koenig and Arthur
Queler resigned as trustees and Michael L. Ashner, the Chief Executive Officer
of the Trust, and Peter Braverman, the Executive Vice President of the Trust,
were elected as trustees to fill such vacancies.

The following table indicates the votes "for" and "against" on these
matters, and abstentions.

Action Votes For Votes Against Abstentions
- ------ --------- ------------- -----------

Election of Trustees
Bruce Berkowitz 27,147,406 1,279,460 --
Arthur Queler 27,146,120 1,280,746 --

Ratification of Deloitte & Touche LLP 27,153,595 1,237,266 36,005

Elimination of Staggered Terms 27,005,256 1,372,463 50,147

Modification of Outside Business
Activities of Trustees 19,701,813 1,370,688 72,520

Elimination of Appraisal Requirement 19,447,763 1,641,897 55,361

31

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

Exhibits required by Item 601 of Regulation S-K are filed herewith or
incorporated herein by reference and are listed in the attached
Exhibit Index.

(b) Reports on Form 8-K

The following reports on Form 8-K were filed on behalf of the Trust during
the quarter ended March 31, 2004:

(i) Closing of FUR Investors Transactions

Date: Jan 2, 2004

Item: 5

(ii) Decision by KPMG LLP to not stand for re-election as independent
auditors for 2004

Date: March 3, 2004

Item: 4

(iii) Retention of Deloitte & Touche LLP as independent auditors for 2004
and fourth quarter 2003 earnings release

Date: March 12, 2004

Item: 4

32

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Trust has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

First Union Real Estate Equity and
Mortgage Investments

Date: May 12, 2004 By: /s/ Michael L. Ashner
------------------------------
Michael L. Ashner
Chief Executive Officer

Date: May 12, 2004 By: /s/ Thomas C. Staples
------------------------------
Thomas C. Staples
Chief Financial Officer

33

EXHIBIT INDEX

Exhibit Description Page
Number

(2)(a) Agreement and Plan of Merger and Contribution by and (a)
among First Union Real Estate Equity and Mortgage
Investments, that certain Ohio Trust, declared as of
October 1, 1996, by Adolph Posnick, Trustee, First Union
Management, Inc., GGC Merger Sub, Inc., Gotham Partners,
L.P., Gotham Golf Partners, L.P., Florida Golf
Associates, L.P., Florida Golf Properties, Inc., and
Gotham Golf Corp.

2(a)(1) Amendment No. 1 dated as of April 30, 2002 to the (b)
Agreement and Plan of Merger and Contribution by and
among First Union Real Estate Equity and Mortgage
Investments, that certain Ohio Trust, declared as of
October 1, 1996, by Adolph Posnick, Trustee, First Union
Management, Inc., GGC Merger Sub, Inc., Gotham Partners,
L.P., Gotham Golf Partners, L.P., Florida Golf
Associates, L.P., Florida Golf Properties, Inc., and
Gotham Golf Corp.

2(a)(2) Amendment and Restatement dated as of October 30, 2002 (c)
of Amendment No. 2 dated as of September 27, 2002 to the
Agreement and Plan of Merger and Contribution by and
among First Union Real Estate Equity and Mortgage
Investments, that certain Ohio Trust, declared as of
October 1, 1996, by Adolph Posnick, Trustee, First Union
Management, Inc., GGC Merger Sub, Inc., Gotham Partners,
L.P., Gotham Golf Partners, L.P., Florida Golf
Associates, L.P., Florida Golf Properties, Inc., and
Gotham Golf Corp.

2(a)(3) Amendment No. 3 dated as of October 24, 2002 to the (d)
Agreement and Plan of Merger and Contribution by and
among First Union Real Estate Equity and Mortgage
Investments, that certain Ohio Trust, declared as of
October 1, 1996, by Adolph Posnick, Trustee, First Union
Management, Inc., GGC Merger Sub, Inc., Gotham Partners,
L.P., Gotham Golf Partners, L.P., Florida Golf
Associates, L.P., Florida Golf Properties, Inc., and
Gotham Golf Corp.

3(a) By-laws of Trust as amended (e)

3(b) Certificate of Amendment to Amended and Restated (f)
Declaration of Trust as of March 6, 2001

3(c) Amendments to Amended and Restated Declaration of Trust 38
dated April 15, 2004

34

4(a) Form of certificate for Shares of Beneficial Interest (g)

4(b) Form of Indenture governing Debt Securities, dated (h)
October 1, 1993 between Trust and Society National Bank

4(c) First Supplemental Indenture governing Debt securities, (f)
dated July 31, 1998 between Trust and Chase Manhattan
Trust Company, National Association

4(d) Form of Note (h)

4(e) Certificate of Designations relating to Trust's Series A (i)
Cumulative Redeemable Preferred Shares of Beneficial
Interest

4(f) Warrant to purchase 500,000 shares of beneficial (e)
interest of Trust

10(a) 1999 Trustee Share Option Plan (j)

10(b) 1999 Long Term Incentive Performance Plan (j)

10(c) Registration Rights Agreement as of November 1, 1999 by (k)
and among First Union Equity and Mortgage Investments
and Gotham Partners, L.P., Gotham Partners III, L.P.,
and Gotham Partners International, Ltd.

10(d) Asset Management Agreement executed March 27, 2000 with (l)
Radiant Partners, LLC.**

10(e) Promissory note dated April 20, 2000 between Park Plaza (m)
Mall, LLC and First Union National Bank

10(f) Mortgage and Security Agreement dated April 20, 2000 (m)
between Park Plaza Mall, LLC and First Union National
Bank

10(g) Cash Management Agreement dated April 20, 2000 among (m)
Park Plaza Mall, LLC, as borrower, Landau & Heymann of
Arkansas, Inc., as manager and First Union National
Bank, as holder

10(h) Amendment to Asset Management Agreement executed May 31, (n)
2000 with Radiant Partners, LLC**

10(i) Amendment to Asset Management Agreement** (o)

10(j) Second Amendment to Asset Management Agreement** (o)

35

10(k) Third Amendment to Asset Management Agreement** (o)

10(l) Fourth Amendment to Asset Management Agreement** (o)

10(m) Fifth Amendment to Asset Management Agreement** (o)

10(n) Modification to Asset Management Agreement** (f)

10(o) Voting Agreement dated as of February 13, 2002, by and (a)
among the Trust, Gotham and Messrs. Ackman, Altobello,
Bruce R. Berkowitz, Citrin and Embry

10(p) Lease, dated as of April 26, 1910, between Frank Fauvre (p)
and Lillian Fauvre as Lessors and the German American
Trust Company as Lessee

10(q) Indemnification Agreement with Neil Koenig, dated as of (q)
April 29, 2002

10(r) Extension Letter Agreement to Asset Management (q)
Agreement, dated as of January 16, 2003

10(s) Real Estate Management Agreement between Park Plaza Mall (q)
LLC and General Growth Management Inc.

10(t) Stock Purchase Agreement between First Union Real Estate (r)
Equity and Mortgage Investments and FUR Investors, LLC,
dated as of November 26, 2003 ("Stock Purchase
Agreement"), including Annex A thereto, being the list
of Conditions to the Offer.

10(u) Guaranty of Michael L. Ashner, Guarantor, dated (r)
November 26, 2003, in favor of First Union Real Estate
Equity and Mortgage Investments, Guarantee, in the form
provided as Annex F to the Stock Purchase Agreement.

10.3(v) Advisory Agreement between First Union Real Estate (r)
Equity and Mortgage Investments and FUR Advisors, LLC.

10(w) Exclusivity Services Agreement between First Union Real (r)
Estate Equity and Mortgage Investments and Michael L.
Ashner.

10(x) Covenant Agreement between First Union Real Estate (r)
Equity and Mortgage Investments and FUR Investors, LLC.

16 Letter from KPMG (s)

36

31 Certifications Pursuant to Section 302 of the 44
Sarbanes-Oxley Act of 2002

32 Certification Pursuant to Section 906 of the 40
Sarbanes-Oxley Act of 2002

99 Press Release dated May 12, 2004 relating to Park Plaza 45
Sale Contract

(a) Incorporated by reference to the Trust's Form 8-K dated February 14, 2002
(b) Incorporated by reference to Appendix B to Amendment No. 4 to Form S-4,
Registration Statement No. 333-88144, of Gotham Golf Corp. and Southwest
Shopping Centers Co. II, L.L.C.
(c) Incorporated by reference to Appendix C to Amendment No. 4 to Form S-4,
Registration Statement No. 333-88144, of Gotham Golf Corp. and Southwest
Shopping Centers Co. II, L.L.C.
(d) Incorporated by reference to Appendix D to Amendment No. 4 to Form S-4,
Registration Statement No. 333-88144, of Gotham Golf Corp. and Southwest
Shopping Centers Co. II, L.L.C.
(e) Incorporated by reference to the Trust's 1998 Form 10-K
(f) Incorporated by reference to the Trust's 2000 Form 10-K
(g) Incorporated by reference to the Trust's Registration Statement on Form S-3
No. 33-2818
(h) Incorporated by reference to the Trust's Registration Statement on Form S-3
No. 33-68002
(i) Incorporated by reference to the Trust's Form 8-K dated October 24, 1996
(j) Incorporated by reference to the Trust's 1999 Proxy Statement for Special
Meeting held May 17, 1999 in lieu of Annual Meeting
(k) Incorporated by reference to the Trust's 1999 Form 10-K
(l) Incorporated by reference to the Trust's March 31, 2000 Form 10-Q
(m) Incorporated by reference to the Trust's Form 8-K dated May 11, 2000
(n) Incorporated by reference to the Trust's Form 8-K dated June 6, 2000
(o) Incorporated by reference to the Trust's September 30, 2000 Form 10-Q
(p) Incorporated by reference to Exhibit 10.1 to Amendment No. 3 to Form S-4,
Registration Statement No. 333-88144, of Gotham Golf Corp. and Southwest
Shopping Centers Co. II, L.L.C.
(q) Incorporated by reference to the Trust's 2002 Form 10-K
(r) Incorporated by reference to the Trust's Form 8-K dated November 26, 2003
(s) Incorporated by reference to the Trust's Form 8-K dated March 2, 2004.

37