AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1997
Registration Statement No. 333-_________

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM S-4
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933

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

AMERICAN REALTY TRUST, INC.
(Exact name of registrant as specified in its governing instrument)

GEORGIA 6513 54-0697989
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)

10670 NORTH CENTRAL EXPRESSWAY
SUITE 300
DALLAS, TEXAS 75231
(214) 692-4700
(Address and telephone number of principal executive offices)

ROBERT A. WALDMAN, ESQ.
10670 NORTH CENTRAL EXPRESSWAY
SUITE 300
DALLAS, TEXAS 75231
(214) 692-4700
(Name, address and telephone number of agent for service)

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

Copy to:
THOMAS R. POPPLEWELL, ESQ.
Andrews & Kurth L.L.P.
4400 Thanksgiving Tower
Dallas, Texas 75201

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

If any of the securities being registered on this Form are being offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]

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

CALCULATION OF REGISTRATION FEE

============================================================================================================================
Proposed maximum Proposed maximum
Title of securities Amount being offering price aggregate Amount of
being registered registered per unit(1) offering price(1) registration fee
- ----------------------------------------------------------------------------------------------------------------------------

Preferred Stock, 7,500,000 Shares $10.00 $75,000,000 $22,727.27
$2.00 par value
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock, 5,250,000 Shares (2)
$0.01 par value
============================================================================================================================

(1) Estimated solely for the purpose of computing the registration fee.

(2) Common Stock of the Registrant, to be issued upon conversion of the
Preferred Stock being registered hereunder. Such shares of Common Stock
will, if issued, be issued for no additional consideration and therefore no
registration fee is required.

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

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

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AMERICAN REALTY TRUST, INC.
-------------------------

CROSS REFERENCE SHEET TO FORM S-4

Location in
Item Number and Caption Prospectus
----------------------- ----------

A. INFORMATION ABOUT THE TRANSACTION

1. Forepart of Registration Statement and Outside Front Cover
Page of Prospectus................................................ Cover Page; Outside Front Cover Page

2. Inside Front and Outside Back Cover Pages of Prospectus........... Inside Front and Outside Back Cover Pages

3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information....................................................... *

4. Terms of the Transaction.......................................... Outside Front Cover Page

5. Pro Forma Financial Information................................... *

6. Material Contracts with the Company Being Acquired................ *

7. Additional Information Required for Reoffering by Persons
and Parties Deemed to be Underwriters............................. *

8. Interests of Named Experts and Counsel............................ *

9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities........................................ *

B. INFORMATION ABOUT THE REGISTRANT

10. Information with Respect to S-3 Registrants....................... *

11. Incorporation of Certain Information by Reference................. *

12. Information with Respect to S-2 or S-3 Registrants................ THE COMPANY, THE BUSINESS OF THE COMPANY,
SELECTED FINANCIAL DATA, MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, FINANCIAL
STATEMENTS

13. Incorporation of Certain Information by Reference................. INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE

14. Information with Respect to Registrants other than
S-3 or S-2 Registrants............................................ *

C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED

15. Information with Respect to S-3 Companies......................... **

16. Information with Respect to S-2 or S-3 Companies.................. **

17. Information with Respect to other than S-3 or S-2 Companies....... **

D. VOTING AND MANAGEMENT INFORMATION

18. Information if Proxies, Consents or Authorizations are to be
Solicited......................................................... **

3
19. Information if Proxies, Consents or Authorizations are not
to be Solicited or in an Exchange Offer........................... **

* Not applicable
** To be included in the Prospectus by means of a post - effective amendment.

PROSPECTUS

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION, DATED FEBRUARY 11, 1997

AMERICAN REALTY TRUST, INC.
PREFERRED STOCK
COMMON STOCK

American Realty Trust, Inc. (the "Company"), a Georgia corporation,
may offer from time to time shares of preferred stock, par value $2.00 per
share (the "Preferred Stock"), and in the event such Preferred Stock is
convertible, common voting stock, par value $.01 per share (the "Common Stock"),
into which such Preferred Stock is convertible having a public offering price of
up to an aggregate of $50,000,000 (or its equivalent based on the exchange rate
at the time of sale) in amounts, at prices and on terms to be determined at the
time of the offering. The Preferred Stock may be offered in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each a "Prospectus Supplement").

The specific terms of the Preferred Stock and the Common Stock
(collectively, the "Offered Securities"), in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable, the specific number of shares,
title, stated value and liquidation preference of each share, issuance price,
dividend rate (or method of calculation), dividend payment dates, any
redemption or sinking fund provisions and any conversion or exchange fund
provisions. The Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered
Securities covered by the Prospectus Supplement.

The Offered Securities may be offered by the Company directly to one
or more purchasers, through agents designated from time to time by the Company
or to or through underwriters or dealers. If any agents or underwriters are
involved in the sale of any Offered Securities, their names, and any applicable
purchase price, fee, commission or discount arrangement between or among them,
will be set forth in, or will be calculable from, the description in the
Prospectus Supplement of the method and terms of the offering of such Offered
Securities. See "Plan of Distribution." No Offered Securities may be sold
without delivery of the applicable Prospectus Supplement describing the method
and terms of the offering of such Offered Securities.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.

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

The date of this Prospectus is February 11, 1997

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports and other information with the Commission.
Reports and proxy and information statements filed by the Company with the
Securities and Exchange Commission (the "Commission") pursuant to the
informational requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New
York, New York 10048; and Chicago Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements
and other information regarding registrants, including the Company, that file
electronically with the Commission. The address of such Web site is
"http://www.sec.gov". In addition, reports, proxy statements and other
information concerning the Company (symbol: "ARB") can be inspected and copied
at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York,
New York 10005-2601, on which the shares of Common Stock of the Company are
listed.

The Company has filed with the Commission a Registration Statement
(the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act") with respect to the shares of Preferred Stock and Common
Stock of the Company. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Preferred Stock and Common
Stock, reference is made to the Registration Statement and to the exhibits
thereto. Statements contained herein concerning the provisions of certain
documents are not necessarily complete and, in each instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement
or otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference. The Registration Statement and the exhibits thereto
may be inspected without charge at the office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies thereof may be obtained from
the Commission upon payment of the prescribed fees.

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The following documents, heretofore filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference,
except as superseded or modified herein:

1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, as filed with the Commission on March 30, 1996, as amended
by Form 10-K/A, as filed with the Commission on September 25, 1996.

2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996, as filed with the Commission on May 15, 1996, as amended
by Form 10-Q/A, as filed with the Commission on September 25, 1996.

3. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1996, as filed with the Commission on August 15, 1996, as
amended by Form 10-Q/A, as filed with the Commission on September 25, 1996.

4. The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, as filed with the Commission on November 13, 1996.

5. The Company's Report on Form 8-K, dated December 18, 1996, as filed
with the Commission on January 15, 1997.

6. The Annual Report on Form 10-K for Continental Mortgage and Equity
Trust for the year ended December 31, 1995, as filed with the Commission on
March 22, 1996, as amended by Form 10-K/A, as filed with the Commission on
November 12, 1996.

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6

7. The Quarterly Report on Form 10-Q for Continental Mortgage and
Equity Trust for the quarter ended March 31, 1996, as filed with the Commission
on May 14, 1996, as amended by Form 10-Q/A, as filed with the Commission on
November 12, 1996.

8. The Quarterly Report on Form 10-Q for Continental Mortgage and
Equity Trust for the quarter ended June 30, 1996, as filed with the Commission
on August 9, 1996, as amended by Form 10-Q/A, as filed with the Commission on
November 12, 1996.

9. The Quarterly Report on Form 10-Q for Continental Mortgage and
Equity Trust for the quarter ended September 30, 1996, as filed with the
Commission on November 13, 1996, as amended by Form 10-Q/A, as filed with the
Commission on November 15, 1996.

10. The Annual Report on Form 10-K for Income Opportunity Realty Trust
for the year ended December 31, 1995, as filed with the Commission on March 13,
1996.

11. The Quarterly Report on Form 10-Q for Income Opportunity Realty
Investors, Inc. for the quarter ended March 31, 1996, as filed with the
Commission on May 9, 1996.

12. The Quarterly Report on Form 10-Q for Income Opportunity Realty
Investors, Inc. for the quarter ended June 30, 1996, as filed with the
Commission on August 12, 1996.

13. The Quarterly Report on Form 10-Q for Income Opportunity Realty
Investors, Inc. for the quarter ended September 30, 1996, as filed with the
Commission on November 12, 1996.

14. The Annual Report on Form 10-K for Transcontinental Realty
Investors, Inc. for the year ended December 31, 1995, as filed with the
Commission on March 22, 1996, as amended by Form 10-K/A, as filed with the
Commission on September 6, 1996.

15. The Quarterly Report on Form 10-Q for Transcontinental Realty
Investors, Inc. for the quarter ended March 31, 1996, as filed with the
Commission on May 13, 1996, as amended by Form 10-Q/A as filed with the
Commission on September 6, 1996.

16. The Quarterly Report on Form 10-Q for Transcontinental Realty
Investors, Inc. for the quarter ended June 30, 1996, as filed with the
Commission on August 12, 1996, as amended by Form 10-Q/A, as filed with the
Commission on September 6, 1996.

17. The Quarterly Report on Form 10-Q for Transcontinental Realty
Investors, Inc. for the quarter ended September 30, 1996, as filed with the
Commission on November 12, 1996.

18. The Annual Report on Form 10-K for National Realty, L.P. for the
year ended December 31, 1995, as filed with the Commission on March 26, 1996.

19. The Quarterly Report on Form 10-Q for National Realty, L.P. for
the quarter ended March 31, 1996, as filed with the Commission on May 14, 1996.

20. The Quarterly Report on Form 10-Q for National Realty, L.P. for
the quarter ended June 30, 1996, as filed with the Commission on August 12,
1996.

21. The Quarterly Report on Form 10-Q for National Realty, L.P. for
the quarter ended September 30, 1996, as filed with the Commission on November
12, 1996.

Each document filed subsequent to the date of this Prospectus pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to termination
of the offering of the Preferred Stock shall be deemed to be incorporated by

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7

reference in this Prospectus and shall be part hereof from the date of filing
of such document. Any statement contained in a document that is deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document that is also deemed to be
incorporated by reference herein modifies or supersedes such statement, and any
statement contained in this Prospectus shall be deemed to be modified or
superseded to the extent that a statement contained in any subsequently filed
document that also is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.

The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any document described
above (other than exhibits). Requests for such copies should be directed to
American Realty Trust, Inc., 10670 North Central Expressway, Suite 300, Dallas,
Texas 75231, Attention: Investor Relations. The Company's telephone number is
(214) 692- 4700.

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8

RATIO OF EARNINGS TO FIXED CHARGES

The following table summarizes the ratio of the Company's earnings to
combined fixed charges and preferred stock dividends (the "Earnings to Combined
Fixed Charges Ratio") for each of the five fiscal years of the Company and for
the nine months ended September 30, 1996:

NINE MONTHS
ENDED
SEPTEMBER 30 , YEAR ENDED DECEMBER 31,
------------- -----------------------------
1996 1995 1994 1993 1992 1991
----- ----- ----- ----- ----- -----

RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS 1.71 1.33 1.13 * * *

* Earnings were inadequate to cover fixed charges by $3,559,000, $6,199,000,
and $6,583,00 in 1993, 1992, and 1991 respectively.

USE OF PROCEEDS

Unless otherwise indicated in a Prospectus Supplement with respect to
the proceeds from the sale of the particular shares of Preferred Stock to which
such Prospectus Supplement relates, the Company plans to use the net proceeds
for working capital and general corporate purposes, including, among other
things, the development and acquisition of additional properties and other
acquisition transactions and the payment of certain outstanding debt.

THE COMPANY

The Company, a Georgia corporation, is the successor to a District of
Columbia business trust organized pursuant to a declaration of trust dated July
14, 1961. The business trust merged into the Company on June 24, 1988. The
Company invests in equity interests in real estate (including equity securities
of real estate-related entities), leases, joint venture development projects
and partnerships and finances real estate and real estate activities through
investments in mortgage loans. The Company has invested in private and open
market purchases in the equity securities of Continental Mortgage and Equity
Trust ("CMET"), Income Opportunity Realty Investors, Inc. ("IORI"),
Transcontinental Realty Investors, Inc. ("TCI") and National Realty, L.P.
("NRLP").

The Company's board of directors has broad authority under the
Company's governing documents to make all types of real estate investments,
including mortgage loans and equity real estate investments, as well as
investments in the securities of other entities, whether or not such entities
are engaged in real estate related activities.

Although the Company's board of directors is directly responsible for
managing the affairs of the Company and for setting the policies which guide
it, the day-to-day operations of the Company are performed by Basic Capital
Management, Inc. ("BCM" or the "Advisor"). BCM is a contractual advisor under
the supervision of the Company's board of directors. The duties of BCM include,
among other things, locating, investigating, evaluating and recommending real
estate and mortgage note investment and sales opportunities, as well as
financing and refinancing sources for the Company. BCM also serves as a
consultant in connection with the Company's business plan and investment policy
decisions made by the Company's board of directors.

BCM is a company owned by a trust for the benefit of the children of
Gene E. Phillips, the Chairman of the Board and a Director of the Company until
November 16, 1992. Gene Phillips served as a director of BCM until December 22,
1989 and as Chief Executive Officer of BCM until September 1, 1992. Gene
Phillips currently serves as a representative of the trust for the benefit of
his children which owns BCM and, in such capacity, Gene Phillips has
substantial contact with the management of BCM and input with respect to BCM's
performance of advisory services to the Company. Ryan T. Phillips and Mickey N.
Phillips, the son and brother, respectively, of Gene Phillips, are directors of
BCM and trustees of the trust for the benefit of the children of Gene Phillips,
which owns BCM. As of December 31, 1996, BCM owned 2,548,130 shares of the
Company's Common Stock, approximately 39.5% of the shares then outstanding. BCM
has been providing advisory services to the Company since February 6, 1989. BCM
also serves as advisor to CMET, IORI and TCI, and performs administrative
services for NLRP on a cost reimbursement basis.

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9

Since February 1, 1990, affiliates of BCM have provided property
management services to the Company. Currently, Carmel Realty Services, Ltd.
("Carmel, Ltd.") provides such property management services. Carmel, Ltd.
subcontracts with other entities for the provision of the property-level
management services to the Company at various rates. The general partner of
Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) Syntek West,
Inc. ("SWI"), of which Gene Phillips is the sole shareholder, (ii) Gene
Phillips and (ii) a trust for the benefit of the children of Gene Phillips.
Carmel, Ltd. subcontracts the property-level management of the Company's
hotels, shopping centers, one of its office buildings and the Denver
Merchandise Mart to Carmel Realty, Inc. ("Carmel Realty") which is owned by
SWI. Carmel Realty is entitled to receive property and construction management
fees and leasing commissions in accordance with the terms of its property-level
management agreement with Carmel, Ltd.

The Company has no employees. Employees of BCM render services to the
Company.

The Company's principal offices are located at 10670 North Central
Expressway, Suite 300, Dallas, Texas 75231. The Company's telephone number is
(214) 692-4700.

THE BUSINESS OF THE COMPANY

GENERAL

The Company, a Georgia corporation, is the successor to a District of
Columbia business trust. The Company elected to be treated as a Real Estate
Investment Trust ("REIT") under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Code"), during the period June 1, 1987
through December 31, 1990. The Company allowed its REIT tax status to lapse in
1991.

The Company's primary business is investing in equity interests in
real estate (including equity securities of real estate-related entities),
leases, joint venture development projects and partnerships and financing real
estate and real estate activities through investments in mortgage loans,
including first, wraparound and junior mortgage loans.

The Company's business is not seasonal. The Company has decided to
pursue a balanced investment policy, seeking both current income and capital
appreciation. The Company's plan of operation is to continue, to the extent its
liquidity permits, to make equity investments in lower risk real estate such as
apartment complexes and residential development projects or equity securities
of real estate-related entities and to continue to service and hold for
investment its mortgage notes. The Company also intends to pursue higher risk,
higher reward investments, such as undeveloped land where it can obtain
financing of a significant portion of a property's purchase price. The Company
also continues to seek selected dispositions of certain of its assets where the
prices obtainable for such assets justify their disposition. The Company also
intends to pursue its rights vigorously with respect to mortgage notes
receivable that are in default.

The Company's board of directors may devote available assets to
particular investments or types of investments, without restriction on the
amount or percentage of the Company's assets that may be so devoted to a single
investment or to any particular type of investment, and without limit on the
percentage of securities of any one issuer that the Company may acquire. The
Company's investment objectives and policies may be changed at any time by the
Company's board of directors without the approval of the Company's
shareholders. By allowing its REIT tax status to lapse in 1991, the Company
relieved itself of investment and operational restrictions imposed on REITs
under the Code.

The specific composition of the Company's real estate and mortgage
notes receivable portfolios from time to time depends largely on the judgment
of the Company's management as to changing investment opportunities and the
level of risk associated with specific investments or types of investments. The
Company's management intends to continue to maintain real estate and mortgage
notes receivable portfolios diversified by location and type of property.

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10

In addition to its equity investments in real estate and mortgage notes, the
Company has also invested in private and open market purchases of the equity
securities of CMET, IORI, TCI and NRLP.

REAL ESTATE

At December 31, 1995, approximately two-thirds of the Company's assets
were invested in real estate and the equity securities of real estate entities.
The Company has invested in real estate located throughout the continental
United States, either on a leveraged or nonleveraged basis. The Company's real
estate portfolio consists of properties held for investment, investments in
partnerships, properties held for sale and investments in equity securities of
CMET, IORI, TCI and NRLP.

The Company's real estate consists of raw land, commercial properties
(office buildings, shopping centers and a merchandise mart) and hotels. In
selecting new real estate investments, the location, age and type of property,
gross rents, lease terms, financial and business standing of tenants, operating
expenses, fixed charges, land values and physical condition are among the
factors considered. The Company may acquire properties subject to or assume
existing debt and may mortgage, pledge or otherwise obtain financing for its
properties. The Company's board of directors may alter the types of and
criteria for selecting new real estate investments and for obtaining financing
without a vote of the Company's shareholders.

A summary of the activity in the Company's owned real estate portfolio
during 1995 is as follows:

Owned properties in real estate portfolio at
January 1, 1995 .................................. 16*
Properties acquired through purchase .................. 2
Property acquired through settlement .................. 1
Properties released through settlement ................ (2)
Properties sold ....................................... (2)
Owned properties in real estate portfolio at
December 31, 1995 ................................ 15*
===

* Includes two residential subdivisions with a total of 33
developed residential lots at January 1, 1995 and one
residential subdivision with 22 developed residential lots at
December 31, 1995.

Properties Held for Investment. Set forth below are the Company's
properties held for investment and the average annual rental rate for
commercial properties and the average daily room rate for hotels and occupancy
at December 31, 1995, 1994 and 1993 for commercial properties and average
occupancy during 1995, 1994 and 1993 for hotels.

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Rent Per
Square Foot Occupancy
Rooms/ ----------- ---------
Property Location Square Footage 1995 1994 1993 1995 1994 1993
-------- -------- -------------- ---- ---- ---- ---- ---- ----

Office Building
- ---------------
Rosedale Towers Minneapolis, MN 84,798 Sq. Ft. $13.16 $14.46 $14.00 90% 94% 92%

Shopping Center
- ---------------
Oak Tree Village Lubbock, TX 45,623 Sq. Ft. 7.34 * * 91% * *

Park Plaza Manitowoc, WI 105,507 Sq. Ft. 5.72 5.65 5.65 93% 93% 86%

Merchandise Mart
- ----------------
Denver Mart Denver, CO 509,008 Sq. Ft. 14.53 14.18 * 96% 97% *

Hotels
- ------
Inn at the Mart Denver, CO 156 Room 44.69 42.38 * 40% 42% *
Kansas City
Holiday Inn Kansas City, MO 196 Rooms 61.66 52.47 48.76 75% 75% 70%

* Property was acquired in 1995 or 1994

Occupancy presented above is without reference to whether leases in
effect are at, below or above market rates.

In November 1995, the Company obtained the Oak Tree Village, a 42,000
square foot shopping center in Lubbock, Texas, as a portion of a settlement
with an insurance company. See "Mortgage Loans" below.

In May 1996, the Company purchased a 2,271 square foot single family
residence in Dallas, Texas for $266,000 in cash. In August 1996, the Company
financed the residence for $173,000. The Company received net financing
proceeds of $168,000 after the payment of various closing costs associated with
the financing. The loan bears interest at the prime rate plus 1%, currently
9.25% per annum, requires monthly principal and interest payments of $2,000 and
matures August 16, 2008.

Properties held for sale. In February 1995, the Company sold the
Boulevard Villas Apartments for $9.6 million. The Company initially treated the
sale as a financing transaction, the Company having provided the purchaser with
the $1.6 million down payment, by loaning a like amount, secured by a second
lien on an office building in Houston, Texas. In March 1995, the office
building was sold and the Company's loan was paid in full. The Company received
net cash of $3.4 million from the sale of the apartment complex, after the
payoff of $5.9 million in existing mortgage debt, recognizing a gain of
$924,000 on the sale. The Company paid a real estate brokerage commission of
$288,000 to Carmel Realty, an affiliate of BCM, the Company's advisor, based on
the $9.6 million sales price.

In May 1995, the Company purchased a 74.9 acre parcel of partially
developed land in Las Colinas, Texas for $13.5 million. The Company paid a real
estate brokerage commission of $405,000 to Carmel Realty based on the $13.5
million purchase price. In connection with the acquisition, the Company
borrowed $15.0 million under a term loan, which bears interest at the prime
rate plus 4%, (12.50% per annum at December 31, 1995), requires monthly
interest only payments, a 1% annual maintenance fee, principal reduction
payments of $1.5 million on the first day of November 1995 and May 1996 and
$3.0 million every six months thereafter commencing November 1996, with the
balance of principal and accrued but unpaid interest due at maturity on May 1,
1998. The term loan is secured by the land in Las Colinas, Texas, a
participation interest in two of the Company's notes receivable, land in
Atlanta, Georgia and a pledge of 586,800 NRLP units of limited partner interest
owned by the Company. The Company received net financing proceeds of $210,000
after the purchase of the land and payment of associated closing costs. In June
1995, the Company borrowed an additional $3.0 million from this lender
increasing the term loan principal balance to $18.0 million. The additional
$3.0 million borrowing was paid in full prior to its March 31, 1996 maturity
date, as discussed below.

In September 1995, the Company sold 6.9 acres of the 74.9 acre parcel
for $2.9 million in cash. In accordance with the provisions of the term loan,
the Company applied the $2.6 million net proceeds of the sale to pay down the
term loan. Such paydown was credited against the principal payments the Company
was otherwise required to make in 1995

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12

and 1996. The principal balance of the term loan was $15.5 million at December
31, 1995. The Company recognized a $1.5 million gain on the sale.

In March, 1996, the Company sold an additional 2.3 acres of the 74.9
acre parcel for $961,000 in cash. In accordance with the provisions of the term
loan, the Company applied the net proceeds of the sale, $891,000, to pay down
the term loan, $400,000 being applied to payoff the remaining balance owing on
the $3.0 million principal payment due March 31, 1996, with the remaining
$491,000 being applied against the principal payment of $1.5 million due in May
1996.

In October 1995, the Company purchased an additional tract of
partially developed land in Las Colinas, Texas, totaling 92.6 acres for $7.1
million. The Company paid a real estate brokerage commission of $212,000 to
Carmel Realty based on the $7.1 million purchase price. The Company paid
$959,000 in cash and borrowed the remaining $6.1 million. The mortgage bears
interest at the prime rate plus 5%, (13.50% at December 31, 1995), requires
monthly interest only payments through September 30, 1996, four quarterly
deferred commitment fee payments of $50,000 and $50,000 monthly principal
reduction payments beginning October 1, 1996. The principal balance, accrued
but unpaid interest and a $500,000 "maturity fee" is due at maturity on
December 1, 1996. The Company has an option to extend the maturity date to
October 1, 1997 if no event of default has occurred, written notice is given
prior to maturity and the principal balance of the loan has been reduced by
$2.1 million. The Company has also pledged to the lender, as additional
collateral for the loan, $2.0 million of newly issued shares of the Company's
Common Stock.

On February 13, 1996, the Company entered into a contract to sell 72.5
of the 92.6 acres for $12.9 million in cash. The contract calls for the sale to
close in two phases. The sale of the first phase closed in July, 1996. The
Company sold 32.3 acres of the 72.5 acres for $4.9 million in cash. The Company
applied the net proceeds of the sale, $4.7 million to pay down the term loan.
The Company recognized a gain of $2.0 million on the sale. The second phase is
to close on or before February 28, 1997.

In June 1996, the Company purchased 442 acres of partially developed
land in Denver, Colorado for $8.5 million. In connection with the acquisition,
the Company obtained purchase money financing of $7.5 million and issued 15,000
shares of the Company's Series C 10% cumulative preferred stock with an
aggregate liquidation value of $1.5 million. The excess financing proceeds of
$500,000 were applied to the various closing costs associated with the
acquisition in addition to $272,000 of such costs which the Company paid in
cash. The loan bears interest at 15% per annum, requires monthly interest only
payments at a rate of 12% with the remaining 3% being deferred and added to the
principal balance of the loan. The principal balance, accrued and unpaid
interest and a $600,000 "maturity fee" is due at maturity on June 1, 1998. The
Company paid a real estate brokerage commission of $255,000 to Carmel Realty,
based on the $8.5 million purchase price.

Also in June 1996, the Company sold for $120,000 in cash a tract of
land in Midland, Michigan that was leased under a long-term land lease. The
Company recognized a gain of $44,000 on the sale.

In July 1996, the Company purchased 568 acres of partially developed
land in Houston, Texas for $6.2 million. The Company paid $451,000 in cash and
obtained seller mortgage financing for $5.7 million. The loan bears interest at
9% per annum, requires a $500,000 principal and interest payment on November 1,
1996 and quarterly principal and interest payments of $145,000, thereafter. The
Company made the November 1, 1996 principal and interest payment. The loan
matures August 1, 1998. The Company paid a real estate brokerage commission of
$187,000 to Carmel Realty based on the $6.2 million purchase price. In
September 1996, the Company entered into a contract to sell the land for a
price in excess of the land's purchase price and carrying and estimated selling
costs. The sale, should it be consummated, would close on December 1, 1997.

In August 1996, the Company purchased a pool of assets for $3.1
million from Southmark Corporation ("Southmark"), consisting of a total of 151
acres of raw land in California, Indiana and Idaho, various percentage
interests, ranging from 15% to 45%, in five partnerships and trusts that hold
an unsecured note receivable with a principal balance of $3.4 million and
Southmark's 19.2% limited partnership interest in Syntek Asset Management, L.P.
("SAMLP"). To complete the acquisition, the Company borrowed an additional $3.0
million from the lender whose term loan is secured by the Company's 63.4 acres
of land in Las Colinas, Texas. The term loan was amended to increase

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13

the loan amount from $10.9 million to $13.9 million. The $3.0 million advance
is secured by the 122 acres of raw land purchased in California and the 19.2%
limited partnership interest in SAMLP.

Also in August 1996, the Company purchased 280 acres of partially
developed land in Dallas County, Texas for $13.5 million. The Company paid $3.8
million in cash and borrowed the remaining $9.7 million as the third advance
under the term loan from the lender discussed above. The term loan was again
amended increasing the term loan amount from $13.9 million to $19.5 million
with an additional $4.0 million being loaned on an overline advance note. The
amendment also changed the principal reduction payments to $2.0 million in
November 1996 and $3.0 million on the last day of December 1996, March 1997,
June 1997, September 1997 and January 1998, and adds 240 acres of the 280 acres
of the land purchased as additional collateral on the term loan. All other
terms of the term loan remained unchanged. The Company paid a real estate
brokerage commission of $406,000 to Carmel Realty based on the $13.5 million
purchase price.

In 1991, the Company purchased all of the capital stock of a
corporation which owned 198 developed residential lots in Fort Worth, Texas.
Through December 31, 1995, 176 of the residential lots had been sold. During
1996, 12 additional lots have been sold for an aggregate gain of $24,000. At
September 30, 1996, 10 lots remained to be sold.

MORTGAGE LOANS

In addition to real estate, a substantial portion of the Company's
assets have been and are expected to continue to be invested in mortgage notes
receivable, principally those secured by income-producing real estate. The
Company's mortgage notes receivable consist of first, wraparound, and junior
mortgage loans.

In addition to originating its own mortgage loans, the Company has
acquired existing mortgage notes either directly from builders, developers or
property owners, or through mortgage banking firms, commercial banks or other
qualified brokers. BCM, in its capacity as a mortgage servicer, services the
Company's mortgage notes receivable.

The types of properties securing the Company's mortgage notes
receivable portfolio consisted of office buildings, apartment complexes,
shopping centers, single-family residences, hotels and developed land. The
Company's board of directors may alter the types of properties subject to
mortgages in which the Company invests without a vote of the Company's
shareholders.

The Company may invest in first mortgage loans, with either short-,
medium- or long-term maturities. First mortgage loans generally provide for
level periodic payments of principal and interest sufficient to substantially
repay the loan prior to maturity, but may involve interest-only payments or
moderate or negative amortization of principal and a "balloon" principal
payment at maturity. With respect to first mortgage loans, it is the Company's
general policy to require that the borrower provide a mortgagee's title policy
or an acceptable legal opinion of title as to the validity and the priority of
the mortgage lien over all other obligations, except liens arising from unpaid
property taxes and other exceptions normally allowed by first mortgage lenders
in the relevant area. The Company may grant to other lenders participations in
first mortgage loans originated by the Company.

The following discussion briefly describes the events that affected
previously funded first mortgage loans during 1995 and the first nine months of
1996.

In June 1991, the Company entered into an asset sales agreement with
an insurance company whereby the Company sold real estate and participations in
various of its assets in an effort to develop a potential source for future
financing and to generate cash from otherwise illiquid assets. Assets
transferred by the Company pursuant to the asset sales agreement included Oak
Tree Village Shopping Center in Lubbock, Texas, with a carrying value of $2.0
million prior to transfer, a $1.5 million senior participation in a second lien
mortgage note secured by the Las Vegas Plaza, a retail shopping center in Las
Vegas, Nevada, with a carrying value of $18.8 million prior to transfer, a
$315,000 participation in a first mortgage note secured by unimproved land in
Virginia Station, Virginia and a $799,000 participation in a second lien
mortgage note secured by the Country Club Apartments in Flagstaff, Arizona. In
return, the Company received a $1.9 million participation in a first mortgage
note secured by a hotel site in Lihue, Hawaii, a

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14

$1.0 million first mortgage note secured by land in Maricopa County, Arizona, a
$118,000 first mortgage note secured by a single-family residence in Silver
Creek, Colorado and $1.5 million in cash. The asset sales agreement contained
put and guaranty provisions whereby, at any time, either party could demand
that the seller reacquire any asset sold pursuant to the terms of the asset
sales agreement for the consideration originally received. In March 1992, the
Company received payment in full on the $118,000 note secured by the
single-family residence in Silver Creek, Colorado.

In March 1992, the insurance company was placed in receivership and in
June 1992, the Company provided notice to the insurance company, under the
terms of the put and guaranty provisions of the asset sales agreement, of its
desire to divest itself of all assets received. The Receiver refused to allow
the enforcement of the put and guaranty provisions of the asset sales
agreement.

In March 1992, the Company recorded a provision for loss of $496,000
to reduce the $1.0 million note receivable secured by land in Maricopa County,
Arizona to its then estimated fair value. In June 1992, the Company foreclosed
on the land. In September 1992, the Company recorded the insubstance
foreclosure of the hotel site in Lihue, Hawaii, which secured a $1.9 million
first mortgage participation received by the Company. In March 1995, the
Company collected in full the second lien mortgage note secured by the Country
Club Apartments, but did not remit such amount to the insurance company.

A settlement between the Company and the Receiver was approved by the
court on February 15, 1995. Under the terms of the settlement, the insurance
company returned to the Company all of the assets which it received from the
Company, except for the participation in the first mortgage note secured by
unimproved land in Virginia Station, Virginia. In exchange, the Company
returned to the insurance company $1.0 million in cash and all the assets which
it received from the insurance company, other than the note secured by the
residence in Colorado which the Company had collected. The asset transfers and
the Company's cash payment were completed in the fourth quarter of 1995. The
Company incurred no loss on the settlement.

The borrower on a $1.7 million first mortgage note receivable secured
by land in Osceola, Florida, failed to pay the note on its November 1, 1993
maturity. The Company instituted foreclosure proceedings and was awarded a
summary judgment in January 1994. During 1994 and 1995, the borrower paid the
Company a total of $270,000 in nonrefundable fees to delay foreclosure on the
property until April 24, 1995. On April 21, 1995, the borrower filed for
bankruptcy protection. In July 1995, the Company filed a motion with the
bankruptcy court to lift the court's stay and allow the Company to proceed with
foreclosure. In September 1995, the bankruptcy court denied the Company's
motion to lift stay and the borrower was allowed to file a plan of
reorganization. The borrower failed to present a confirmable plan of
reorganization and the bankruptcy court converted the bankruptcy proceeding to
a Chapter 7 liquidation proceeding. On August 24, 1996, the bankruptcy court's
stay was lifted allowing the Company to proceed with foreclosure. The Company
expects to receive title to the property in December 1996. The note had a
principal balance of $1.6 million at September 30, 1996. The Company does not
expect to incur any loss resulting from foreclosing on the collateral property,
as its estimated fair value, less costs of sale, exceeds the carrying value of
the note.

In February 1996, the Company refinanced the $7.8 million of debt
collateralized by a mortgage note receivable with a balance of $18.3 million at
September 30, 1996, which is secured by the Las Vegas Shopping Center in Las
Vegas, Nevada, for $12.0 million. The Company received net refinancing proceeds
of $2.3 million after the payoff of the existing debt, payment of closing costs
associated with the refinancing and making a $1.5 million paydown on the term
loan secured by land in Las Colinas, in exchange for that lender's release of
its participation interest in the note receivable. The new loan bears interest
at 15% per annum, requires monthly principal and interest payments of $152,000
and matures February 6, 1998. The Company paid BCM a mortgage brokerage and
equity refinancing fee of $120,000 based upon the $12.0 million refinancing.

The Company may invest in wraparound mortgage loans, sometimes called
all-inclusive loans, made on real estate subject to prior mortgage
indebtedness. A wraparound mortgage note is a mortgage note having an original
principal amount equal to the outstanding balance under the prior existing
mortgage loan plus the amount actually advanced under the wraparound mortgage
loan. Wraparound mortgage loans may provide for full, partial or no

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15

amortization of principal. The Company's policy is to make wraparound mortgage
loans in amounts and on properties as to which it would otherwise make a first
mortgage loan.

In April 1996, the underlying liens relating to this wraparound
mortgage note receivable were refinanced for $16.8 million. The Company
received net cash of $11.2 million after the payoff of the two underlying liens
then totaling $2.9 million, the payment of various closing costs associated
with the refinancing and making a $1.4 million paydown on the term loan secured
by land in Las Colinas, Texas, in exchange for that lender's release of its
participation interest in the wraparound note receivable. Such paydown was
credited against the term loan payments that would have otherwise been due in
May and November 1996. The new loan bears interest at 16.5% per annum, requires
monthly interest only payments at a rate of 12.5% with the remaining 4% being
deferred and added to principal. The loan matures April 16, 1998. The Company
paid BCM a mortgage brokerage and equity refinancing fee of $168,000 based upon
the $16.8 million refinancing.

The Company may invest in junior mortgage loans. Such notes are
secured by mortgages that are subordinate to one or more prior liens either on
the fee or a leasehold interest in real estate. Recourse on such notes
ordinarily includes the real estate which secures the note, other collateral
and personal guarantees of the borrower.

The following discussion briefly describes the junior mortgage loans
funded in 1994 and the events that affected previously funded junior mortgage
notes during 1995 and the first nine months of 1996.

At December 31, 1995 and September 30, 1996, the Company held a
mortgage note receivable secured by a third lien on a commercial property in
South Carolina and personal guaranties of several individuals. The borrower had
failed to make the required payments of principal and interest since December
1, 1994. The Company accelerated the note and instituted foreclosure
proceedings, as well as actions against the guarantors of the note. Effective
September 1, 1994, the note was extended to September 1, 1996, requiring a
$68,000 principal reduction payment with the monthly interest, quarterly
principal payments and all other terms remaining the same. The Company received
$43,000 of the required principal reduction payment in 1994 and received the
remaining $25,000 in 1995 as well as the required first and second quarterly
principal reduction payments totaling $50,000. The Company and the borrower
again agreed to extend the mortgage note receivable's maturity date to
September 1, 1997. The extension required an additional $90,000 principal
reduction payment payable in three equal monthly installments beginning
November 1, 1996. The monthly interest, quarterly principal reduction payments
of $24,000 and all other terms remain the same. The first $25,000 quarterly
principal reduction payment is due December 1, 1996. The principal balance of
the note was $179,000 at September 30, 1996 and the note is performing in
accordance with its amended terms.

In May 1996, the Company funded a $100,000 second lien mortgage
secured by a single family residence in Oklahoma City, Oklahoma. The mortgage
note receivable bears interest at 10% per annum with principal and accrued but
unpaid interest due on demand. The mortgage note receivable matures June 1,
1998.

INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS AND REAL ESTATE PARTNERSHIPS

The Company's investment in real estate entities includes (i) equity
securities of three publicly traded REITs (collectively the "Trusts"), CMET,
IORI and TCI, (ii) units of limited partner interest of NRLP, (iii) a general
partner interest in NRLP and NOLP, through its 96% limited partner interest in
SAMLP, the general partner of NRLP and NOLP, and (iv) interests in real estate
joint venture partnerships. Gene E. Phillips, Chairman of the Board and a
Director of the Company until November 16, 1992, served until May 1996 as a
director and Chief Executive Officer of SAMI, a company owned by BCM that
serves as SAMLP's managing general partner. Mr. Phillips is also a general
partner of SAMLP. BCM serves as advisor to the Trusts, and performs certain
administrative and management functions

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16

for NRLP and NOLP on behalf of SAMLP. At December 31, 1996, SAMLP, the general
partner of NRLP and NOLP, owned 26,475 shares of TCI. The Company owns a 96%
limited partnership interest in SAMLP which the Company consolidates for
financial statement purposes.

Since acquiring its initial investments in the equity securities of
the Trusts and NRLP in 1989, the Company has made additional investments in the
equity securities of these entities through private and open market purchases.
The aggregate carrying value (cost plus or minus equity in income or losses and
less distributions received) of such equity securities of the Trusts and NRLP
was $35.4 million at September 30, 1996 ($36.7 million at December 31, 1995)
and the aggregate market value of such equity securities was $75.7 million
($69.2 million at December 31, 1995). The aggregate investee book value of the
equity securities of the Trusts was $61 million at September 30, 1996 and $59.7
million at December 31, 1995. The Company's share of NRLP's revaluation equity
was $161.5 million at both September 30, 1996 and December 31, 1995.

In 1990, the Company's board of directors authorized and in May 1993
reaffirmed the expenditure by the Company of up to an aggregate of $17.0
million to acquire, in open market purchases, additional units of NRLP and
shares of the Trusts. In March 1995, the Company's board of directors increased
such authorization to $25.0 million. As of December 31, 1995, the Company had
expended $2.8 million to acquire additional units of NRLP and an aggregate of
$3.0 million to acquire additional shares of the Trusts, in open market
purchases, in accordance with these authorizations. The Company expects to make
additional investments in the equity securities of the Trusts and NRLP.

The purchases of the equity securities of the Trusts and NRLP were
made for the purpose of investment and were based principally on the opinion of
the Company's management that the equity securities of each were and are
currently undervalued. The determination by the Company to purchase additional
equity securities of the Trusts and NRLP is made on an entity-by-entity basis
and depends on the market price of each entity's equity securities relative to
the value of its assets, the availability of sufficient funds and the judgment
of the Company's management regarding the relative attractiveness of
alternative investment opportunities. Substantially all of the equity
securities of the Trusts and NRLP owned by the Company are pledged as
collateral for borrowings.

Each of the Trusts and NRLP own a considerable amount of real estate,
much of which, particularly in the case of NRLP, has been held for many years.
Because of depreciation, these entities may earn substantial amounts in periods
in which they sell real estate and will probably incur losses in periods in
which they do not. The Company's reported income or loss attributable to these
entities will differ materially from its cash flow attributable to them.

The Company does not have a controlling equity interest in any of the
Trusts and therefore it cannot, acting by itself, determine either the
individual investments or the overall investment policies of such investees.
However, due to the Company's equity investments in, and the existence of
common officers with, each of the Trusts, and that the Trusts have the same
advisor as the Company and that Mr. Paulson, an Executive Officer of the
Company, is also the President of the Trusts and BCM, the Company's advisor,
and the President and a director of SAMI, a Company owned by BCM that is the
managing general partner of SAMLP, the Company may be considered to have the
ability to exercise significant influence over the operating and investing
policies of these entities. The Company accounts for its investment in these
entities using the equity method. Under the equity method, the Company
recognizes its proportionate share of the income or loss from the operations of
these entities currently, rather than when realized through dividends or on
sale. The Company continues to account for its investment in NRLP under the
equity method due to the pending resignation of SAMLP as general partner of
NRLP and NOLP. The carrying value of the Company's investment in these
entities, as set forth in the table below, is the original cost of each such
investment adjusted for the Company's proportionate share of each entity's
income or loss and distributions received.

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Equivalent
Percentage Carrying Investee
of the Company's Value of Book Value Market Value
Ownership at Investment at at of Investment at
Investee September 30, 1996 September 30, 1996 September 30, 1996 September 30, 1996
- -------- ------------------ ------------------ ------------------ ------------------

(dollars in thousands)

NRLP 52.9% $ 10,682 $ * $ 41,865

CMET 39.0% 14,617 31,745 17,564

IORI 28.9% 2,765 6,247 4,503

TCI 29.6% 6,420 23,762 11,758
---------- -----------
34,484 $ 75,690
===========

General partner
interest in NRLP
and NOLP 8,847

Other equity
investees 11,004
----------
$ 54,335
==========

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

* At September 30, 1996 and December 31, 1995, NRLP reported a deficit
partners' capital. The Company's share of NRLP's revaluation equity at
December 31, 1995, was $161.5 million. Revaluation equity is defined
as the difference between the appraised value of the partnership's
real estate, adjusted to reflect the partnership's estimate of
disposition costs, and the amount of the mortgage notes payable and
accrued interest encumbering such property as reported in NRLP's
Annual Report on Form 10-K for the year ended December 31, 1995.

The difference between the carrying value of the Company's investment
and the equivalent investee book value is being amortized over the life of the
properties held by each investee.

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SELECTED FINANCIAL DATA

Nine Months Ended September 30, For the Years Ended December 31,
------------------------------ --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(dollars in thousands, except per share)

EARNINGS DATA
Revenue ................................ $ 19,442 $ 18,698 $ 22,952 $ 23,070 $ 13,427 $ 11,481 $ 13,687
Expense ................................ 29,211 25,143 33,437 29,019 22,142 21,631 25,465
--------- --------- --------- --------- --------- --------- ---------
(Loss) before gain on sale
of real estate and
extraordinary gain ............ (9,769) (6,445) (10,485) (5,949) (8,715) (10,150) (11,778)
Gain on sale of real estate ............ 7,799 2,544 6,866 3,200 481 566 1,271
--------- --------- --------- --------- --------- --------- ---------
(Loss) before extraordinary gain ....... (1,970) (3,901) (3,619) (2,749) (8,234) (9,584) (10,507)
Extraordinary gain ..................... 381 758 783 323 3,807 -- 7,628
--------- --------- --------- --------- --------- --------- ---------
Net (loss) ............................. (1,589) (3,143) (2,836) (2,426) (4,427) (9,584) (2,879)
Preferred Dividend
Requirement ............................ (65) -- -- -- -- -- --
Redeemable Common Stock,
accretion of discount ......... -- -- -- -- (129) (258) --
--------- --------- --------- --------- --------- --------- ---------
(Loss) applicable to
Common Shares ................. $ (1,654) $ (3,143) $ (2,836) $ (2,426) $ (4,556) $ (9,842) $ (2,879)
========= ========= ========= ========= ========= ========= =========
PER SHARE DATA
(Loss) before extraordinary
gain .......................... (.32) (.67) $ (.61) $ (.45) $ (1.36) $ (1.95) $ (2.48)
Extraordinary Gain ..................... .06 .13 .13 .05 .63 -- 1.80
--------- --------- --------- --------- --------- --------- ---------
Net (loss) ............................. (.26) (.54) (.48) (.40) (.73) (1.95) (.68)
Redeemable Common Stock,
accretion of discount ......... -- -- -- -- (.02) (.05) --
--------- --------- --------- --------- --------- --------- ---------
(Loss) applicable to
Common shares ................. $ (.26) $ (--) $ (.48) $ (.40) $ (.75) $ (2.00) $ (.68)
========= ========= ========= ========= ========= ========= =========
Dividends per share .................... $ .10 $ -- $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- --------- --------- ---------
Weighted average shares
outstanding ................... 6,354,447 5,858,328 5,858,328 6,104,438 6,050,550 4,906,584 4,235,398

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September 30, December 31,
------------- -----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(dollars in thousands, except per share)

BALANCE SHEET DATA
Notes and interest
receivable..... $ 49,293 $ 49,741 $ 45,664 $ 51,769 $ 72,808 $ 68,507
Real estate............. 88,999 59,424 47,526 52,437 45,317 52,654
Total assets............ 205,125 162,033 137,362 139,861 151,010 153,131
Notes and interest
payable................. 107,613 61,163 45,695 53,693 63,698 65,074
Shareholders'
equity.................. 51,932 53,058 55,894 56,120 60,476 70,221
Book value per share.... $ 7.71 $ 9.06 $ 9.54 $ 11.11 $ 11.88 $ 16.58

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

Shares and per share data have been adjusted for the 2 for 1 forward Common
Stock split effected January 2, 1996.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

INTRODUCTION

American Realty Trust, Inc. (the "Company") was organized in 1961 to
provide investors with a professionally managed, diversified portfolio of
equity real estate and mortgage loan investments selected to provide
opportunities for capital appreciation as well as current income.

LIQUIDITY AND CAPITAL RESOURCES

General. Cash and cash equivalents at September 30, 1996 and December
31, 1995 aggregated $1.1 million. Although the Company anticipates that it will
generate excess cash flow from operations during 1996, as discussed below, such
excess cash is not expected to be sufficient to discharge all of the Company's
debt and interest payment obligations as they come due. The Company will
therefore continue to rely on externally generated funds, including borrowings
against its investments in various real estate entities, mortgage notes
receivable, the sale or refinancing of properties and, to the extent available
or necessary, borrowings from its advisor to meet its debt service obligations,
pay taxes, interest and other non-property related expenses.

At December 31, 1995, notes payable totaling $26.4 million had
scheduled maturities during 1996. Through September 30, 1996 the Company has
paid a total of $10.9 million of such debt and refinanced an additional $12.1
million. The Company intends to either pay off, extend the maturity dates or
obtain alternate financing for the remaining $3.4 million of debt obligations
that mature during the remainder of 1996. There can be no assurance, however,
that these efforts to obtain alternative financing or debt extensions will be
successful.

The Company expects an increase in cash flow from property operations
during 1996. Such increase is expected to be derived from operations of the
Denver Merchandise Mart, the Kansas City Holiday Inn and the Oak Tree Village
Shopping Center. The Company also expects continued lot sales at its Texas
residential subdivisions and sales of its land holdings to generate additional
cash flow.

In March 1996, the Company sold 2.3 acres of the 74.9 acre parcel in
Las Colinas, Texas for $961,000 in cash. In accordance with the provisions of
the term loan, the Company applied the $891,000 net proceeds of the sale to pay
down the term loan.

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In April 1996, a subsidiary of the Company purchased for $10.7 million
in cash 80% of the common stock of an entity that had acquired 26 operating
pizza parlors in various communities in California's San Joaquin Valley.

Also in April 1996, the Company purchased a 28% general partner
interest in Campbell Center Associates, Ltd. for $550,000 in cash and a
$500,000 four-year note.

In May 1996, the Company sold an additional 2.3 acres of the 74.9 acre
parcel in Las Colinas, Texas for $941,000 in cash. In accordance with the
provisions of the term loan, the Company applied the $864,000 net proceeds of
the sale to paydown the term loan.

In June 1996, the Company purchased 442 acres of partially developed
land in Denver, Colorado for $8.5 million. In connection with the purchase, the
Company obtained purchase money financing of $7.5 million and issued 15,000
shares of the Company Series C 10% Cumulative Preferred Stock with an aggregate
liquidation value of $1.5 million. The excess financing proceeds of $500,000
was applied to the various closing costs associated with the acquisition in
addition to $272,000 of such costs paid by the Company.

Also in June 1996, the Company sold a tract of land that was leased
under a long-term ground lease for $120,000 in cash.

In July 1996, a newly formed limited partnership of which the Company
is the general partner acquired 580 acres of land in Collin County, Texas for
$5.7 million in cash. The Company paid $100,000 in cash with the remaining $5.6
million being contributed by the limited partner.

In October 1995, the Company purchased 92.6 acres of partially
developed land in Las Colinas, Texas. In February 1996, the Company entered
into a contract to sell 72.5 of the 92.6 acres for $12.9 million in cash. In
July 1996, the Company closed the first phase of the contract selling 32.3
acres for $4.9 million in cash. In accordance with the provisions of the term
loan, the Company applied the $4.7 million net proceeds to paydown the term
loan in exchange for that lender's release of its collateral interest in such
land.

In August 1996, the Company purchased a pool of assets for $3.1
million, from Southmark Corporation ("Southmark") consisting of raw land
totaling 151 acres in California, Indiana and Idaho, various percentage
interests, ranging from 15% to 45%, in five partnerships and trusts that hold
an unsecured note receivable with a principal balance of $3.4 million and
Southmark's 19.2% limited partnership interest in SAMLP. In connection with the
acquisition, the Company borrowed $3.0 million.

On June 12, 1996, the Company's Board of Directors announced the
resumption of dividend payments at the initial rate of $.10 per share, per
quarter. Through September 30, 1996, the Company has paid dividends totaling
$.20 per share or $1.3 million.

Also on June 12, 1996, the Company announced the redemption of the
share purchase rights for $.01 per right. The redemption price, totaling
$101,000, was paid on July 8, 1996 to shareholders of record on June 21, 1996.

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The Company expects that funds from existing cash resources,
collections on mortgage notes receivable, sales or refinancing of real estate
and/or mortgage notes receivable, and borrowings against its investments in
marketable equity securities, mortgage notes receivable and to the extent
available, borrowings from the Company's advisor, will be sufficient to meet
the cash requirements associated with the Company's current and anticipated
level of operations, maturing debt obligations and existing commitments. To the
extent that the Company's liquidity permits or financing sources are available,
the Company may make investments in real estate, primarily investments in
partially developed and/or raw land, continue making additional investments in
real estate entities and marketable equity securities and fund or acquire
mortgage notes.

The Company expects that it will be necessary for it to sell $9.1
million and $23.0 million of such land in each of the next two years,
respectively, to satisfy the debt on land holdings as it matures. If the
Company is unable to sell at least the minimum amount of land to satisfy the
debt obligations on such land as it matures, the Company, if it was not able to
extend such debt, would either sell other of its assets to pay such debt or
return the property to the lender.

Notes Receivable. The Company has received $640,000 in principal
payments on its notes receivable in the nine months ended September 30, 1996.

At September 30, 1996, the Company held a mortgage note receivable
secured by a third lien on a commercial property in South Carolina and personal
guaranties of several individuals. The borrower had failed to make the required
payments of principal and interest since December 1, 1994. The Company
accelerated the note and instituted foreclosure proceedings, as well as actions
against the guarantors of the note. Effective September 1, 1995, the note was
extended to September 1, 1996, requiring a $68,000 principal reduction payment
with the monthly interest, quarterly principal payments and all other terms
remaining the same. The Company received $43,000 of the required principal
reduction payment in 1995 and received the remaining $25,000 in 1996 as well as
the required first and second quarterly principal reduction payments totaling
$50,000. The Company and the borrower have again agreed to extend the mortgage
note receivable's maturity date to September 1, 1997. The extension required an
additional $90,000 principal reduction payment payable in three equal monthly
installments beginning November 1, 1996. The monthly interest, quarterly
principal reduction payments of $25,000 and all other terms remain the same.
The first $25,000 quarterly principal reduction payment was due December 1,
1996. The principal balance of the note was $179,000 at September 30, 1996 and
the note is now performing in accordance with its terms.

Loans Payable. In February 1996, the Company refinanced $7.8 million
of debt collateralized by a mortgage note receivable with a balance of $18.4
million which is secured by the Las Vegas Shopping Center in Las Vegas, Nevada,
for $12.0 million. The Company received net cash of $2.3 million after the
payoff of the existing debt, payment of closing costs associated with the
refinancing and making a $1.5 million paydown on the term loan secured by land
in Las Colinas, Texas in exchange for that lender's release of its
participation interest in the note receivable.

In April 1996, the Company refinanced the first and second lien
mortgage debt on its $22.0 million wraparound mortgage note receivable secured
by the Continental Hotel and Casino in Las Vegas, Nevada for $16.8 million. The
Company received net cash of $11.2 million after the payoff of the two
underlying liens totaling $2.9 million, various closing costs associated with
the refinancing and making a $1.4 million paydown on the term loan secured by
land in Las Colinas, Texas in exchange for that lender's release of its
participation interest in the note receivable.

Also in April 1996, the Company refinanced $5.1 million of first and
second lien mortgage debt secured by the Denver Merchandise Mart for $15.0
million. The Company received net refinancing proceeds of $7.8 million after
the payoff of the first and second lien debt, purchasing the ground lease on
Denver Merchandise Mart for $678,000 and payment of various closing costs
associated with the refinancing.

In August 1996, the Company refinanced the $2.4 million first lien
mortgage debt secured by the Rosedale Towers Office Building in Roseville,
Minnesota for $2.8 million. The Company received net refinancing proceeds of
$154,000 after the payoff of the first lien debt of $2.4 million and payment of
various closing costs associated with the refinancing. The Company also
received 282,352 shares of Common Stock of the Company that it had pledged as
additional collateral on the existing mortgage debt.

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Also in August 1996, the Company financed the previously unencumbered
Inn at the Mart in Denver, Colorado for $2.0 million to facilitate renovating
the property. The Company received net financing proceeds of $890,000 after the
payment of various closing costs associated with the financing and a $1.1
million renovation holdback. The lender advanced the $1.1 million renovation
holdback in December 1996.

In October 1996, the Company completed the sale of $1.1 million in
11-1/2% senior subordinated notes in a private placement.

Equity Investments. During the fourth quarter of 1988, the Company
began purchasing shares of various real estate investment trusts having the
same advisor as the Company, and units of limited partner interest in National
Realty, L.P. ("NRLP"). It is anticipated that additional equity securities of
NRLP and the REITs, Continental Mortgage and Equity Trust ("CMET"), Income
Opportunity Realty Investors, Inc., formerly Income Opportunity Realty Trust
(collectively "IORI") and Transcontinental Realty Investors, Inc. ("TCI"), will
be acquired in the future through open-market and negotiated transactions to
the extent the Company's liquidity permits.

The Company has margin arrangements with various brokerage firms which
provide for borrowing up to 50% of the market value of the Company's marketable
equity securities. The borrowing under such margin arrangements are secured by
equity securities of the REITs, and the Company's trading portfolio and bear
interest rates ranging from 6.5% to 9.25%. Margin borrowing totaled $36.8
million at September 30, 1996.

In August 1996, the Company consolidated its existing NRLP margin debt
held by the various brokerage firms into a single loan of $20.3 million. The
loan is secured by the Company's NRLP units with a market value of at least 50%
of the principal balance. The Company received $1.9 million in cash after the
payment of $617,000 in various closing costs associated with the financing and
a $17.8 million holdback, pending the lender's receipt of the remaining NRLP
units as collateral. As of October 31, 1996, the Company had pledged 3,208,119
NRLP units with a market value of $39.8 million and the lender had released
$16.8 million of the holdback directly to the brokerage firms in payment of the
margin debt related to the NRLP units pledged. The lender received the final
200,600 NRLP units with a market value of $2.4 million in November 1996. These
NRLP units were being held as additional collateral on the term loan secured by
the Company's 63.4 acres of Las Colinas land and were released upon receipt of
a $2.0 million term loan paydown in November 1996.

Also in August 1996, the Company obtained a $2.0 million margin loan
from a financial institution secured by a pledge of $4.0 million of previously
unencumbered equity securities of the REITs owned by the Company and Common
Stock of the Company owned by BCM. The Company received $1,966,000 in net cash
after the payment of closing costs associated with the margin loan. The loan
bears interest at the prime rate plus 2.25%, currently 10.50% per annum,
requires monthly interest only payments and matures August 2, 1997.

In September 1996, the same lender made a second $2.0 million loan.
The second margin loan is secured by a pledge of $5.0 million previously
unencumbered equity securities of the REITs owned by the Company and Common
Stock of the Company owned by BCM. The Company received $1,970,000 in net cash
after the payment of closing costs associated with the margin loan. The margin
loan bears interest at the prime rate plus 2.25%, currently 10.50% per annum,
requires interest only payments and matures September 27, 1997.

Equity securities of the REITs and NRLP held by the Company may be
deemed to be "restricted securities" under Rule 144 of the Securities Act of
1933. Accordingly, the Company may be unable to sell such equity securities
other than in a registered public offering or pursuant to an exemption under
the Securities Act for a period of two years after they are acquired. Such
restrictions may reduce the Company's ability to realize the full fair market
value of such investments if the Company attempted to dispose of such
securities prior to such two year period.

The Company's cash flow from these investments is dependent on the
ability of each of the entities to make distributions. The Company received
distributions totaling $8.6 million in the first nine months of 1996 from the
REITs and NRLP.

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On a quarterly basis, the Company's management reviews the carrying
value of the Company's mortgage notes receivable, properties held for sale and
periodically, but no less than annually, its properties held for investment.
Generally accepted accounting principles require that the carrying value of
such assets cannot exceed the lower of their respective carrying amounts or
estimated net realizable value. In the initial instance when the estimated net
realizable value of a mortgage note receivable or a property held for sale is
less than the carrying amount at the time of evaluation, a reserve is
established and a corresponding provision for loss is recorded by a charge
against earnings. A subsequent revision to estimated net realizable value
either increases or decreases such reserve with a corresponding charge against
or credit to earnings. In the case of properties held for investment the
carrying value of the property is written down and a provision for loss is
recorded. The estimate of net realizable value of the Company's mortgage note
receivable is based on management's review and evaluation of the collateral
property securing the mortgage note. The property review generally includes
selective property inspections, a review of the property's current rents
compared to market rents, a review of the property's expenses, a review of
maintenance requirements, discussions with the manager of the property and a
review of the surrounding area. See "Recent Accounting Pronouncement," below.

COMMITMENTS AND CONTINGENCIES

In January 1995, NRLP, SAMLP and the NRLP oversight committee executed
an Implementation Agreement which provides for the nomination of a successor
general partner to succeed SAMLP as general partner of NRLP and National
Operating, L.P. ("NOLP"), the operating partnership of NRLP and for the
resolution of all related matters under the 1990 settlement of a class action
lawsuit ("Moorman Settlement Agreement"). On February 20, 1996, the parties to
the Implementation Agreement executed an Amended and Restated Implementation
Agreement.

Provided that the successor general partner is elected pursuant to the
terms of the Amended and Restated Implementation Agreement, SAMLP shall receive
$12,471,500 from the Partnership of SAMLP and NOLP (the "Partnership"). This
amount represents a compromise settlement of the net amounts owed by the
Partnership to SAMLP upon SAMLP's withdrawal as general partner and any amounts
which SAMLP and its affiliates may owe to the Partnership. This amount shall be
paid to SAMLP pursuant to a promissory note in accordance with the terms set
forth in the Amended and Restated Implementation Agreement.

The Amended and Restated Implementation Agreement was submitted to the
Judge appointed to supervise the class action settlement (the "Supervising
Judge") for tentative approval and approval of the notice to be sent to the
original class members. On September 23, 1996, the Supervising Judge entered an
order granting tentative approval of the Amended and Restated Implementation
Agreement and the form of notice. On January 2, 1997, the Supervising Judge
entered an order granting tentative approval of additional matters relating to
the Amended and Restated Implementation Agreement. Upon final approval by the
Supervising Judge, the proposal to elect the successor general partner will be
submitted to the NRLP's unitholders for a vote. In addition, the unitholders
will vote upon amendments to the NRLP's Partnership Agreement which relate to
the proposed compensation of the successor general partner and other related
matters.

Upon approval by NRLP's unitholders, SAMLP shall withdraw as General
Partner and the successor general partner shall take office. If the required
approvals are obtained, it is anticipated that the successor general partner
will be elected and take office during the third or fourth quarter of 1997.

The Amended and Restated Implementation Agreement provides that SAMLP,
and its affiliates owning units in NRLP shall not vote to remove the successor
general partner, except for removal with cause, for a period of 36 months from
the date the successor general partner takes office.

Upon election and taking office of the successor general partner, the
class action settlement and the NRLP oversight committee shall be terminated.
If the successor general partner is not elected, the existing class action
settlement shall remain in full force and effect and all of the provisions of
the Amended and Restated Implementation Agreement shall be voided, including
the compromise settlement of amounts owed by SAMLP and NRLP to each other.

On September 3, 1996, Joseph B. Moorman filed a Motion for orders
Compelling Enforcement of the Moorman Settlement Agreement, Appointment of a
Receiver and Collateral Relief with the Superior Court of California in and

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for the County of San Mateo. The motion alleged that the settling defendants
had failed or refused to perform their obligations under the Moorman Settlement
Agreement. The motion requested that SAMLP be removed as general partner and a
receiver be appointed to manage the Partnership. The motion also requested that
the Company be ordered to deliver to the court all NRLP units which had been
purchased by the Company since August 7, 1991. A hearing was held on this
motion on October 4, 1996. On January 2, 1997 the Supervising Judge entered an
order denying the motion.

On January 27, 1997, Joseph B. Moorman filed motions to (i) discharge
the Oversight Committee, (ii) vacate the court's orders and renewed his prior
motions to (i) compel enforcement of the Moorman Settlement Agreement, (ii)
appoint a receiver over NRLP, and (iii) for collateral relief against the
Company. Also on January 27, 1997, Robert A. McNeil filed motions to (i) be
installed as receiver for NRLP, (ii) vacate the court's orders and (iii)
disband the Oversight Committee. A hearing on the motions to discharge or
disband the Oversight Committee and to vacate the court's orders has been
scheduled to be held on March 21, 1997.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995. For the three months ended September 30, 1996, the Company
reported net income of $770,000, compared to net income of $1.2 million for the
three months ended September 30, 1995. For the nine months ended September 30,
1996, the Company had a net loss of $1.6 million compared with a net loss of
$3.1 million for the nine months ended September 30, 1995. The primary factors
effecting the Company's three and nine month results are discussed in the
following paragraphs.

Rents increased from $5.2 million and $14.2 million for the three and
nine months ended September 30, 1995 to $5.3 million and $14.7 million for the
three and nine months ended September 30, 1996. The increases are principally
due to the Company obtaining the Oak Tree Village Shopping Center in November
1995 combined with increases in rents from the Denver Merchandise Mart, Kansas
City Holiday Inn and rents from a ground lease on land in Atlanta, Georgia.

Interest income from mortgage notes receivable decreased from $1.2
million and $3.8 million for the three and nine months ended September 30, 1995
to $1.1 million and $3.4 million for the three and nine months ended September
30, 1996. The decrease is due to the payoff of a mortgage note receivable in
February 1995 and $640, 000 in principal paydowns on the Company's notes
receivable in the nine months ended September 30, 1996. Interest income for the
remainder of 1996 is expected to approximate that of the third quarter.

Other income increased from $739,000 for the three months ended
September 30, 1995 to $824,000 for the three months ended September 30, 1996
and increased from $700,000 for the nine months ended September 30, 1995 to
$1.3 million for the nine months ended September 30, 1996. The increase in
other income for the three months ended September 30, 1996 is due to a $768,000
increase in gains from the sale of trading portfolio securities offset by a
$128,000 decrease in dividend income from trading portfolio securities and a
$556,000 increase in unrealized losses. The nine month improvement is due to
recognizing $598,000 of unrealized gains on trading portfolio securities in
1996 compared to a $408,000 unrealized loss in 1995 and an increase of $181,000
in preferred return distributions on a partnership interest. This is offset by
a $622,000 decrease in dividend income from trading portfolio securities.

Property operating expenses increased from $3.0 million and $10.2
million for the three and nine months ended September 30, 1995 to $3.6 million
and $11.2 million for the three and nine months ended September 30, 1996. Of
this increase, $267, 000 and $857, 000 for the three and nine months ended
September 30, 1996 is due to obtaining the Oaktree Shopping Center in November
1995 and the purchase of six parcels of land in 1995 and 1996.

Interest expense increased from $2.4 million and $6.1 million for the
three and nine months ended September 30, 1995 to $4.2 million and $10.7
million for the three and nine months ended September 30, 1996. The increases
are primarily attributable to debt refinancings and the debt incurred related
to the purchase of six parcels of land in 1995 and 1996 and the Oaktree
Shopping Center obtained in November 1995. The increase for the nine months
ended September 30, 1996 is offset by a $161,000 decrease in interest expense
due to the sale of the Boulevard Villa Apartments in February 1995. Interest
expense for the remainder of 1996 is expected to approximate that of the third
quarter.

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Advisory and mortgage servicing fees increased from $328,000 and
$871,000 for the three and nine months ended September 30, 1995 to $392,000 and
$1.1 million for the three and nine months ended September 30, 1996. The
increases are primarily attributable to the Company's increase in gross assets,
the basis for such fee.

General and administrative expenses increased from $382,000 and $1.6
million for the three and nine months ended September 30, 1995 to $618,000 and
$1.9 million for the three and nine months ended September 30, 1996. The
increases are primarily attributable to legal expenses incurred in 1996
relating to acquisitions and refinancings and an increase in advisor cost
reimbursements.

Depreciation and amortization of $429,000 and $1.3 million for the
three and nine months ended September 30, 1996 approximate the $416,000 and
$1.3 million for the three and nine months ended September 30, 1995.

Equity in losses of investees improved from a loss of $1.4 million and
$4.4 million for the three and nine months ended September 30, 1995 to a loss
of $702,000 and $3.1 million for the three and nine months ended September 30,
1996. The decrease in equity losses is attributable to a decrease in the
combined operating losses of the equity investees from a combined operating
loss of $4.5 million and $14.1 million for the three and nine months ended
September 30, 1995 to a combined operating loss of $3.1 million and $11.8
million for the three and nine months ended September 30, 1996. Such
improvement is generally attributable to improved occupancy and increased
rental rates.

For the nine months ended September 30, 1995, the Company recognized
$671,000 of minority interest expense. The expense is attributable to the
termination of a joint venture partnership in which the Company held a 60%
interest in June 1995.

Gains on sale of real estate were $3.3 million and $7.8 million for
the three and nine months ended September 30, 1996 compared to $1.6 million and
$2.5 million for the three and nine months ended September 30, 1995. For the
three months ended September 30, 1996, the Company recognized a $2.0 million
gain on the sale of 32.3 acres of the 92.6 acre tract of land in Las Colinas,
Texas, a $13,000 gain on the sale of four residential lots and a $1.3 million
gain representing the Company's equity share of the REITs gain on sale of real
estate. In the three months ended September 30, 1995, the Company recognized a
$1.5 million gain on the sale of 6.9 acres of partially developed land in Las
Colinas, Texas. The first nine months of 1996 includes an additional $1.1
million gain on the sale of 4.6 acres of land in Las Colinas, Texas, a $44, 000
gain on the sale of a parcel of land in Midland, Michigan, an $11,000 gain on
the sale of eight residential lots and a $3.3 million gain representing the
Company's equity share of the REITs' gain on the sale of real estate. The first
nine months of 1995 includes an additional $924,000 gain on the sale of
Boulevard Villas in February and a $24,000 gain on the sale of the final four
lots in a joint venture.

The Company reported extraordinary gains of $121,000 and $381,000 for
the three and nine months ended September 30, 1996 compared to $431,000 and
$758,000 for the three and nine months ended September 30, 1995. The
extraordinary gain for the three months ended September 30, 1996 represents the
Company's share of its equity investees' extraordinary gain from the early
payoff of debt. The first nine months of 1996 includes an additional
extraordinary gain of $13,000 which represents the Company's share of an equity
investee's extraordinary gain from the early payoff of debt and $247,000
represents the Company's share of an equity investee's extraordinary gain
relating to an insurance settlement from a fire loss. For the three and nine
months ended September 30, 1995, the extraordinary gains also represent the
Company's share of an equity investee's extraordinary gain from the early
payoff of debt.

1995 Compared to 1994. The Company reported a net loss of $2.8 million
in 1995 as compared to a net loss of $2.4 million in 1994. The primary factors
contributing to the increase in the Company's net loss are discussed in the
following paragraphs.

Net rental income (rents less property operating expenses) decreased
from $5.0 million in 1994 to $4.6 million in 1995. This decrease is primarily
attributable to the sale of four apartment complexes in November 1994 and the
sale of an additional apartment complex in February 1995 contributing a
combined $2.4 million to the decrease. Offsetting the decrease in part, is a
$1.2 million increase in net rental income from the Denver Merchandise Mart and
Inn at the Mart, acquired in the second quarter of 1994 and a $529,000 increase
at the Kansas City Holiday Inn due to increased room rates directly
attributable to the capital improvements made to the property in 1994. Net
rental income is expected

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to increase in 1995 from continued improvement at the Kansas City Holiday Inn
and on a full years operations of the Oak Tree Village Shopping Center acquired
in November 1995.

Interest income increased from $4.0 million in 1994 to $4.9 million in
1995. This increase is primarily attributable to the Continental Hotel
wraparound mortgage note receivable performing throughout 1994. Interest income
in 1996 is expected to approximate that of 1995.

Other income decreased from $1.1 million in 1994 to $154,000 in 1995.
This decrease is primarily attributable to the fourth quarter write down of the
Company's marketable equity securities trading portfolio by $98,000 due to a
decline in market value.

Interest expense increased from $7.9 million in 1994 to $8.9 million
in 1995. This increase is primarily due to a $1.2 million increase in margin
interest due to a $7.6 million increase in margin debt from December 1994 to
December 1995 and a $2.0 million increase due to the debt incurred in
connection with the Company's two land purchases in Las Colinas, Texas, during
1995. These increases are offset by a $1.5 million decrease due to a reduction
in debt as a result of the sale of four apartment complexes in November 1994
and an additional apartment complex in February 1995 and reductions in loan
principal balances. Interest expense is expected to increase in 1996 as a
result of a full years interest on the debt incurred in 1995 to purchase the
land in Las Colinas, Texas.

Advisory and mortgage servicing fees were comparable in 1995 and 1994
at $1.2 million as were general and administrative expense at $2.6 million in
1995 and 1994.

Depreciation increased from $1.6 million in 1994 to $1.7 million in
1995. This increase is primarily attributable to the 1994 acquisitions of the
Denver Merchandise Mart and the Inn at the Mart offset by the sale of four
apartment complexes in November 1994 and the sale of an additional apartment
complex in February 1995.

Equity in losses of investees increased from a loss of $2.5 million in
1994 to $5. 1 million in 1995. This increase in equity losses is primarily
attributable to an increase in the net loss of both IORI and TCI, resulting
from a $1.5 million writedown of a wraparound mortgage note receivable to the
balance of the underlying first lien mortgage by a partnership in which IORI
and TCI are sole partners.

Gains on the sale of real estate increased from $3.2 million in 1994
to $6.9 million in 1995. The 1995 gains are attributable to the Company's
equity share ($1.8 million) of NRLP's fourth quarter gain on the sale of two
apartment complexes, the Company's equity share ($2.5 million) of TCI's gain on
the sale of land in the third quarter and an apartment complex in the fourth
quarter of 1995, a $1.6 million gain recognized by the Company on the sale of
6.9 acres of partially developed land in Las Colinas, Texas, acquired by the
Company in May 1995 and a $924,000 gain recognized by the Company on the sale
of the Boulevard Villas Apartments in February 1995. The 1994 gains are
attributable to the Company's equity share ($1.9 million) of NRLP's fourth
quarter gain on the sale of two apartment complexes and the Company's equity
share ($895,000) of TCI's 1994 third quarter gain on the sale of an apartment
complex.

The Company reported $323,000 in extraordinary gains in 1994 compared
to $783,000 in extraordinary gains in 1995. The 1995 extraordinary gain is the
Company's equity share of TCI's extraordinary gain from the early payoff of
mortgage debt. In 1994, $273,000 of the extraordinary gain is the Company's
equity share of TCI's settlement of litigation with a lender and the remaining
$50,000 is due to a lender's forgiveness of a portion of a first mortgage, due
to the Company's early payoff of the second lien mortgage secured by the same
property.

1994 Compared to 1993. The Company reported a net loss of $2.4 million
in 1994 as compared to a net loss of $4.4 million in 1993. The primary factors
contributing to the decrease in the Company's net loss are discussed in the
following paragraphs.

Net rental income (rents less property operating expenses) increased
from $2.6 million in 1993 to $5.0 million in 1994. This increase is primarily
attributable to increases of $486,000 and $444,000 from Boulevard Villas
Apartments and the Kansas City Holiday Inn, respectively, both acquired in
1993, an increase of $1.1 million due to

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27

the acquisition of the Denver Merchandise Mart and Inn at the Mart, both of
which were acquired in March 1994, and an increase in the Company's other
commercial properties of $503,000 as a result of improved occupancy and rents.
These increases are offset by a decrease of $253,000 due to the sale of the
Culver City Shopping Center in August 1993.

Interest income decreased from $5.0 million in 1993 to $4.0 million in
1994. Of the decrease, $335,000 is attributable to the August 1993 Collecting
Bank settlement, $257,000 to the Continental Hotel and Casino note being
nonperforming prior to June 1994, $248,000 due to the nonperforming Osceola
land note receivable and $118,000 due to the Boulevard Villas note receivable
foreclosure in July 1993.

Equity in losses of investees decreased from a loss of $4.0 million in
1993 to a loss of $2.5 million in 1994. The decrease in equity losses is
primarily attributable to a $4.6 million reduction in NRLP's loss from
operations. At December 31, 1994, the Company owned approximately 48% of the
then outstanding units of limited partner interest in NRLP.

Interest expense increased from $6.5 million in 1993 to $7.9 million
in 1994. This increase is attributable to a $563,000 increase in interest from
property acquisitions and refinancings, an $879,000 increase in interest on
margin borrowings, and $319,000 due to an increase in the interest rate on the
Las Vegas Plaza underlying lien. These increases were offset in part by a
$314,000 reduction from the August 1993 sale of the Culver City Shopping
Center, $383,000 attributable to the 1993 Collecting Bank Settlement and
$219,000 due to payoffs of notes and principal reductions in 1993 and 1994.

Advisory and mortgage servicing fees in 1994 and 1993 were comparable
at $1.3 million.

General and administrative expenses increased from $1.8 million in
1993 to $2.6 million in 1994. The increase is primarily attributable to a
$259,000 increase in consulting fees relating to the Continental Hotel and
Casino and Las Vegas Plaza wraparound notes receivable, a $258,000 increase in
legal fees and a $146,000 increase in advisor cost reimbursements.

Depreciation and amortization expense increased from $1.1 million in
1993 to $1.6 million in 1994. The increase is attributable to the Denver
Merchandise Mart and Inn at the Mart, properties the Company acquired in March
1994, and a full year of depreciation on the properties the Company acquired in
March and July 1993.

The Company recorded no provision for losses in 1994 compared to $2.3
million in 1993. The 1993 provision for losses is comprised of a $2.0 million
reserve against the carrying value of undeveloped land in downtown Atlanta,
Georgia and a $300,000 reduction in the estimated fair value of the collateral
securing a mortgage note receivable.

Gains on sale of real estate increased from $481,000 in 1993 to $3.2
million in 1994. This increase is primarily attributable to the Company's
equity share ($895,000) of TCI's third quarter $2.2 million gain on the sale of
an apartment complex and the Company's equity share ($1.9 million) of NRLP's
fourth quarter gain on the sale of two apartment complexes.

The Company reported $3.8 million extraordinary gain in 1993 compared
to a $323,000 extraordinary gain in 1994. In 1993, $3.4 million of the
extraordinary gain represents the Company's equity share of NRLP's
extraordinary gain of $9.0 million from the acquisition at a discount of its
mortgage debt and $443,000 is due to a lender's forgiveness of a portion of a
first mortgage, upon the Company's early payoff of a second lien mortgage
secured by the same property. In 1994, $273,000 of the extraordinary gain is
the Company's equity share of TCI's settlement of litigation with a lender and
the remaining $50, 000 is due to a lender's forgiveness of a portion of a first
mortgage, due to the Company's early payoff of the second lien mortgage secured
by the same property.

ENVIRONMENTAL MATTERS

Under various federal, state and local environmental laws, ordinances
and regulations, the Company may be potentially liable for removal or
remediation costs, as well as certain other potential costs relating to
hazardous or toxic substances (including governmental fines and injuries to
persons and property) where property-level managers have

-23-
28

arranged for the removal, disposal or treatment of hazardous or toxic
substances. In addition, certain environmental laws impose liability for
release of asbestos-containing materials into the air, and third parties may
seek recovery from the Company for personal injury associated with such
materials.

The Company' s management is not aware of any environmental liability
relating to the above matters that would have a material adverse effect on the
Company's business, assets or results of operations.

INFLATION

The effects of inflation on the Company's operations are not
quantifiable. Revenues from property operations fluctuate proportionately with
inflationary increases and decreases in housing costs. Fluctuations in the rate
of inflation also affect the sales values of properties and, correspondingly,
the ultimate gains to be realized by the Company from property sales.

RECENT ACCOUNTING PRONOUNCEMENT

In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121 - "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
Of". The statement requires that long-lived assets be considered impaired "...
if the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset." If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"... the amount by which the carrying amount of the asset exceeds the fair
value of the asset." If impairment of a long-lived asset is recognized, the
carrying amount of the asset shall be reduced by the amount of the impairment,
shall be accounted for as the asset's "new cost" and such new cost shall be
depreciated over the asset's remaining useful life.

SFAS No. 121 further requires that long-lived assets held for sale
"... be reported at the lower of carrying amount or fair value less cost to
sell." If a reduction in a held for sale asset's carrying amount to fair value
less cost to sell is required, a provision for loss shall be recognized by a
charge against earnings. Subsequent revisions, either upward or downward, to a
held for sale asset's fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount, but not in excess of the asset's
carrying amount when originally classified as held for sale. A corresponding
charge or credit to earnings is to be recognized. Long-lived assets held for
sale are not to be depreciated. The Company adopted SFAS No. 121 effective
January 1, 1996.

The adoption of SFAS No. 121 had no effect on the Company's net loss
for the nine months ended September 30, 1996, as the Company's one depreciable
asset classified as held for sale is fully depreciated and none of the
Company's other long lived assets are considered to be impaired.

DESCRIPTION OF THE CAPITAL STOCK

GENERAL

The Company is authorized by its Articles of Incorporation, as
amended, to issue up to 16,666,667 shares of Common Stock, $.01 par value per
share, and 20,000,000 shares of a special class of stock, $2.00 par value per
share (the "Special Stock"), which may be designated by the Company's board of
directors from time to time. The Preferred Stock to be offered hereunder will
be a series of the Special Stock.

COMMON STOCK

All shares of the Company's Common Stock are entitled to share equally
in dividends from funds legally available therefor, when declared by the
Company's board of directors, and upon liquidation or dissolution of the
Company, whether voluntary or involuntary (subject to any prior rights of
holders of the Special Stock), and to share equally in the assets of the
Company available for distributions to shareholders. Each holder of Common
Stock is entitled to one vote for each share held on all matters submitted to
the shareholders. There is no cumulative voting, redemption right, sinking fund
provision or right of conversion with respect to the Common Stock. The holders
of

-24-
29

Common Stock do not have any preemptive rights to acquire additional shares of
Common Stock when issued. All outstanding shares of the Company will be fully
paid and nonassessable. As of December 31, 1996, 6,739,540 shares of Common
Stock were issued and 6,457,188 shares were outstanding.

SPECIAL STOCK

The following is a description of certain general terms and provisions
of the Preferred Stock. The particular terms of any series of Preferred Stock
will be described in the applicable Prospectus Supplement.

Article 5 of the Articles of Incorporation of the Company, as amended,
authorizes the issuance of up to 20,000,000 shares of Special Stock in one or
more series with such preferences, limitations and rights as the Company's
board of directors determines. In particular, the board of directors may fix
and determine, among other things, the dividend payable with respect to such
shares of Special Stock (including whether and in what manner such dividend
shall be accumulated); whether such shares shall be redeemable, and if so, the
prices, terms and conditions of such redemption; the amount payable on such
shares in the event of voluntary or involuntary liquidation; the nature of any
purchase, retirement or sinking fund provisions; the nature of any conversion
rights with respect to such shares; and the extent of the voting rights, if
any, of such shares. Certain provisions of the Special Stock may, under certain
circumstances, adversely affect the rights or interests of holders of Common
Stock. For example, the Company's board of directors could, without shareholder
approval, issue a series of Special Stock with voting and conversion rights
which could adversely affect the voting power of the common shareholders. In
addition, the Special Stock may be issued under certain circumstances as a
defensive device to thwart an attempted hostile takeover of the Company.

The Prospectus Supplement relating to the series of Preferred Stock
being offered will describe its terms, including: (i) its title and stated
value; (ii) the number of shares offered, the liquidation preference per share
and the purchase price; (iii) the dividend rate(s), period(s) and/or payment
date(s) or method(s) of calculating dividends; (iv) whether dividends are
cumulative or non-cumulative and, if cumulative, the date from which dividends
accumulate; (v) the procedures for any auction and remarketing, if any; (vi)
the provisions for a sinking fund, if any; (vii) the provisions for redemption,
if applicable; (viii) any listing of such Preferred Stock on a securities
exchange; (ix) the terms and conditions, if applicable, for its conversion into
Common Stock, including the conversion price (or manner of calculation) and
conversion period; (x) voting rights, if any; (xi) its relative ranking and
preferences as to dividend rights and rights upon liquidation, dissolution or
winding up of the affairs of the Company; and (xii) any limitations on issuance
of any series of Preferred Stock ranking senior to or on a parity with such
series of Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company. The Prospectus
Supplement for such Preferred Stock will also include a discussion of any
material and/or special Federal income tax considerations applicable to such
Preferred Stock.

Through the date of this Prospectus, the Company has amended its
Articles of Incorporation to designate six series of the Special Stock as
explained below. Each series of Special Stock now outstanding ranks on a parity
as to dividends and upon liquidation, dissolution or winding up with all other
shares of Special Stock.

Series A Preferred Stock; Terminated Rights Plan. On April 11, 1990,
the board of directors of the Company designated 500,000 shares of the Series A
Cumulative Participating Preferred Stock (the "Series A Preferred Stock"),
adopted a preferred share purchase rights plan and approved the distribution to
shareholders of a dividend of one preferred share purchase right on each
outstanding share of the Company's Common Stock (the "Rights"). The rights plan
provided that one Right would be distributed to all shareholders of the Company
for each share of Common Stock owned of record by them as of April 23, 1990. In
addition, the rights plan required that the Company issue one Right with each
share of Common Stock that became outstanding thereafter so that all shares of
Common Stock would carry a Right. The Rights were primarily designed to assure
that all holders of Common Stock of the Company receive fair and equal
treatment in the event of any attempt to acquire the Company and to guard the
interest of such shareholders against partial tender offers, inadequate offers,
open market accumulations and other abusive or coercive tactics. The rights plan
was not adopted in response to any effort to acquire the Company, and the
Company has remained unaware of any such effort. On June 12, 1996, the board of
directors of the Company resolved to redeem the Rights held by the shareholders
of record as of June 21, 1996 at the redemption price of $.01 per Right. The
redemption price was paid on July 8, 1996.

-25-
30

The decision by the board of directors of the Company was based on a
determination that the rights plan was no longer necessary to protect the
Company and its shareholders from coercive tender offers.

The Series A Preferred Stock bears a cumulative quarterly dividend of
the greater of $1.00 per share or, subject to certain limitations, the sum of
100 times the aggregate per share amount of all cash dividends and 100 times
the aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions (other than dividends payable in shares of Common Stock)
declared on the Common Stock since the immediately preceding quarter. The
Series A Preferred Stock has a liquidation preference of $100 per share plus
accrued and unpaid dividends. The Company may not redeem shares of the Series A
Preferred Stock. As of February 1, 1997, no shares of the Series A Preferred
Stock were issued and outstanding, and due to the redemption of the Rights,
none will be issued in the future.

Series B Preferred Stock. On April 3, 1996, the board of directors of
the Company designated 4,000 shares of Series B 10% Cumulative Preferred Stock
(the "Series B Preferred Stock") with a par value of $2.00 per share and a
preference on liquidation of $100 per share plus payment of accrued and unpaid
dividends. The Series B Preferred Stock is non-voting except as required by
law, and the Company is not required to maintain a sinking fund for such stock.

The Series B Preferred Stock is convertible, but only during a 30-day
period beginning May 8, 1998, into that number of shares of the Company's
Common Stock obtained by multiplying the number of shares being converted by
$100 and then dividing such sum by (in most instances) 90% of the simple
average of the daily closing price of the Common Stock for the 30 trading days
immediately preceding the conversion period on the market where the shares of
Common Stock of the Company are then regularly traded. The right of conversion
shall terminate at the close of business on the second full business day prior
to the date fixed for redemption and on the commencement of any liquidation,
dissolution or winding up of the Company.

The Series B Preferred Stock bears a cumulative dividend per share of
$10.00 per annum, payable quarterly in equal installments of $2.50. Dividends
on the Series B Preferred Stock are in preference to and with priority over
dividends upon the Common Stock. The Series B Preferred Stock ranks on a parity
as to dividends and upon liquidation, dissolution or winding up with all other
shares of Special Stock.

The Company may from time to time redeem any or all of the Series B
Preferred Stock upon payment of the liquidation value of $100 per share plus
all accrued and unpaid dividends. There is no restriction on the repurchase or
redemption of the Series B Preferred Stock by the Company while there is any
arrearage in payment of dividends except that at the time of such repurchase or
redemption the Company must pay all accrued and unpaid dividends on the shares
being redeemed. As of February 1, 1997, 4,000 shares of the Series B Preferred
Stock were issued and outstanding.

Series C Preferred Stock. The board of directors of the Company
designated 16,500 shares of Series C 10% Cumulative Preferred Stock (the
"Series C Preferred Stock") on May 23, 1996, with a par value of $2.00 per
share and a preference on liquidation of $100 per share plus all accrued and
unpaid dividends. The Series C Preferred Stock is non-voting except as required
by law. The Company is not required to maintain a sinking fund for such stock.

Each share of Series C Preferred Stock is convertible, but only during
a 90-day period beginning on November 25, 1998, into the number of shares of
Common Stock obtained by multiplying the number of shares being converted by
$100 and dividing the result by (in most instances) 90% of the then-recent
average trading price for the Common Stock.

The Series C Preferred Stock bears a cumulative dividend per share of
$10.00 per annum, payable quarterly in equal installments of $2.50. Dividends
on the Series C Preferred Stock are in preference to and with priority over
dividends upon the Common Stock. The Series C Preferred Stock ranks on a parity
as to dividends and upon liquidation, dissolution or winding up with all other
shares of Special Stock. The dividends for the first twelve months are to be
paid in additional shares of Series C Preferred Stock.

The Company may from time to time redeem any or all of the Series C
Preferred Stock upon payment of the liquidation value of $100 per share plus
all accrued and unpaid dividends. There is no restriction on the repurchase or

-26-
31

redemption of the Series C Preferred Stock by the Company while there is any
arrearage in payment of dividends except that at the time of such repurchase or
redemption the Company must pay all accrued and unpaid dividends on the shares
being redeemed. As of February 1, 1997, 15,877 shares of the Series C Preferred
Stock were issued and outstanding.

Series D Preferred Stock. The board of directors of the Company
designated 91,000 shares of Series D Cumulative Preferred Stock (the "Series D
Preferred Stock") on August 2, 1996, with a par value of $2.00 per share and a
preference on liquidation of $20.00 per share plus payment of accrued and
unpaid dividends. The Series D Preferred Stock is non-voting except as required
by law and is not convertible. The Company is not required to maintain a
sinking fund for such stock.

The Series D Preferred Stock has a cumulative dividend per share of
9.5% per annum of the $20.00 liquidation preference, payable quarterly in equal
installments of $0.475. Dividends on the Series D Preferred Stock are in
preference to and with priority over dividends upon the Common Stock. The
Series D Preferred Stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of Special Stock.

The Company may from time to time after June 1, 2001 redeem any or all
of the Series D Preferred Stock upon payment of the liquidation value of $20.00
per share plus all accrued and unpaid dividends. There is no restriction on the
repurchase or redemption of the Series D Preferred Stock by the Company while
there is any arrearage in payment of dividends except that at the tine of such
repurchase or redemption the Company must pay all accrued and unpaid dividends
on the shares being redeemed. As of February 1, 1997, no shares of the Series D
Preferred Stock were issued and outstanding.

The Series D Preferred Stock is reserved for issuance upon the
conversion Class A units held by the limited partners of Ocean Beach Partners
L.P.

Series E Preferred Stock. On December 3, 1996, the Company's board of
directors designated 80,000 shares of Series E Cumulative Convertible Preferred
Stock (the "Series E Preferred Stock") with a par value of $2.00 per share and
a preference on liquidation of $100 per share plus payment of all accrued and
unpaid dividends. The Series E Preferred Stock is non-voting except as required
by law. The Company is not required to maintain a sinking fund for such stock.

The Series E Preferred Stock is convertible into that number of shares
of the Company's Common Stock obtained by multiplying the number of shares
being converted by $100, then adding all accrued and unpaid dividends on such
shares, then dividing such sum by (in most instances) 80% of the Common Stock's
then-recent average trading price for the 20 business days ending on the last
business day of the calendar week immediately preceding the date of conversion
on the principal stock exchange on which such Common Stock is then listed or
admitted to trading as determined by the Company. The schedule pursuant to
which shares of Series E Preferred Stock may be so converted is as follows: up
to 30,000 shares of the Series E Preferred Stock may be converted beginning as
of November 4, 1998 and thereafter; up to an additional 10,000 shares of the
Series E Preferred Stock may be converted beginning as of November 4, 1999; and
up to an additional 40,000 shares of the Series E Preferred Stock may be
converted beginning as of November 4, 2001.

The Series E Preferred Stock bears a cumulative dividend per share
equal to $10.00 per annum, payable quarterly in equal installments of $2.50 for
the period from date of issuance to November 4, 1999, and $11.00 per annum
($2.75 per quarter) thereafter. Dividends on the Series E Preferred Stock are
in preference to and with priority over dividends upon the Common Stock. The
Series E Preferred Stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of Special Stock.

The Company may redeem any or all of the shares of Series E Preferred
Stock from time to time upon payment of $100.00 per share plus all accrued and
unpaid dividends. There is no restriction on the repurchase or redemption of
the Series E Preferred Stock by the Company while there is any arrearage in
payment of dividends except that at the time of such repurchase or redemption
the Company must pay all accrued and unpaid dividends on the shares being
redeemed. As of February 1, 1997, no shares of the Series E Preferred Stock
were issued and outstanding.

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32

The Series E Preferred Stock is reserved for issuance upon the
conversion of Class A units held by the limited partners in the Valley Ranch
Limited Partnership.

Series F Preferred Stock. On January 14, 1997, the Company's Board of
Directors designated 200,000 shares of Series F Cumulative Convertible
Preferred Stock (the "Series F Preferred Stock") with a par value of $2.00 per
share and a preference on liquidation of $20.00 per share plus all accrued and
unpaid dividends. The Series F Preferred Stock is entitled to one vote per
share and votes together as one voting group on all matters submitted to a vote
of shareholders of the Company except as provided by law. The Company is not
obligated to maintain a sinking fund with respect to the Series F Preferred
Stock.

The Series F Preferred Stock may be converted at any time after
December 31, 2001 into that number of shares of the Common Stock obtained by
multiplying the number of shares to be converted by $20.00, then adding all
accrued and unpaid dividends on such shares, and then dividing such sum by 90%
of the Common Stock's then-recent average trading price for the 20 business
days ending on the last business day of the calendar week immediately preceding
the date of conversion on the principal stock exchange on which such Common
Stock is then listed or admitted to trading as determined by the Company.

The Series F Preferred Stock bears a cumulative dividend per share
equal to $1.30 per annum, payable quarterly in equal installments of $.325 for
1997, $1.40 per annum ($0.35 per quarter) for 1998, and $1.60 per annum ($0.40
per quarter) thereafter. Dividends on the Series F Preferred Stock are in
preference to and with priority over dividends upon the Common Stock. The
Series F Preferred Stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of Special Stock.

The Company has no right to redeem the Series F Preferred Stock, but
each holder of the Series F Preferred Stock has the right to redeem one-half of
the shares owned by such holder upon the occurrence of certain events, provided
that such holder may redeem all of such holder's Series F Preferred Stock in
the event of a merger or consolidation in which the holders of the Series F
Preferred Stock are to receive securities of the survivor corporation or
combined corporation but only if the Company is not the survivor. The
redemption price is equal to $20.00 per share plus accrued but unpaid dividends
thereon. As of February 1, 1997, no shares of the Series F Preferred Stock were
issued and outstanding.

The description of the foregoing provisions of each series of the
Special Stock does not purport to be complete and is subject to and qualified
in its entirety by reference to the definitive Articles of Amendment of the
Articles of Incorporation relating to such series of Special Stock.

PLAN OF DISTRIBUTION

The Company may sell the Offered Securities offered hereby (1) through
underwriters or dealers; (2) through agents; (3) directly to purchasers; or (4)
through a combination of any such methods of sale. Any such underwriter, dealer
or agent may be deemed to be an underwriter within the meaning of the
Securities Act. The Prospectus Supplement relating to the Offered Securities
will set forth their offering terms, including the name or names of any
underwriters, dealers or agents, the purchase price of the Offered Securities
and the proceeds to the Company from such sale, any underwriting discounts,
commissions and other items constituting compensation to underwriters, dealers
or agents, any initial public offering price, any discounts or concessions
allowed or reallowed or paid by underwriters or dealers to other dealers, and
any securities exchanges on which the Offered Securities may be listed.

If underwriters or dealers are used in the sale, the Offered
Securities will be acquired by the underwriters or dealers for their own
account and may be resold from time to time in one or more transactions, at a
fixed price or prices, which may be changed, or at market prices prevailing at
the time of sale, or at prices related to such prevailing market prices, or at
negotiated prices. The Offered Securities may be offered to the public either
through underwriting syndicates represented by one or more managing
underwriters or directly by one or more of such firms. Unless otherwise set
forth in the Prospectus Supplement, the obligations of underwriters or dealers
to purchase the Offered

-28-
33

Securities will be subject to certain conditions precedent and the underwriters
or dealers will be obligated to purchase all the Offered Securities if any are
purchased. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid by underwriters or dealers to other dealers may be
changed from time to time.

Offered Securities may be sold directly by the Company or through
agents designated by the Company from time to time. Any agent involved in the
offer or sale of the Offered Securities in respect of which this Prospectus is
delivered will be named, and any commissions payable by the Company to such
agent will be set forth, in the Prospectus Supplement. Unless otherwise
indicated in the Prospectus Supplement, any such agent will be acting on a best
efforts basis for the period of its appointment.

If so indicated in the Prospectus Supplement, the Company will
authorize underwriters, dealers or agents to solicit offers by certain
specified institutions to purchase Offered Securities from the Company at the
public offering price set forth in the Prospectus Supplement pursuant to
delayed delivery contracts providing for payment and delivery on a specified
date in the future. Such contracts will be subject to any conditions set forth
in the Prospectus Supplement and the Prospectus Supplement will set forth the
commission payable for solicitation of such contracts. The underwriters and
other persons soliciting such contracts will have no responsibility for the
validity or performance of any such contracts.

Underwriters, dealers and agents may be entitled under agreements
entered into with the Company to indemnifications by the Company against
certain civil liabilities, including liabilities under the Securities Act, or
to contribution by the Company to payments they may be required to make in
respect thereof. The terms and conditions of such indemnification will be
described in an applicable Prospectus Supplement. Underwriters, dealers and
agents may be customers of, engage in transactions with, or perform services
for the Company in the ordinary course of business.

LEGAL MATTERS

Certain legal matters with respect to the Preferred Stock offered by
the Company will be passed upon for the Company by Holt Ney Zatcoff &
Wasserman, LLP, Atlanta, Georgia.

EXPERTS

The financial statements and schedules included and incorporated by
reference in this Prospectus have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the period set forth in
their reports appearing elsewhere herein and in the registration statement, and
such reports are included herein in reliance upon the authority of said firm as
experts in auditing and accounting.

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FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Consolidated Financial Statements (Annual)
Report of Independent Accountants ................................... F-2
Consolidated Balance Sheets, December 31, 1995 and 1994 ............. F-3
Consolidated Statements of Operations, Three Years Ended
December 31, 1995, 1994 and 1993 .................. F-4
Consolidated Statements of Stockholders' Equity, Years Ended
December 31, 1995, 1994 and 1993 .................. F-5
Consolidated Statements of Cash Flows, Three Years Ended
December 31, 1995, 1994 and 1993 .................. F-6
Notes to Consolidated Financial Statements .......................... F-9

Consolidated Financial Statements (Interim)
Consolidated Balance Sheets, September 30, 1996 and December 31, 1995 F-28
Consolidated Statements of Operations, Nine Months Ended
September 30, 1996 and 1995 ....................... F-30
Consolidated Statement of Stockholders' Equity, Nine Months Ended
September 30, 1996 ................................ F-31
Consolidated Statements of Cash Flows, Nine Months Ended
September 30, 1996 and 1995 ....................... F-32
Notes to Consolidated Financial Statements .......................... F-34

F-1
35

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors of
American Realty Trust, Inc.

We have audited the accompanying consolidated balance sheets of
American Realty Trust, Inc. and Subsidiaries as of December 31, 1995 and 1994
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
We have also audited the schedules listed in the accompanying index. These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.

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

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of American Realty Trust, Inc. and Subsidiaries as of December 31,
1995 and 1994, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.

Also, in our opinion, the schedules referred to above present fairly,
in all material respects, the information set forth therein.

BDO Seidman, LLP

Dallas, Texas
March 29, 1996

F-2
36

AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS

December 31,
----------------------
1995 1994
--------- ---------
(dollars in thousands)

Assets

Notes and interest receivable
Performing (including $9,422 in 1995 and
$6,127 in 1994 from affiliate) $ 51,840 $ 47,378
Nonperforming, nonaccruing 1,827 2,315
--------- ---------
53,667 49,693

Less - allowance for estimated losses (3,926) (4,029)
--------- ---------
49,741 45,664
Real estate held for sale, net of accumulated
depreciation ($5,098 in 1995 and $5,423
in 1994) 32,627 23,748

Less - allowance for estimated losses (3,328) (4,172)
--------- ---------
29,299 19,576
Real estate held for investment net of accumu-
lated depreciation ($2,646 in 1995 and $1,396
in 1994) 30,125 27,950

Marketable equity securities, at market value 2,093 1,309
Cash and cash equivalents 1,054 193
Investments in real estate entities 41,072 38,844
Other assets (including $3,336 in 1995 from
affiliate) 8,649 3,826
--------- ---------
$ 162,033 $ 137,362

Liabilities and Stockholders' Equity

Liabilities
Notes and interest payable (including $8,556 in
1995 and $9,732 in 1994 due to affiliates) $ 61,163 $ 45,695
Margin borrowings 34,017 26,391
Accounts payable and other liabilities
(including $4,584 in 1995 and $1,505 in 1994
due affiliate) 12,698 8,921
--------- ---------
107,878 81,007

Minority interest 1,097 461

Commitments and contingencies

Stockholders' equity
Common stock, $.01 par value, authorized
16,666,667 shares; issued and outstanding
5,858,328 shares in 1995 and 1994 59 59
Paid-in capital 66,719 66,719
Accumulated (deficit) (13,720) (10,884)
--------- ---------
53,058 55,894
--------- ---------
$ 162,033 $ 137,362
--------- ---------

The accompanying notes are an integral part of these Consolidated Financial
Statements.

F-3
37

AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
(dollars in thousands, except per share)

Income
Rents ........................................................ $ 17,869 $ 18,013 $ 7,885
Interests (including $506 in 1995, $366 in 1994 and $48 in
1993 from affiliates) ...................................... 4,929 3,959 4,984
Other ........................................................ 154 1,098 558
----------- ----------- -----------
22,952 23,070 13,427

Expenses
Property operations (including $1,200 in 1995, $899 in 1994
and $348 in 1993 to affiliates) ............................ 13,260 13,013 5,273
Interest (including $437 in 1995, $589 in 1994 and $1,029
in 1993 to affiliates) ..................................... 8,941 7,875 6,497
Advisory and servicing fees to affiliate ..................... 1,195 1,242 1,257
General and administrative (including $516 in 1995, $434 in
1994 and $288 in 1993 to affiliate) ........................ 2,554 2,562 1,819
Depreciation and amortization ................................ 1,691 1,620 1,130
Provision for losses ......................................... 2,300
Equity in losses of investees ................................ 5,123 2,529 4,014
Minority interest ............................................ 671 169 (159)
----------- ----------- -----------
33,435 29,010 22,131

(Loss) from operations ......................................... (10,483) (5,940) (8,704)
Income tax expense ............................................. 2 9 11
----------- ----------- -----------

(Loss) before gain on sale of real estate and extraordinary gain (10,485) (5,949) (8,715)

Gain on sale of real estate .................................... 6,866 3,200 481
----------- ----------- -----------
(Loss) before extraordinary gain ............................... (3,619) (2,749) (8,234)
Extraordinary gain ............................................. 783 323 3,807
----------- ----------- -----------
Net (loss) ..................................................... (2,836) (2,426) (4,427)
Redeemable Common Stock, accretion of discount ................. -- -- (129)
----------- ----------- -----------
Net (loss) applicable to Common shares ......................... $ (2,836) $ (2,426) $ (4,556)
=========== =========== ===========

Earnings per share
(Loss) before extraordinary gain ............................... $ (.61) $ (.45) $ (1.36)
Extraordinary gain ............................................. .13 .05 .63
----------- ----------- -----------

Net (loss) ..................................................... (.48) (.40) (.73)

Redeemable Common Stock, accretion of discount ................. -- -- (.02)
----------- ----------- -----------

Net (loss) applicable to Common shares ......................... $ (.48) $ (.40) $ (.75)
=========== =========== ===========

Weighted average Common shares used in computing
earnings per share .......................................... 5,858,328 6,104,438 6,050,550
=========== =========== ===========

The accompanying notes are an integral part of these Consolidated Financial
Statements.

F-4
38

AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

- ------------------------------------------------------------------------------------------
Accumulated
Common Stock Paid-in Earnings Stockholder's
Shares Amount Capital (Deficit) Equity

- ------------------------------------------------------------------------------------------
(dollars in thousands)
- ------------------------------------------------------------------------------------------

Balance
January 1, 1993 ... 5,089,562 $ 51 $ 64,327 (3,902) 60,476
- ------------------------------------------------------------------------------------------
Common Stock issued . 349,018 4 196 -- 200
- ------------------------------------------------------------------------------------------
Fractional Shares
reacquired ........ (252) -- -- -- --
- ------------------------------------------------------------------------------------------
Accretion of discount
on redeemable
Common Stock ...... -- -- -- (129) (129)
- ------------------------------------------------------------------------------------------
Common Stock
retired ........... (390,000) (4) 4 -- --
- ------------------------------------------------------------------------------------------
Net (loss) .......... -- -- -- (4,427) (4,427)
- ------------------------------------------------------------------------------------------
Balance
December 31, 1993 . 5,048,328 51 64,527 (8,458) 56,120
- ------------------------------------------------------------------------------------------
Reclassification of
Redeemable Common
Stock ............. 720,000 7 2,193 -- 2,200
- ------------------------------------------------------------------------------------------
Common Stock issued . 480,000 5 (5) -- --
- ------------------------------------------------------------------------------------------
Common Stock retired (390,000) (4) 4 -- --
- ------------------------------------------------------------------------------------------
Net (loss) .......... -- -- -- (2,426) (2,426)
---------- ---------- ---------- ---------- ----------
- ------------------------------------------------------------------------------------------
Balance
December 31, 1994 . 5,858,328 59 66,719 (10,884) 55,894
- ------------------------------------------------------------------------------------------
Net (loss) .......... -- -- -- (2,836) (2,836)
---------- ---------- ---------- ---------- ----------
- ------------------------------------------------------------------------------------------
Balance
December 31, 1995 . 5,858,328 $ 59 $ 66,719 $ (13,720) $ 53,058
---------- ========== ========== ========== ==========
- ------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these Consolidated Financial
Statements.

F-5
39

AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Years Ended December 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(dollars in thousands)

Cash Flows From Operating Activities
Rents collected ...................................... $ 18,473 $ 17,130 $ 8,317

Interest collected (including $399 in 1995, $366 in .. 4,845 3,829 4,584
1994 and $48 in 1993 from affiliates)

Distributions from equity investees' ................. 1,464 1,642 676
operating activities

Interest paid (including $19 in 1995, $213 in 1994 and (8,296) (4,286) (4,689)
$275 in 1993 to affiliate)

Payments for property operations
(including $1,200 in 1995, $899 in 1994 (13,442) (13,162) (6,122)
and $348 in 1993 to affiliate)

Advisory fee paid to affiliate ....................... (1,195) (1,242) (1,295)

General and administrative expenses paid
(including $516 in 1995, $434 in 1994
and $288 in 1993 to affiliate) ........ (2,448) (2,384) (1,517)

Litigation settlement ................................ (100) (750) --

Other ................................................ 500 235 91
---------- ---------- ----------

Net cash provided by (used in) operating
activities ............................ (199) 1,012 44

Cash Flows From Investing Activities
Collections on notes receivable
(including $394 in 1995 from affiliates) ............. 1,604 2,757 1,481

Purchase of marketable equity securities ............. (19,394) (16,518) --

Proceeds from sale of marketable equity securities ... 18,374 15,123 2,202

Deposit on acquisition of mortgage note receivable ... -- -- (300)

Notes receivable funded .............................. (3,295) (700) (609)

Proceeds from sale of real estate .................... 11,992 4,058 2,305

Return of capital distributions ...................... -- 514 --

Acquisition of real estate ........................... (21,394) -- --

Real estate improvements ............................. (1,802) (2,168) (2,013)

Investment in real estate entities ................... (7,169) (6,884) (3,976)
---------- ---------- ----------

Net cash (used in) investing
activities ................................ (21,084) (3,818) (910)

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

F-6
40

For The Years Ended December 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(dollars in thousands)

Cash Flows From Financing Activities
Proceeds from notes payable .................................... $ 36,211 $ 710 $ 15,677

Margin borrowings, net ......................................... 7,626 8,598 6,466

Proceeds from issuance of Common Stock ......................... -- -- 200

Payments on notes payable (including $990 in 1995,
$1,320 in 1994 and $384 in 1993 to affiliate) .............. (22,268) (5,151) (17,350)

Southmark settlement payments .................................. -- (435) (950)

Deferred borrowing costs ....................................... (2,475) -- --

Net collections (advances) to/from affiliates .................. 3,050 (1,566) (2,845)
---------- ---------- ----------

Net cash provided by financing activities................... 22,144 2,156 1,198
---------- ---------- ----------

Net increase (decrease) in cash and cash equivalents ........... 861 (650) 333

Cash and cash equivalents, beginning of year ................... 193 843 510
---------- ---------- ----------

Cash and cash equivalents, end of year ......................... $ 1,054 $ 193 $ 843
========== ========== ==========

Reconciliation of net (loss) to net cash provided
by (used in) operating activities
Net (loss) ..................................................... $ (2,836) $ (2,426) $ (4,427)

Adjustments to reconcile net (loss) to net cash provided
by (used in) operating activities Extraordinary gain ....... (783) (323) (3,807)

Gain on sale of real estate .............. (6,866) (3,200) (481)

Depreciation and amortization ............ 1,691 1,620 1,130

Provision for losses ..................... -- -- 2,300

Equity in losses of investees ............ 5,123 2,529 4,014

Distributions from equity investees'
operating activities .................... 1,464 1,642 676

(Increase) decrease in accrued
interest receivable ..................... 79 (18) (1,588)

Decrease in other assets ................. 1,439 228 422

Increase (decrease) in accrued
interest payable ........................ (5) 575 1,954

Increase (decrease) in accounts
payable and other liabilities.......... 495 150 (148)

Other .................................... -- 235 --
---------- ---------- ----------

Net cash provided by (used in) operating
activities ........................... $ (199) $ 1,012 $ 45
========== ========== ==========

F-7
41

AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For The Years Ended December 31,
1995 1994 1993
---------- ---------- ----------
(dollars in thousands)

Schedule of noncash investing activities

Acquisition of real estate financed by debt ................................ $ 21,394 $ 6,800 $ 5,400

Real estate sales financed by purchase money mortgages ..................... -- 1,400 --

Carrying value of real estate acquired through
foreclosure in satisfaction of notes receivable with
carrying value of $8,443 ................................................. -- -- 7,115

Carrying value of real estate securities acquired through
assumption of debt with a carrying value of
$6,080 in 1994 ........................................................... -- 9,810 --

Sale of real estate subject to debt ........................................ (5,878) -- (5,534)

Settlement of term loan obligation in exchange
for a note receivable participation with a carrying
value of $9,895 .......................................................... -- -- (9,863)

Carrying value of real estate obtained in satisfaction
of a receivable with a carrying value of $125 ............................ -- 125 --

Settlement with insurance company
Carrying value of real estate received ................................... 1,619 -- --

Carrying value of note receivable
participation received ....................................... 1,500 -- --

Carrying value of notes receivable
returned ..................................................... (32) -- --

Carrying value of real estate returned ................................... (2,183) -- --

F-8
42

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements of American Realty Trust,
Inc. and consolidated entities (the "Company") have been prepared in conformity
with generally accepted accounting principles, the most significant of which
are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." These,
along with the remainder of the Notes to Consolidated Financial Statements, are
an integral part of the Consolidated Financial Statements. The data presented
in the Notes to Consolidated Financial Statements are as of December 31 of each
year and for the year then ended, unless otherwise indicated. Dollar amounts in
tables are in thousands, except per share amounts. For purposes of these Notes,
"ART" refers to American Realty Trust, Inc., and "the Company" refers to ART
and its consolidated entities.

Certain balances for 1993 and 1994 have been reclassified to conform to the
1995 presentation. Shares and per share data have been restated for the 2 for 1
forward Common Stock split effected January 2, 1996.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and company business. The Company is successor to a District of
Columbia business trust, that primarily invests in real estate and real
estate-related entities and purchases and originates mortgage loans.

Basis of consolidation. The Consolidated Financial Statements include the
accounts of the Company, and all majority-owned subsidiaries and partnerships
other than National Realty, L.P. ("NRLP"). The Company uses the equity method
to account for its investment in NRLP as control is considered to be temporary.
See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P." All significant intercompany
transactions and balances have been eliminated.

Accounting estimates. In the preparation of the Company's Consolidated
Financial Statements in conformity with generally accepted accounting
principles it was necessary for the Company's management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the Consolidated
Financial Statements and the reported amounts of revenues and expense for the
year then ended. Actual results could differ from these estimates.

Interest recognition on notes receivable. It is the Company's policy to cease
recognizing interest income on notes receivable that have been delinquent for
60 days or more. In addition, accrued but unpaid interest income is only
recognized to the extent that the net realizable value of the underlying
collateral exceeds the carrying value of the receivable.

Allowance for estimated losses. Valuation allowances are provided for estimated
losses on notes receivable and properties held for sale to the extent that the
investment in the notes or properties exceeds the Company's estimate of net
realizable value of the property or the collateral securing such note, or fair
value of the collateral if foreclosure is probable. In estimating net
realizable value, consideration is given to the current estimated collateral or
property value adjusted for costs to complete or improve, hold and dispose. The
provision for losses is based on estimates, and actual losses may vary from
current estimates. Such estimates are reviewed periodically, and any additional
provision determined to be necessary is charged against earnings in the period
in which it becomes reasonably estimable.

Foreclosed real estate held for sale. Foreclosed real estate is initially
recorded at new cost, defined as the lower of original cost or fair value minus
estimated costs of sale. After foreclosure, the excess of new cost, if any,
over fair value minus estimated costs of sale is recognized in a valuation
allowance. Subsequent changes in fair value either increase or decrease such
valuation allowance. See "Allowance for estimated losses" above. Properties
held for sale are depreciated in accordance with the Company's established
depreciation policies. See "Real estate and depreciation" below.

Annually, all foreclosed properties held for sale are reviewed by the
Company's management and a determination is made if the held for sale
classification remains appropriate. The following are among the factors

F-9
43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

considered in determining that a change in classification to held for
investment is appropriate: (i) the property has been held for at least one
year; (ii) Company management has no intent to dispose of the property within
the next twelve months; (iii) property improvements have been funded, and (iv)
the Company's financial resources are such that the property can be held
long-term. The subsequent classification of property previously held for sale
to held for investment does not result in a restatement of previously reported
revenues, expenses or net (loss).

Investment in real estate entities. Because the Company may be considered to
have the ability to exercise significant influence over the operating and
investment policies of certain of its investees, the Company accounts for such
investments by the equity method. Under the equity method, the Company's
initial investment, recorded at cost, is increased by the Company's
proportionate share of the investee's operating income and any additional
investment and decreased by the Company's proportionate share of the investee's
operating losses and distributions received.

Real estate and depreciation. Real estate is carried at the lower of cost or
estimated net realizable value, except that foreclosed properties held for
sale, which are recorded at the lower of original cost or fair value minus
estimated costs of sale. Depreciation is provided by the straight-line method
over the estimated useful lives of the assets, which range from 10 to 40 years.

Present value premiums/discounts. The Company provides for present value
premiums and discounts on notes receivable or payable that have interest rates
that differ substantially from prevailing market rates and amortizes such
premiums and discounts by the interest method over the lives of the related
notes. The factors considered in determining a market rate for notes receivable
include the borrower's credit standing, nature of the collateral and payment
terms of the note.

Revenue recognition on the sale of real estate. Sales of real estate are
recognized when and to the extent permitted by Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No.
66"). Until the requirements of SFAS No. 66 for full profit recognition have
been met, transactions are accounted for using either the deposit, the
installment, the cost recovery or the financing method, whichever is
appropriate.

Fair value of financial instruments. The Company used the following assumptions
in estimating the fair value of its notes receivable, marketable equity
securities and notes payable. For performing notes receivable, the fair value
was estimated by discounting future cash flows using current interest rates for
similar loans. For nonperforming notes receivable the estimated fair value of
the Company's interest in the collateral property was used. For marketable
equity securities fair value was based on the year end closing market price of
each security. The estimated fair values presented do not purport to present
amounts to be ultimately realized by the Company. The amounts ultimately
realized may vary significantly from the estimated fair values presented. For
notes payable the fair value was estimated using current rates for mortgages
with similar terms and maturities.

Cash equivalents. For purposes of the Consolidated Statements of Cash Flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.

Earnings per share. Loss per share is computed based upon the weighted average
number of shares of Common Stock and redeemable Common Stock outstanding during
each year, adjusted for the two for one forward Common Stock split effected
January 2, 1996.

NOTE 2. SYNTEK ASSET MANAGEMENT, L.P.

The Company owns 76.8% limited partner interest in Syntek Asset Management,
L.P. ("SAMLP"), the general partner of NRLP and National Operating, L.P.
("NOLP"), the operating partnership of NRLP. Gene E. Phillips, a Director and
Chairman of the Board of the Company until November 16, 1992, is a general
partner of SAMLP, and until March 4, 1994, William S. Friedman, a Director and
President of the Company until December 31, 1992, was also general partner of
SAMLP.

F-10
44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NRLP, SAMLP and Messrs. Phillips and Friedman were among the defendants in a
class action lawsuit arising from the formation of NRLP. An agreement settling
such lawsuit for the above mentioned defendants became effective on July 5,
1990. The settlement agreement provided for, among other things, the
appointment of an NRLP oversight committee; the establishment of specified
annually increasing targets for five years relating to the price of NRLP's
units of limited partner interest; a limitation and deferral or waiver of
NRLP's reimbursement to SAMLP of certain future salary costs; a deferral or
waiver of certain future compensation to SAMLP; the required distribution to
unitholders of all of NRLP's cash from operations in excess of certain
renovation costs unless the NRLP oversight committee approves alternative uses
for such cash from operations; the issuance of unit purchase warrants to
members of the plaintiff class; and the contribution by the then individual
general partners of $2.5 million to NRLP over a four-year period. In accordance
with the indemnification provisions of SAMLP's agreement of limited
partnership, SAMLP agreed to indemnify Messrs. Phillips and Friedman, the
individual general partners, at the time, of SAMLP, for the $2.5 million
payment to NRLP. The final annual installment of principal and interest was
paid by SAMLP in May 1994.

The settlement agreement provides for the resignation and replacement of
SAMLP as general partner if the unit price targets are not met for two
consecutive anniversary dates. NRLP did not meet the unit price targets for the
first and second anniversary dates. On July 8, 1992, SAMLP notified the NRLP
oversight committee of the failure of NRLP to meet the unit price targets for
two successive years and that it expects to resign as general partner of NRLP
and NOLP.

The withdrawal of SAMLP as general partner would require NRLP to purchase
SAMLP's general partner interest (the "Redeemable General Partner Interest") at
its then fair value, and to pay certain fees and other compensation as provided
in the partnership agreement. Syntek Asset Management, Inc. ("SAMI"), the
managing general partner of SAMLP, has calculated the fair value of such
Redeemable General Partner Interest to be $36.2 million at December 31, 1995,
before reduction for the principal balance ($4.2 million at December 31, 1995)
and accrued interest ($4.4 million at December 31, 1995) on the note receivable
from SAMLP for its original capital contribution to the Partnership.

In January 1995, NRLP, SAMLP and the NRLP oversight committee executed an
Implementation Agreement which provides for the nomination of a successor
general partner to succeed SAMLP and for the resolution of all related matters
under the class action settlement. On February 20, 1996, the parties to the
Implementation Agreement executed an Amended and Restated Implementation
Agreement.

Provided that the successor general partner is elected pursuant to the terms
of the Amended and Restated Implementation Agreement, SAMLP shall receive
$12,471,500 from the NRLP. This amount represents a compromise settlement of
the net amounts owed by NRLP to SAMLP upon SAMLP's withdrawal as general
partner and any amounts which SAMLP and its affiliates may owe to NRLP. This
amount shall be paid to SAMLP pursuant to a promissory note in accordance with
the terms set forth in the Amended and Restated Implementation Agreement.

Upon approval by NRLP's unitholders, SAMLP shall resign as general partner of
NRLP and NOLP and the successor general partner shall take office. If the
required approvals are obtained, it is anticipated that the successor general
partner may be elected and take office during the second or third quarter of
1996.

The Amended and Restated Implementation Agreement provides that SAMLP, and
its affiliates owning units in NRLP, shall not vote to remove the successor
general partner, except for removal with cause, for a period of 36 months from
the date the successor general partner takes office.

F-11
45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Upon the election and taking office of the successor general partner, the
class action settlement and the NRLP oversight committee shall be terminated.
If the successor general partner nominee is not elected, the existing
settlement shall remain in full force and effect and all of the provisions of
the Amended and Restated Implementation Agreement shall be voided, including
the compromise settlement referred to above.

NOTE 3. NOTES AND INTEREST RECEIVABLE

1995 1994
-------------------- -------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------- -------- -------- --------

Notes Receivable
Performing (including $12,962
in 1995 and $10,930 in 1994
from affiliates) $ 60,121 $ 56,335 $ 54,032 $ 51,844
Nonperforming, nonaccruing 1,784 1,784 2,325 2,206
-------- -------- -------- --------
$ 61,905 58,119 $ 56,357 54,050
======== ========
Interest receivable 267 286
Unamortized premiums/
(discounts) (102) (26)
Deferred gains (4,617) (4,617)
-------- --------
$ 53,667 $ 49,693
======== ========

The Company does not recognize interest income on nonperforming notes
receivable. For the years 1995, 1994 and 1993 unrecognized interest income on
such nonperforming notes receivable totaled $1.2 million, $2.0 million and $3.1
million, respectively.

Notes receivable at December 31, 1995, mature from 1996 to 2014 with interest
rates ranging from 6.0% to 12.9% and a weighted average rate of 8.8%. A small
percentage of these notes receivable carry a variable interest rate. Notes
receivable include notes generated from property sales which have interest
rates adjusted at the time of sale to yield rates ranging from 6% to 14%. Notes
receivable are generally nonrecourse and are generally collateralized by real
estate. Scheduled principal maturities of $38.4 million are due in 1996 of
which $1.8 million is due on nonperforming notes receivable.

Nonrecourse participations totaling $1.1 million and $2.6 million at December
31, 1995 and 1994, respectively, have been deducted from notes receivable.

In June 1991, the Company entered into an asset sales agreement with an
insurance company whereby the Company sold real estate and participations in
various of its assets in an effort to develop a potential source for future
financing and to generate cash from otherwise illiquid assets. Assets
transferred by the Company pursuant to the asset sales agreement included a
retail shopping center in Lubbock, Texas with a carrying value of $2.0 million
prior to transfer, a $1.5 million senior participation in a second lien
mortgage note secured by the Las Vegas Plaza, a retail shopping center in Las
Vegas, Nevada, a $315,000 participation in a first mortgage note secured by
unimproved land in Virginia Station, Virginia and a $799,000 participation in a
second lien mortgage note secured by the Country Club Apartments, an apartment
complex in Flagstaff, Arizona. In return, the Company received a $1.9 million
participation in a first mortgage note secured by a hotel site in Lihue,
Hawaii, a $1.0 million first mortgage note secured by land in Maricopa County,
Arizona, a $118,000 first lien mortgage note secured by a single-family
residence in Silver Creek, Colorado and $1.5 million in cash. The asset sales
agreement contained put and guaranty provisions whereby, at any time, either
party could demand that the seller reacquire any asset sold pursuant to the
terms of the asset sales agreement

F-12
46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

for the consideration originally received. In March 1992, the Company received
payment in full on the $118,000 note secured by the single-family residence in
Silver Creek, Colorado.

In March 1992, the insurance company was placed in receivership and in June
1992, the Company provided notice to the insurance company, under the terms of
the put and guaranty provisions, of the asset sales agreement, of its desire to
divest itself of all assets received. The Receiver refused to allow the
enforcement of the put and guaranty provisions of the asset sales agreement.

In June 1992, the Company foreclosed on the note receivable secured by land
in Maricopa County, Arizona, and recorded provision for loss of $845,000 to
reduce the land's carrying value to its then estimated fair value. During
September 1992, the Company recorded the foreclosure of the hotel site in
Lihue, Hawaii. In March 1995, the Company collected in full the second lien
mortgage note secured by the Country Club Apartments, but did not remit such
amount to the insurance company.

A settlement between the Company and Receiver was approved by the court on
February 15, 1995. Under the terms of the settlement, the insurance company
returned to the Company all of the assets which it received from the Company,
except for the participation in the first mortgage note secured by unimproved
land in Virginia Station, Virginia. In exchange, the Company returned to the
insurance company $1.0 million in cash and all the assets which it received
from the insurance company, other than the note secured by the residence in
Colorado which the Company had collected. The asset transfers and the Company's
cash payment were completed in the fourth quarter of 1995. The Company incurred
no loss on the settlement.

The borrower on a $1.7 million first mortgage note receivable secured by land
in Osceola, Florida failed to make the required principal payment on the note's
November 1, 1993 maturity. The Company instituted foreclosure proceedings and
was awarded a summary judgment in January 1994. During 1994 and 1995, the
borrower paid the Company a total of $270,000 in nonrefundable fees to delay
foreclosure of the property until April 24, 1995. On April 21, 1995, the
borrower filed for bankruptcy protection. In July 1995, the Company filed a
motion with the bankruptcy court to lift the court's stay and allow the Company
to proceed with foreclosure. In September 1995, the bankruptcy court denied the
Company's motion to lift stay and the borrower was allowed to file a plan of
reorganization. The bankruptcy court has set a hearing date of May 15, 1996,
for confirmation of the borrower's plan of reorganization. The note had a
principal balance of $1.6 million at December 31, 1995. The Company does not
expect to incur any loss if it is allowed to foreclose on the collateral
property as its estimated fair value exceeds the carrying value of the note.

The Company did not receive the payment due on October 1, 1991 on the first
mortgage note receivable secured by the 386 Ocean Parkway Co-op. In December
1993, the Company recorded a provision for loss of $300,000 to reduce the
carrying value of the note to the estimated fair value of the collateral
property. In February 1994, the Company agreed to reinstate and modify its note
in exchange for the pledge of additional collateral. The reinstated note
reduced the principal balance from $900,000 to $750,000, waived all defaults on
the note and extended the maturity date of the note to September 15, 1999. In
June 1994, the Company sold its mortgage note for $450,000 in cash. The Company
incurred no loss on the sale in excess of the amounts previously provided.

In March 1994, as partial consideration for the sale of a restaurant site in
Los Angeles, California, the Company provided $100,000 of purchase money
financing. See NOTE 4. "REAL ESTATE."

In August 1990, the Company foreclosed on its fourth lien note receivable
secured by the Continental Hotel and Casino in Las Vegas, Nevada. The Company
acquired the hotel and casino property at foreclosure subject to first and
second lien mortgages totaling $10.0 million and a disputed third lien
mortgage. In June 1992, the Company sold the hotel and casino to the third
lienholder accepting as partial payment a $22.0 million wraparound mortgage
note receivable. The $22.0 million note bears interest at 11%, requires monthly
payments of $175,000, and has an extended maturity of December 31, 1995. The
Company recorded a deferred gain of $4.3 million in connection with the sale of
the hotel and casino resulting from the disputed third lien mortgage being
subordinated to the Company's wraparound mortgage note receivable. The Company,
the borrower and the underlying lienholder have again agreed to extend the

F-13
47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

wraparound mortgage note receivable and underlying liens to July 1, 1996. A one
percent extension fee was added to the principal balance of the wraparound
note. The Company's modified wraparound note receivable continues to accrue
interest at 11% per annum with any unpaid interest being added monthly to the
principal balance. All other terms remained the same. The borrower is making
payments in accordance with the terms of the modified note. The Company's
wraparound mortgage note receivable had a principal balance of $22.7 million at
December 31, 1995.

In conjunction with the modification of the Company's wraparound mortgage
note receivable, the underlying lienholder has agreed to forebear exercising
its rights under the first and second liens on the condition that the Company
continue to remit to it the greater of either $175,000 or all sums received by
the Company. The Company remains in compliance with the terms of the
forbearance agreement. Also as discussed in NOTE 4. "REAL ESTATE", in November
1994, the Company sold its apartment complex in San Antonio, Texas, along with
its three apartment complexes in Biloxi, Mississippi to a newly formed
partnership in exchange for a 27% limited partner interest, $3.2 million in net
cash, a $100,000 certificate of deposit and second and third lien mortgages
totaling $1.3 million secured by the apartment complex in San Antonio, Texas.
Both notes require interest only payments and mature September 1, 2004.

At December 31, 1995, the Company held a mortgage note receivable secured by
a third lien on a commercial property in South Carolina and personal guaranties
of several individuals. The borrower has failed to make the required payments
of principal and interest since December 1, 1994. The Company accelerated the
note and instituted foreclosure proceedings, as well as actions against the
guarantors of the note. Upon notice of acceleration, the borrowers had 30 days
to cure their default. Effective September 1, 1995, the note was extended to
September 1, 1996, requiring a $68,000 principal reduction payment with the
monthly interest, quarterly principal payments and all other terms remaining
the same. The Company has received $43,000 of the required principal payment
and is to receive the remaining $25,000 on April 1, 1996. The principal balance
of the note was $279,000 at December 31, 1995. The Company expects to incur no
loss on this note in excess of reserves previously provided.

The Company holds a junior mortgage note receivable secured by the
Williamsburg Hospitality House in Williamsburg, Virginia, that is subject to
underlying liens totaling $11.7 million at December 31, 1995. In October 1993,
the first lien debt was restructured and split in three pieces. During 1995,
the Company advanced the borrower $3.3 million to payoff the second lien,
allowing the borrower to receive a $2.4 million discount offered by the lender
for early payoff of such lien. In conjunction with such advance, the Company
extended the maturity of its note to April 1, 1996. All other terms of the note
remained unchanged.

NOTE 4. REAL ESTATE

In February 1995, the Company sold the Boulevard Villas Apartments in Las
Vegas, Nevada, for $9.6 million. The Company initially treated the sale as a
financing transaction, the Company having provided the purchaser with its $1.6
million down payment, by loaning a like amount, secured by a second lien on an
office building in Houston, Texas. In March 1995, the office building was sold
and the Company's loan was paid in full. The Company received net cash of $3.4
million from the sale after the payoff of $5.9 million in existing mortgage
debt and the payment of various closing costs associated with the sale. The
Company recognized a gain of $924,000 on the sale.

In May 1995, the Company purchased a 74.9 acre parcel of partially developed
land in Las Colinas, Texas, for $13.5 million. In connection with the
acquisition, the Company borrowed $15.0 million under a term loan, which bears
interest at the prime rate plus 4%, (12.50% per annum at December 31, 1995),
requires monthly interest only payments, a 1% annual maintenance fee, principal
reduction payments of $1.5 million on the first day of November 1995 and May
1996 and $3.0 million every six months thereafter commencing November 1996,
with the balance of principal and accrued but unpaid interest due at maturity
on May 1, 1998. The loan is secured by the land in Las Colinas, Texas, a
participation interest in two of the Company's notes receivable, land in
Atlanta, Georgia and a pledge of 586,800 NRLP limited partner units owned by
the Company. The Company received net financing proceeds of $210,000 after the
purchase of the land and payment of associated closing costs. In June 1995, the
Company borrowed an additional $3.0

F-14
48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

million from this lender increasing the term loan principal balance to $18.0
million. The additional $3.0 million borrowing was paid in full prior to its
March 31, 1996 maturity.

In September 1995, the Company sold 6.9 acres of the 74.9 acre parcel, for
$2.9 million in cash. In accordance with the provisions of the term loan, the
Company applied the net proceeds of the sale, $2.6 million, to pay down the
term loan. Such pay down was credited against the principal payments the
Company was otherwise required to make in 1995 and 1996. The principal balance
of the term loan was $15.5 million at December 31, 1995. The Company recognized
a $1.6 million gain on the sale. In February 1996, the Company refinanced the
$7.8 million of debt secured by its $18.0 million note receivable secured by
the Las Vegas Plaza Shopping Center in Las Vegas, Nevada, for $12.0 million,
paying $1.5 million of the net refinancing proceeds on the term loan balance
due by March 31, 1996. See NOTE 19. "SUBSEQUENT EVENTS." In March 1996, the
Company sold an additional 2.3 acres for $961,000 in cash. See NOTE 19.
"SUBSEQUENT EVENTS." The Company applied the net proceeds of the sale, $891,000
to pay down the term loan.

In October 1995, the Company purchased an additional tract of partially
developed land in Las Colinas, Texas, totaling 92.6 acres for $7.1 million. The
Company paid $959,000 in cash and borrowed the remaining $6.1 million. The
mortgage bears interest at the prime rate plus 5%, (13.50% at December 31,
1995), requires monthly interest only payments through September 30, 1996, four
quarterly deferred commitment fee payments of $50,000 and $50,000 monthly
principal payments beginning October 1, 1996. The principal balance, accrued
but unpaid interest and a $500,000 "maturity fee" is due at maturity on
December 1, 1996. The Company has an option to extend the maturity date to
October 1, 1997 if no event of default has occurred, written notice is given
prior to maturity and the principal balance of the loan has been reduced by
$2.1 million. The Company has also agreed to pledge to the lender, as
additional collateral for the loan, $2.0 million of newly issued shares of the
Company's Common Stock. On February 13, 1996, the Company entered into a
contract to sell 72.5 of the 92.6 acres for $12.9 million in cash. See NOTE 19.
"SUBSEQUENT EVENTS."

In November 1994, the Company sold its three Mississippi apartment complexes,
Watersedge III Apartments, Edgewater Garden Apartments, Chateau Bayou
Apartments, and its apartment complex in San Antonio, Texas, Mediterranean
Villa Apartments, to a newly formed limited partnership in exchange for, a 27%
limited partner interest in the partnership, $3.2 million in net cash, a
$100,000 certificate of deposit, and second and third liens totaling $1.3
million secured by the Mediterranean Villa Apartments. See NOTE 3. "NOTES AND
INTEREST RECEIVABLE." The Company has deferred any gain related to the property
sales due to the Company having a continuing ownership interest in the
properties, through its 27% limited partner interest in the owning partnership
and the Company also having the option to reacquire the properties at anytime
prior to September 2, 1997, and unwind the partnership under certain
circumstances. The deferred gain of $5.6 million is offset against the
Company's investment in the partnership in the accompanying Consolidated
Balance Sheets.

In March 1994, the Company sold a restaurant site in Los Angeles, California,
that was held for sale for $190,000. The Company received $90,000 in cash and
provided purchase money financing of $100,000. The Company recognized a gain of
$18,000 on the sale. See NOTE 3. "NOTES AND INTEREST RECEIVABLE."

Also in March 1994, the Company acquired for $26,000 in cash, all of the
capital stock of the corporate general partner of Merchandise Mart Associates,
Ltd. (" Mart, Ltd."). Concurrently, the Company also acquired all of the
capital stock of Garden Capital Merchandise Mart, Inc. ("GCMMI") for $1,000 and
the assumption of $271,000 in debt including $125,000 payable to the Company.
The GCMMI stock was purchased from individuals who also own the corporate
general partner of a limited partnership in which NOLP is a 99.3% limited
partner. (See NOTE 6. "INVESTMENTS IN REAL ESTATE ENTITIES.") The acquired
assets of GCMMI included a wraparound mortgage note receivable with a principal
balance of $33.4 million secured by the Denver Merchandise Mart, a 509,008
square foot merchandise mart in Denver, Colorado, title to the Inn at the Mart,
a 156 room hotel adjacent to the Denver Merchandise Mart, and parcels of land
contiguous to the Denver Merchandise Mart. In May 1992, the Company had
acquired title to land in Denver, Colorado subject to a ground lease to Mart,
Ltd. as lessee, for the operation of the Denver Merchandise Mart and a 2.9%
limited partner interest in Mart, Ltd. Effective April 1, 1994, the Company

F-15
49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

recorded the acquisition of the Denver Merchandise Mart and the assumption of
underlying debt of $6.1 million. The Company acquired the wraparound mortgage
and the general partner of Mart, Ltd. with the intent of acquiring the Denver
Merchandise Mart, hence its classification as held for investment. See NOTE 8.
"NOTES AND INTEREST PAYABLE."

In 1991, the Company purchased all of the capital stock of a corporation
which owned 198 developed residential lots in Fort Worth, Texas. Through
December 31, 1994, a total of 172 of the residential lots were sold for an
aggregate gain of $250,000. During 1995, an additional 4 lots were sold for
aggregate gain of $6,000. At December 31, 1995, 22 lots remained to be sold.

Also in 1991, the Company purchased all of the capital stock of a company
which owned a 60% interest in a joint venture which in turn owned 113 partially
developed residential lots in Denton, Texas. Through 1994, 109 of the
residential lots were sold for an aggregate gain of $992,000. During 1995, the
remaining 4 lots were sold for an aggregate gain of $24,000.

NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES

Activity in the allowance for estimated losses was as follows:

1995 1994 1993
-------- -------- --------

Balance January 1, $ 8,201 $ 9,913 $ 12,444

Provision for losses -- -- 2,300

Amounts charged off (947) (1,712) (3,159)

Amounts reclassified to
liabilities -- -- (1,672)
-------- -------- --------
Balance December 31, $ 7,254 $ 8,201 $ 9,913
======== ======== ========

NOTE 6. INVESTMENTS IN REAL ESTATE ENTITIES

The Company's investment in real estate entities at December 31, 1995,
includes (i) equity securities of three publicly traded real estate investment
trusts (collectively the "Trusts"), Continental Mortgage and Equity Trust
("CMET"), Income Opportunity Realty Investors, Inc., formerly Income
Opportunity Realty Trust (collectively "IORI"), and Transcontinental Realty
Investors, Inc. ("TCI"), (ii) units of limited partner interest of NRLP, (iii)
a general partner interest in NRLP and NOLP, the operating partnership of NRLP,
through its 76.8% limited partner interest in SAMLP and (iv) interests in real
estate joint venture partnerships. Gene E. Phillips, the Chairman of the Board
and a Director of the Company until November 16, 1992, is a general partner of
SAMLP, the general partner of NRLP and NOLP and a director and Chief Executive
Officer of SAMI. Randall M. Paulson, an executive officer of the Company,
serves as a director of SAMI and as President of the Trusts, SAMI and BCM. In
addition, BCM serves as advisor to the Trusts, and performs certain
administrative and management functions for NRLP and NOLP on behalf of SAMLP.

The Company accounts for its investment in the Trusts, NRLP and the joint
venture partnerships using the equity method as more fully described in NOTE 1.
"SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Investment in real estate
entities." The Company continues to account for its investment in NRLP under
the equity method due to the pending resignation of SAMLP as general partner of
NRLP. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P."

Substantially all of the Company's equity securities of the Trusts and NRLP
are pledged as collateral for borrowings. See NOTE 8. "NOTES AND INTEREST
PAYABLE."

F-16
50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company's investment in real estate entities, accounted for using the
equity method, at December 31, 1995 was as follows:

Percentage of Equivalent
the Company's Carrying Value Investee Market Value of
Ownership at of Investment at Book Value at Investment at
December 31, December 31, December 31, December 31,
Investee 1995 1995 1995 1995
- -------- ---- ---- ---- ----

NRLP 52.1% $ 12,712 $ * $ 38,020
CMET 37.2 12,116 28,297 15,757
IORI 25.9 2,752 6,271 4,065
TCI 28.2 9,162 25,195 11,335
---------- -----------
36,742 $ 69,177
===========
General partner
interest in NRLP and NOLP 7,726
Other (3,396)
----------
$ 41,072
==========

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

* At December 31, 1995, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity, however, was $161.5 million
(unaudited). Revaluation equity is defined as the difference between the
appraised value of the partnership's real estate, adjusted to reflect the
partnership's estimate of disposition costs, and the amount of the mortgage
notes payable and accrued interest encumbering such property as reported in
NRLP's Annual Report on Form 10-K for the year ended December 31, 1995.

The Company's investment in real estate entities, accounted for using the
equity method, at December 31, 1994 was as follows:

NRLP 48.1% $ 13,727 $ * $ 31,623
CMET 33.9 11,389 26,723 14,850
IORI 21.0 2,285 5,378 3,267
TCI 24.6 78,332 22,909 9,782
--------- ---------
35,234 $ 59,522
=========

General partner
interest in NRLP and NOLP 7,791
Other (4,181)
---------
$ 38,844
=========

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

* At December 31, 1994, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity, however, was $144.9 million.
Revaluation equity is defined as the difference between the appraised value
of the partnership's real estate, adjusted to reflect the partnership's
estimate of disposition costs, and the amount of the mortgage notes payable
and accrued interest encumbering such property as reported in NRLP's Annual
Report on Form 10- K for the year ended December 31, 1994.

F-17
51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company's management continues to believe that the market value of each
of the Trusts and NRLP undervalues their assets and the Company has, therefore,
continued to increase its ownership in these entities in 1995, as its liquidity
has permitted.

IORI was scheduled to begin liquidation of its assets prior to October 24,
1996. However, on March 15, 1996, IORI's stockholders approved a proposal to
convert IORI from a finite life business trust to a perpetual life corporation.

In January 1992, the Company entered into a partnership agreement with an
entity affiliated with the owner, at the time, of in excess of 14% of the
Company's outstanding shares of Common Stock, to acquire 287 developed
residential lots adjacent to the Company's other residential lots in Fort
Worth, Texas. The partnership agreement designates the Company as managing
general partner. The partnership agreement also provides each of the partners
with a guaranteed 10% return on their respective investments. Through December
31, 1994, 73 of the residential lots owned by the partnership were sold. During
1995, an additional 72 lots were sold with 142 lots remaining to be sold at
December 31, 1995. Through December 31, 1995, each partner had received
$226,000 in return of capital distributions and $120,000 in profit
distributions from the partnership. See NOTE 8. "NOTES AND INTEREST PAYABLE".

In November 1994, the Company sold four apartment complexes to a newly formed
limited partnership in exchange for cash, a 27% limited partner interest in the
partnership and two mortgage notes receivable, secured by one of the properties
sold by the Company. In conjunction with the exchange transaction the Company
recorded a deferred gain of $5.6 million which is offset against the Company's
investment in the partnership. See NOTE 3. "NOTES AND INTEREST RECEIVABLE" and
NOTE 4. "REAL ESTATE."

In June 1995, the Company purchased the corporate general partner of a
limited partnership which owns apartment complexes in Illinois, Florida and
Minnesota, with a total of 900 units. The purchase price of the corporate
general partner was $628,000 in cash. The corporate general partner has a 1%
interest in the partnership which is subordinated to a priority return of the
limited partner.

Set forth below are summary financial data for equity investees owned over
50%:

1995 1994
--------- ---------

Property and notes
receivable, net ........... $ 239,728 $ 253,067
Other assets ................. 53,202 37,073
Notes payable ................ (338,534) (337,544)
Other liabilities ............ (53,663) (44,419)
--------- ---------
Equity ....................... $ (99,267) $ (91,823)
========= =========

1995 1994 1993
--------- --------- ---------

Revenues .......................... $ 110,892 $ 107,546 $ 103,044
Depreciation ...................... (10,268) (10,034) (10,168)
Interest .......................... (34,956) (34,145) (34,699)
Operating expenses ................ (69,572) (66,602) (65,972)
--------- --------- ---------
(Loss) before gains on sale of
real estate and extraordinary
gains .......................... (3,904) (3,235) (7,795)
Gains on sale of real estate ...... 7,701 8,252 --
Extraordinary gains ............... -- -- 9,046
--------- --------- ---------
Net income ........................ $ 3,797 $ 5,017 $ 1,251
========= ========= =========

F-18
52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company's equity share of:

1995 1994 1993
------- ------- -------

(Loss) before gains on sale of
real estate and extraordinary
gains .......................... (1,767) (1,279) (2,584)
Gains on sale of real estate ...... 1,884 1,923 --
Extraordinary gains ............... -- -- 3,364
------- ------- -------
Net income ........................ $ 117 $ 644 $ 780
======= ======= =======

Set forth below are summary financial data for equity investees owned less than
50%:

1995 1994
--------- ---------

Property and notes
receivable, net ........... $ 466,220 $ 427,384
Other assets ................. 61,697 52,454
Notes payable ................ (318,161) (253,714)
Other liabilities ............ (20,396) (28,608)
--------- ---------
Equity ....................... $ 189,360 $ 197,516
========= =========

1995 1994 1993
-------- -------- --------

Revenues .......................... $ 94,730 $ 74,093 $ 63,006
Depreciation ...................... (13,950) (10,276) (8,816)
Provision for losses .............. (541) (1,429) (1,094)
Interest .......................... (28,102) (20,264) (15,962)
Operating expenses ................ (65,471) (54,213) (47,003)
-------- -------- --------
(Loss) before gains on sale of
real estate and extraordinary
gains .......................... (13,334) (12,089) (9,869)
Gains on sale of real estate ...... 5,822 6,375 389
Extraordinary gains ............... 1,437 1,189 2,400
-------- -------- --------
Net (loss) ........................ $ (6,075) $ (4,525) $ (7,080)
======== ======== ========

The Company's equity share of:

1995 1994 1993
------- ------- -------

(Loss) before gains on sale of
real estate and extraordinary
gains ........................... (3,356) (1,250) (1,430)
Gains on sale of real estate ....... 2,463 895 --
Extraordinary gains ................ 783 273 --
------- ------- -------
Net (loss) ......................... $ (110) $ (82) $(1,430)
======= ======= =======

The difference between the carrying value of the Company's investment and the
equivalent investee book value is being amortized over the life of the
properties held by each investee.

The Company's cash flow from the Trusts and NRLP is dependent on the ability
of each of the entities to make distributions. In the first quarter of 1993,
CMET and IORI resumed regular quarterly distributions, NRLP in the fourth
quarter of 1993 and TCI in the fourth quarter of 1995. In 1995, the Company
received distributions from CMET, IORI

F-19
53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

and TCI totaling $641,000 and $719,000 from NRLP. At December 31, 1995 the
Company accrued $3.3 million in NRLP distributions which were paid January 2,
1996. The Company received total distributions from CMET and IORI of $675,000
in 1994 and $1.4 million from NRLP in December 1994.

The Company's investments in the Trusts and NRLP were initially acquired in
1989. In 1995, the Company purchased an additional $6.5 million of equity
securities of the Trusts and NRLP.

NOTE 7. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO

In 1994, the Company began purchasing equity securities of entities other
than those of the Trusts and NRLP to diversify and increase the liquidity of
its margin accounts. In 1995, the Company purchased $19.4 million and sold
$18.4 million of such securities. These equity securities are considered a
trading portfolio and are carried at market value. At December 31, 1995, the
Company recognized an unrealized decline in the market value of the equity
securities in its trading portfolio of $998,000. In 1995, the Company realized
a net gain of $349,000 from the sale of trading portfolio securities and
received $852,000 in dividends and $238,000 in return of capital distributions
on such securities. At December 31, 1994, the Company recognized an unrealized
decline in the market value of the equity securities in its trading portfolio
of $242,000, realized a net loss of $101,000 from the sale of trading portfolio
securities and received $274,000 in dividends on such securities. Unrealized
and realized gains and losses in the trading portfolio are included in other
income in the accompanying Consolidated Statements of Operations.

NOTE 8. NOTES AND INTEREST PAYABLE

Notes and interest payable consisted of the following:

1995 1994
------------------- -------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------- -------- -------- --------

Notes payable
Mortgage Loans ............ $ 18,376 $ 22,086 $ 26,020 $ 26,239
Borrowings from financial
institutions ............. 27,052 29,945 7,929 9,298
Notes payable to affiliates 1,554 4,176 1,533 5,166
-------- -------- -------- --------
$ 46,982 56,207 $ 35,482 40,703
======== ========

Interest payable (including
$4,380 in 1995 and $4,566
in 1994 to affiliate) 4,956 4,992
-------- --------
$61,163 $ 45,695
======== ========

Scheduled principal payments on notes payable are due as follows:

1996............................ $26,442
1997............................ 13,053
1998............................ 3,747
1999............................ 369
2000............................ 293
Thereafter...................... 12,303
-------
$56,207
=======

F-20
54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Stated interest rates on notes payable ranged from 6.0% to 14% at December
31, 1995, and mature in varying installments between 1996 and 2007. At December
31, 1995, notes payable were collateralized by mortgage notes receivable with a
net carrying value of $18.5 million and by deeds of trust on real estate with a
net carrying value of $73.2 million.

In March 1995, the Company exercised its option to extend the maturity date
of the loan secured by the Kansas City Holiday Inn, from March 1995 to March
1997. In April and October 1995, the Company refinanced the mortgage debt in
the amount of $6.0 million. The Company received net cash of $2.8 million after
the payoff of $2.9 million of existing mortgage debt and various closing costs
associated with the refinancing. The new mortgage bears interest at 9.45% per
annum, requires monthly principal and interest payments of $55,732 and matures
on November 1, 2005.

In May 1995, the Company obtained a $15.0 million term loan, the proceeds of
which were used to acquire 74.9 acres of partially developed land in Las
Colinas, Texas. In June 1995, the Company borrowed an additional $3.0 million
from this lender increasing the term loan balance to $18.0 million. See NOTE 4.
"REAL ESTATE." The principal balance of the loan was $15.5 million at December
31, 1995. The loan bears interest at the prime rate plus 4%, (12.50% per annum
at December 31, 1995), requires monthly interest only payments, a 1% annual
maintenance fee, principal reduction payments of $1.5 million on the first day
of November 1995 and May 1996 and $3.0 million every six months thereafter
commencing November 1996, with the balance of principal and accrued but unpaid
interest due at maturity on May 1, 1998. The loan is secured by the land in Las
Colinas, Texas, a participation interest in two of the Company's notes
receivable, land in Atlanta, Georgia and a pledge of 586,800 NRLP units of
limited partner interest owned by the Company. The Company received net
financing proceeds of $210,000 after the purchase of the land and payment of
associated closing costs. In June 1995, the Company borrowed an additional $3.0
million from this lender increasing the term loan principal balance to $18.0
million. The additional $3.0 million borrowing was paid in full prior to its
March 31, 1996 maturity.

In October 1995, the Company obtained $6.1 million of purchase money
financing in conjunction with the acquisition of an additional 92.6 acres of
partially developed land in Las Colinas, Texas. See NOTE 4. "REAL ESTATE." The
outstanding principal balance of this note was $6.5 million at December 31,
1995. The mortgage bears interest at the prime rate plus 5%, (13.50% at
December 31, 1995), requires monthly interest only payments through September
30, 1996, four quarterly deferred commitment fee payments of $50,000 and
$50,000 monthly principal reduction payments beginning October 1, 1996. The
principal balance, accrued but unpaid interest and a $500,000 "maturity fee" is
due at maturity on December 1, 1996. The Company has an option to extend the
maturity date to October 1, 1997 if no event of default has occurred, written
notice is given prior to maturity and the principal balance of the loan has
been reduced by $2.1 million.

Notes payable to affiliates at December 31, 1995 and 1994 include a $4.2
million note due to NRLP as payment for SAMLP's general partner interest in
NRLP. The note bears interest at 10% per annum compounded semi-annually and is
due at the earlier of September 2007, the liquidation of NRLP or the withdrawal
of SAMLP as general partner of NRLP. See NOTE 2. "SYNTEK ASSET MANAGEMENT,
L.P."

In June 1992, the Company obtained a $3.3 million loan from the owner, at the
time, of in excess of 14% of the Company's outstanding shares of Common Stock.
The note was paid in full at its May 1995 maturity. The loan also provided for
the lender's participation in the proceeds from either the sale or refinancing
of the Company's land in Atlanta, Georgia, or to put his participation to the
Company in exchange for a payment of $623,000. On December 2, 1993, the lender
exercised his put and required full payment by the Company by January 2, 1996.
The Company paid its $623,000 put obligation in May 1995.

F-21
55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company has margin arrangements with various brokerage firms which
provide for borrowings of up to 50% of the market value of the Company's
marketable equity securities. The borrowings under such margin arrangements are
secured by equity securities of the Trusts, NRLP and the Company's trading
portfolio and bear interest rates ranging from 7.0% to 11.0%. Margin borrowings
were $34.0 million at December 31, 1995, and $26.4 million at December 31,
1994, 47% and 45%, respectively, of the market values of such equity securities
at such dates.

NOTE 9. REDEEMABLE COMMON STOCK

In June 1992, the Company sold 794,718 newly issued shares of its Common
Stock to Donald C. Carter for $2.0 million in cash. Terms of the sale agreement
provided Mr. Carter with the option of requiring the Company to reacquire up to
720,000 of the purchased shares at a price of $3.06 per share, a total of $2.2
million. The Company accredited the difference between the issuance price and
the redemption price using the "interest method". In December 1994, Mr. Carter
contributed his shares of the Company's Common Stock to a newly formed
partnership in which he is a limited partner. Concurrent with the share
contribution, the partnership rescinded the put provision of the original sales
agreement. Accordingly, as of December 31, 1994, the Company reclassified such
redeemable Common shares to stockholder's equity.

NOTE 10. RIGHTS PLAN

In April 1990, the Company adopted a Preferred Share Purchase Rights Plan
(the "Rights Plan") and approved the distribution to stockholders of a dividend
of one share purchase right (the "Rights") for each then outstanding share of
the Company's Common Stock. Each Right will entitle stockholders to purchase
one one-hundredth of a share of a new series of preferred stock at an exercise
price of $25.00. The Rights will generally be exercisable only if a person or
group (the "Adverse Group") increases its then current ownership in the Company
by more than 25% or commences a tender offer for 25% or more of the Company's
Common Stock. If any person or entity actually increases its then current
ownership in the Company by more than 25% or if the Company's Board of
Directors determines that any 10% stockholder is adversely affecting the
business of the Company, holders of the Rights, other than the Adverse Group,
will be entitled to buy, at the exercise price, the Common Stock of the Company
with a market value of twice the exercise price. Similarly, if the Company is
acquired in a merger or other business combination, each Right will entitle its
holder to purchase, at the Right's exercise price, the number of shares of the
surviving company having a market value of twice the Right's exercise price. In
connection with the one for three reverse Common Stock split effected in
December 1990, the Rights were proportionately adjusted so that each post-split
share certificate represented three Rights, each of which permitted the holder
thereof to purchase one one-hundredth of a preferred share for $25.00 under
such circumstances. The Rights expire in 2000 and may be redeemed at the
Company's option for $.01 per Right under certain circumstances. In connection
with the two for one forward Common Stock split effected January 2, 1996, the
Rights were again proportionately adjusted so that each post-split share
represents one and one-half Rights, each of which permit the holder thereof to
purchase one one-hundredth of a preferred share for $25.00 under such
circumstances.

On March 5, 1991, the Company's Board of Directors approved an amendment to
the Rights Plan. The amendment excludes the Company, the Company's
subsidiaries, and the Company's advisor or its officers and Directors from the
class of persons who may cause the Rights to become exercisable by increasing
their ownership of the Company's stock.

NOTE 11. ADVISORY AGREEMENT

Although the Company's Board of Directors is directly responsible for
managing the affairs of the Company and for setting the policies which guide
it, the day-to-day operations of the Company are performed by BCM, a
contractual advisor under the supervision of the Company's Board of Directors.
The duties of the advisor include,

F-22
56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

among other things, locating, investigating, evaluating and recommending real
estate and mortgage loan investment and sales opportunities as well as
financing and refinancing sources for the Company. BCM as advisor also serves
as a consultant in connection with the Company's business plan and investment
policy decisions made by the Company's Board of Directors.

BCM has been providing advisory services to the Company since February 6,
1989. BCM is a company owned by a trust for the benefit of the children of Gene
E. Phillips. Mr. Phillips served as Chairman of the Board and as a Director of
the Company until November 16, 1992. Mr. Phillips also served as a director of
BCM until December 22, 1989, and as Chief Executive Officer of BCM until
September 1, 1992. Mr. Phillips serves as a representative of the trust for the
benefit of his children that owns BCM and, in such capacity, has substantial
contact with the management of BCM and input with respect to BCM's performance
of advisory services to the Company. Ryan T. Phillips, a Director of the
Company, is a director of BCM and a trustee of the trust that owns BCM. Oscar
W. Cashwell, a Director of the Company, serves as Executive Vice President of
BCM.

The Advisory Agreement provides that BCM shall receive base compensation at
the rate of 0.125% per month (1.5% on an annualized basis) of the Company's
Average Invested Assets. On October 23, 1991, based on the recommendation of
BCM, the Company's advisor, the Company's Board of Directors approved a
reduction in BCM's base advisory fee by 50% effective October 1, 1991. This
reduction remains in effect until the Company's earnings for the four preceding
quarters equals or exceeds $1.00 per share.

In addition to base compensation, the Advisory Agreement provides that BCM,
or an affiliate of BCM, receive an acquisition fee for locating, leasing or
purchasing real estate for the Company; a disposition fee for the sale of each
equity investment in real estate; a loan arrangement fee; an incentive fee
equal to 10% of net income for the year in excess of a 10% return on
stockholders' equity, and 10% of the excess of net capital gains over net
capital losses, if any; and a mortgage placement fee, on mortgage loans
originated or purchased.

The Advisory Agreement further provides that BCM shall bear the cost of
certain expenses of its employees not directly identifiable to the Company's
assets, liabilities, operations, business or financial affairs; and
miscellaneous administrative expenses relating to the performance by BCM of its
duties under the Advisory Agreement.

If and to the extent that the Company shall request BCM, or any director,
officer, partner or employee of BCM, to render services to the Company other
than those required to be rendered by BCM under the Advisory Agreement, such
additional services, if performed, will be compensated separately on terms
agreed upon between such party and the Company from time to time. The Company
has requested that BCM perform loan administration functions, and the Company
and BCM have entered into a separate agreement, as described below.

The Advisory Agreement automatically renews from year to year unless
terminated in accordance with its terms. The Company's management believes that
the terms of the Advisory Agreement are at least as fair as could be obtained
from unaffiliated third parties.

Since October 4, 1989, BCM has acted as loan administration/servicing agent
for the Company, under an agreement terminable by either party upon thirty
days' notice, under which BCM services the Company's mortgage notes and
receives as compensation a monthly fee of .125% of the month-end outstanding
principal balances of the mortgage notes serviced.

NOTE 12. PROPERTY MANAGEMENT

Since February 1, 1990, affiliates of BCM have provided property management
services to the Company. Currently, Carmel Realty Services, Ltd. ("Carmel,
Ltd.") provides property management services for a fee of 5% or less of the
monthly gross rents collected on the properties under its management. Carmel,
Ltd. subcontracts with other entities for the property-level management
services to the Company at various rates. The general partner of Carmel,

F-23
57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) Syntek West, Inc.
("SWI"), of which Mr. Phillips is the sole stockholder, (ii) Mr. Phillips and
(iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd.
subcontracts the property-level management of the Company's hotels, shopping
centers, one of its office buildings and the Denver Merchandise Mart to Carmel
Realty, Inc. ("Carmel Realty"), which is a company owned by SWI. Carmel Realty
is entitled to receive property and construction management fees and leasing
commissions in accordance with the terms of its property-level management
agreement with Carmel, Ltd.

NOTE 13. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.

Fees and cost reimbursements to BCM, the Company's advisor, and its
affiliates were as follows:

1995 1994 1993
------ ------ ------

Fees
Advisory and mortgage
servicing .................... $1,195 $1,242 $1,258
Brokerage commissions ........... 905 497 180
Property and construction
management and leasing
commissions* ................. 1,200 899 348
Loan arrangement ................ 95 25 102
------ ------ ------
$3,395 $2,663 $1,888
====== ====== ======

Cost reimbursements ............... $ 516 $ 434 $ 288
====== ====== ======

* Net of property management fees paid to subcontractors, other than Carmel
Realty.

NOTE 14. INCOME TAXES

Financial statement income varies from taxable income, principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated
losses. At December 31, 1995, the Company had a tax net operating loss
carryforward of $17.3 million expiring through 2009.

At December 31, 1995, the Company recognized a deferred tax benefit of $4.7
million due to tax deductions available to it in future years. However, due to,
among other factors, the Company's inconsistent earnings history, the Company
was unable to conclude that the future realization of such deferred tax
benefit, which requires the generation of taxable income, was more likely than
not. Accordingly, a valuation allowance for the entire amount of the deferred
tax benefit has been recorded.

The components of tax expense are as follows:

1995 1994 1993
------ ------ ------

Income tax provision
Current .................... $ 2 $ 9 $ 11
====== ====== ======

F-24
58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

A reconciliation of the federal statutory tax rate (34%) with the income tax
provision in the Consolidated Statements of Operations is as follows:

1995 1994 1993
------- ------- -------

Income tax at statutory rate ...... $(2,185) $ (825) $(1,450)
Carryforward of net operating
loss income tax benefit ......... 2,185 825 1,450
State income tax, net of
federal benefit ................. 2 9 11
------- ------- -------
Income tax provision .............. $ 2 $ 9 $ 11
======= ======= =======

NOTE 15. EXTRAORDINARY GAIN

In 1995, the Company recognized an extraordinary gain of $783,000
representing its equity share of TCI's extraordinary gain due to the early
payoff of debt.

In 1994, the Company recognized an extraordinary gain of $273,000
representing its equity share of TCI's extraordinary gain from the settlement
of claims against it by a lender. The Company also recognized $50,000 from the
forgiveness of a portion of a first mortgage due to the early payoff of the
second mortgage.

In 1993, the Company recognized an extraordinary gain of $3.4 million
representing its equity share of NRLP's extraordinary gain of $9.0 million from
its acquisition at a discount of certain of its mortgage debt. The Company also
recognized an additional $443,000 from the forgiveness of a portion of a first
mortgage from the early payoff of a second mortgage.

NOTE 16. RENTS UNDER OPERATING LEASES

The Company's operations include the leasing of office buildings and shopping
centers. The leases thereon expire at various dates through 2006. The following
is a schedule of minimum future rents on non-cancelable operating leases as of
December 31, 1995:

1996.............................. $1,740
1997.............................. 1,450
1998.............................. 1,100
1999.............................. 775
2000.............................. 609
Thereafter........................ 1,982
------
$7,656
======

NOTE 17. COMMITMENTS AND CONTINGENCIES

The Company is involved in various lawsuits arising in the ordinary course of
business. In the opinion of the Company's management the outcome of these
lawsuits will not have a material impact on the Company's financial condition,
results of operations or liquidity.

F-25
59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 18. QUARTERLY RESULTS OF OPERATIONS

The following is a tabulation of the Company's quarterly results of
operations for the years 1995 and 1994:

Three Months Ended
---------------------------------------------------
1995 March 31, June 30, September 30, December 31,
- ---- --------- -------- ------------- ------------

Revenue ........................... $ 6,080 $ 5,552 $ 7,06 $ 4,254
Expense ........................... 8,200 9,010 7,93 8,294
---------- ---------- ---------- ----------
(Loss) before gain
on sale of real estate
and extraordinary gain .......... (2,120) (3,458) (867) (4,040)
Gain on sale of
real estate ..................... 924 24 1,59 4,322
Extraordinary gain ................ 315 12 43 25
---------- ---------- ---------- ----------
Net income (loss) ................. $ (881) $ (3,422) $ 1,16 $ 307
========== ========== ========== ==========
Earnings per share
Income (loss) before extra-
ordinary gain ................... $ (.20) $ (.59) $ .13 $ .05
Extraordinary gain ................ .05 -- .07 .01
---------- ---------- ---------- ----------
Net income (loss) ................. $ (.15) $ (.59) $ .20 $ .06
========== ========== ========== ==========

Expense includes equity in losses of investees of $1.3 million, $1.7 million,
$1.4 million and $754,000 in the first, second, third and fourth quarters of
1995, respectively.

Three Months Ended
----------------------------------------------------
1995 March 31, June 30, September 30, December 31,
- ---- --------- -------- ------------- ------------

Revenue ........................... $ 2,960 $ 5,685 $ 7,260 $ 4,636
Expense ........................... 4,529 6,946 7,844 7,171
---------- ---------- ---------- ----------
(Loss) before gain on sale
of real estate and extra-
ordinary gain ................... (1,569) (1,261) (584) (2,535)
Gain on sale of real estate ....... 176 57 910 2,057
Extraordinary gain ................ 36 14 273 --
---------- ---------- ---------- ----------
Net income (loss) ................. $ (1,357) $ (1,190) $ 599 $ (478)
========== ========== ========== ==========
Earnings per share
(Loss) before extra-
ordinary gain ................... $ (.23) $ (.19) $ (.05) $ (.08)
Extraordinary gain ................ .01 -- .05 --
---------- ---------- ---------- ----------
Net income (loss) ................. $ (.22) $ (.19) $ .10 $ (.08)
========== ========== ========== ==========

Expense includes equity in losses of investees of $527,000, $545,000, $1.0
million and $415,000 in the first, second, third and fourth quarters of 1994,
respectively.

F-26
60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 19. SUBSEQUENT EVENTS

In March 1995, the Company modified and extended a loan from a financial
institution with a principal balance of $7.8 million at December 31, 1995 and
collateralized by a note receivable with principal balance of $17.1 million at
such date. On February 5, 1996 the loan was refinanced for $12.0 million. The
Company received net cash of $1.8 million from the refinancing after the payoff
of the financial institution's debt and after making a $1.5 million paydown on
the term loan secured by land in Las Colinas, Texas, in exchange for that
lender's release of its second lien on such note receivable. The new loan bears
interest at 15% per annum, requires monthly principal and interest payments of
$152,000, and matures January 31, 1998. See NOTE 8. "NOTES AND INTEREST
PAYABLE."

In May 1995, the Company purchased 74.9 acres of partially developed land in
Las Colinas, Texas, for $13.5 million. See NOTE 14. "REAL ESTATE." In March
1996, the Company sold 2.3 acres for $961,000 in cash, the net sales proceeds
of $891,000 were used to paydown the term loan. Also in March 1996, the Company
entered into a contract to sell an additional 2.2 acres for $923,000 in cash.
This sale is scheduled to close in April 1996.

In October 1995, the Company purchased an additional tract of 92.6 acres of
partially developed land in Las Colinas, Texas. On February 13, 1996, the
Company entered into a contract to sell 72.5 of the 92.6 acres for $12.9
million in cash. The contract calls for the sale to close in two phases. The
first phase is to close on or before May 23, 1996 but may be extended to July
24, 1996, and the second phase is to close on or before December 31, 1996.

F-27
61

AMERICAN REALTY TRUST, INC.

CONSOLIDATED BALANCE SHEETS

September 30, December 31,
1996 1995
----------- -----------
(dollars in thousands)

Assets
Notes and interest receivable
Performing ........................................... $ 51,392 $ 51,840
Nonperforming, nonaccruing ........................... 1,827 1,827
----------- -----------
53,219 53,667

Less - allowance for estimated losses ................ (3,926) (3,926)
----------- -----------
49,293 49,741
Real estate held for sale, net of accumulated
depreciation ($5,098 in 1996 and 1995) ............ 60,403 32,627

Less - allowance for estimated losses ................ (3,328) (3,328)
----------- -----------
57,075 29,299

Real estate held for investment, net of accumulated
depreciation ($3,678 in 1996 and $2,646 in 1995) .. 31,924 30,125

Marketable equity securities, at market value ........ 1,947 2,093
Cash and cash equivalents ............................ 1,097 1,054
Investments in equity investees ...................... 54,335 41,072
Other assets (including $2,964 in 1996 from affiliate) 9,454 8,649
----------- -----------
$ 205,125 $ 162,033
=========== ===========

F-28
62

AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEET - CONTINUED

September 30, December 31,
1996 1995
--------- ---------
(dollars in thousands)

Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable ................................................. $ 107,613 $ 61,163
Margin borrowings .......................................................... 36,843 34,017
Accounts payable and other liabilities (including $123 in
1996 and $4,584 in 1995 to affiliate) ................................... 7,640 12,698
--------- ---------

152,096 107,878

Minority interest .......................................................... 1,097 1,097

Commitments and contingencies

Stockholders' equity
Preferred stock, authorized 20,000,000 shares,
issued and outstanding
4,000 shares Series B, 10% cumulative, $2.00
par value .......................................................... --
15,489 shares Series C, 10% cumulative, $2.00
par value .......................................................... 31 --
Common stock, $.01 par value, authorized 16,667,000 shares,
6,739,540 shares in 1996 and 5,858,328 in 1995 issued .............. 68 59
Paid-in capital ............................................................ 68,623 66,719
Accumulated (deficit) ...................................................... (16,795) (13,720)
Treasury stock at cost, 282,352 shares ..................................... (3) --
--------- ---------

51,932 53,058
--------- ---------
$ 205,125 $ 162,033
========= =========

F-29
63

AMERICAN REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
September 30, September 30,
------------- -------------
1996 1995 1996 1995
----------- ----------- ----------- -----------

Revenues
Rents ....................................... $ 5,339 $ 5,154 $ 14,733 $ 14,245
Interest .................................... 1,143 1,173 3,416 3,753
Other ....................................... 824 739 1,293 700
----------- ----------- ----------- -----------
7,306 7,066 19,442 18,698

Expenses .................................... 5,339
Property operations ......................... 3,600 3,004 11,166 10,216
Interest .................................... 4,240 2,393 10,656 6,149
Advisory and servicing fees to affiliate .... 392 328 1,093 871
General and administrative .................. 618 382 1,855 1,609
Depreciation and amortization ............... 429 416 1,319 1,258
Equity in losses of investees ............... 702 1,410 3,122 4,369
Minority interest ........................... -- -- -- 671
----------- ----------- ----------- -----------
9,981 7,933 29,211 25,143
----------- ----------- ----------- -----------

(Loss) before gain on sale of real estate and
extraordinary gain .......................... (2,675) (867) (9,769) (6,445)
Gain on sale of real estate ................. 3,324 1,596 7,799 2,544
----------- ----------- ----------- -----------

Income (loss) before extraordinary gain ..... 649 729 (1,970) (3,901)
Extraordinary gain .......................... 121 431 381 758
----------- ----------- ----------- -----------
Net income (loss) ........................... 770 1,160 (1,589) (3,143)

Preferred dividend requirement .............. (48) -- (65) --
----------- ----------- ----------- -----------
Net income (loss) applicable to Common
shares ...................................... $ 722 $ 1,160 $ 1,654) $ (3,143)
=========== =========== =========== ===========

Earnings per share
Income (loss) before extraordinary gain ..... $ .09 $ .13 $ (.32) $ (.67)
Extraordinary gain .......................... .02 .07 .06 .13
----------- ----------- ----------- -----------
Net income (loss) applicable to Common
shares ...................................... $ .11 $ .20 $ (.26) $ (.54)
=========== =========== =========== ===========

Weighted average Common shares used in
computing earnings per share ................ 6,596,074 5,858,328 6,357,447 5,858,328
=========== =========== =========== ===========

F-30
64

AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1996

Series B Series C Common
Preferred Stock Preferred Stock Stock
------------- ------------- -------------
(dollars in thousands)

Balance, January 1, 1996 $ -- $ -- $ 59
Common Stock issued ..... -- -- 9
Series B Preferred Stock
issued .................. 8 -- --
Series C Preferred Stock
issued .................. -- 30 --
Common Stock cash
dividend ................ -- -- --
($.20 per share)
Redemption of share
purchase rights ($.015
per right per share) . -- -- --
Series B Preferred Stock
cash dividend
($3.96 per share) .... -- -- --
Series C Preferred Stock
stock dividend ....... -- 1 --
Treasury stock, at cost . -- -- --
Net (loss) .............. -- -- --
----------- ----------- -----------
Balance, September 30,
1996 ................. $ 8 $ 31 $ 68
=========== =========== ===========

Treasury Paid-in Accumulated Stockholders'
Stock Capital (Deficit) Equity
------------- ------------- ------------- -------------
(dollars in thousands)

Balance, January 1, 1996 $ -- $ 66,719 $ (13,720) $ 53,058
Common Stock issued ..... -- (9) -- --
Series B Preferred Stock
issued .................. -- 392 -- 400
Series C Preferred Stock
issued .................. -- 1,470 -- 1,500
Common Stock cash
dividend ................ -- -- (1,320) (1,320)
($.20 per share)
Redemption of share
purchase rights ($.015
per right per share) . -- -- (101) (101)
Series B Preferred Stock
cash dividend
($3.96 per share) .... -- -- (16) (16)
Series C Preferred Stock
stock dividend ....... -- 48 (49) --
Treasury stock, at cost . (3) 3 -- --
Net (loss) .............. -- -- (1,589) (1,589)
----------- ----------- ----------- -----------
Balance, September 30,
1996 ................. $ (3) $ 68,623 $ (16,795) $ 51,932
=========== =========== =========== ===========

The accompanying notes are an integral part of these Consolidated Financial
Statements.

F-31
65

AMERICAN REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months
Ended September 30,
--------------------
1996 1995
-------- --------
(dollars in thousands

Cash Flows From Operating Activities
Rents collected ................................ $ 14,760 $ 15,228
Interest and dividends collected ............... 3,197 4,579
Distributions received from equity investees'
operating cash flow ........................... 8,626 1,219
Payments for property operations ................. (11,628) (11,220)
Interest paid .................................... (5,881) (6,154)
Advisory and servicing fees paid to affiliate .... (1,093) (871)
General and administrative expenses paid ......... (2,169) (1,626)
Other ............................................ 417 191
-------- --------

Net cash provided by operating activities ...... 6,229 1,346

Cash Flows From Investing Activities
Collections on notes receivable ................ 640 1,423
Notes receivable funded ........................ (100) (430)
Proceeds from sale of real estate .............. 6,740 12,312
Proceeds from sale of marketable equity
securities .................................... 22,564 11,307
Purchases of marketable equity securities ...... (21,271) (13,832)
Investment in equity investees ................. (14,219) (6,794)
Purchases of real estate ....................... (5,658) (14,076)
Earnest money deposits ......................... (526) --
Real estate improvements ....................... (1,901) (1,827)
-------- --------

Net cash used in) investing activities ........ (13,731) (11,917)

Cash Flows From Financing Activities
Proceeds from notes payable .................... 48,153 23,700
Payments on notes payable ...................... (29,486) (17,840)
Deferred borrowing costs ....................... (3,019) (1,200)
Net repayment of advances from affiliates ...... (7,530) (23)
Margin borrowings, net ......................... 464 6,896
Proceeds from issuance of Series B preferred
stock ......................................... 400 --
Deferred borrowing costs ....................... (3,019) (1,200)
Net repayment of advances from affiliates ...... (7,530) (23)
Margin borrowings, net ......................... 464 6,896
Proceeds from issuance of Series B preferred
stock ......................................... 400 --

Distributions to Stockholders .................. (1,437) --
-------- --------

F-32
66

For the Nine Months
Ended September 30,
--------------------
1996 1995
-------- --------
(dollars in thousands

Net cash provided by financing activities .... 7,545 11,533

Net increase in cash and cash equivalents .... 43 962

Cash and cash equivalents, beginning of period .. 1,054 193
-------- --------

Cash and cash equivalents, end of period ........ $ 1,097 $ 1,155
======== ========

Reconciliation of net (loss) to net cash provided
by operating activities
Net (loss) .................................... $ (1,589) $ (3,143)
Adjustments to reconcile net (loss) to net cash
provided by operating activities
Extraordinary gain ........................... (381) (758)
Depreciation and amortization ................ 1,319 1,258
Gain on sale of real estate .................. (7,799) (2,544)
Distributions from equity investees' operating
cash flow ................................. 8,626 1,219
Equity in losses of investees ................ 3,122 4,369
Unrealized (gain) loss on marketable equity
securities ................................ (598) 408
(Increase) decrease in interest receivable ... (93) 64
Decrease in other assets ..................... 2,151 955
Increase (decrease) in interest payable ...... 844 (173)
(Decrease) in accounts payable and
other liabilities ......................... (131) (475)
Other ........................................ 758 166
-------- --------
Net cash provided by operating activities . $ 6,229 $ 1,346
======== ========

Schedule of noncash financing activities

Issuance of 15,489 shares of Series C Preferred
Stock with a liquidation value of $1.5 million $ 31 $ --

F-33
67

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements of American Realty Trust,
Inc. and consolidated entities (the "Company") have been prepared in conformity
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Operating results for the nine month period ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.

Certain balances for 1995 have been reclassified to conform to the 1996
presentation. Shares and per share data have been restated for the two for one
forward share split effected January 2, 1996.

NOTE 2. SYNTEK ASSET MANAGEMENT, L.P.

In August 1996, the Company purchased a pool of assets from Southmark
Corporation ("Southmark") for $3.1 million. See NOTE 4. "'REAL ESTATE."
Included in the asset pool was Southmark's 19.2% limited partnership interest
in Syntek Asset Management, L.P. ("SAMLP") . Such purchase increased the
Company's limited partner interest in SAMLP from 76.8% to 96%. SAMLP is the
general partner of National Realty, L.P. ("NRLP") and National Operating, L.P.
("NOLP"), the operating partnership of NRLP. Gene E. Phillips, a Director and
Chairman of the Board of the Company until November 16, 1992, is a general
partner of SAMLP, and until March 4, 1994, William S. Friedman, a Director and
President of the Company until December 31, 1992, was also general partner of
SAMLP.

NRLP, SAMLP and Messrs. Phillips and Friedman were among the defendants in a
class action lawsuit arising from the formation of NRLP. An agreement settling
such lawsuit for the above- mentioned defendants became effective on July 5,
1990. The settlement agreement provided for, among other things, the
appointment of an NRLP oversight committee; the establishment of specified
annually increasing targets for five years relating to the price of NRLP's
units of limited partner interest; a limitation and deferral or waiver of
NRLP's reimbursement to SAMLP of certain future salary costs; a deferral or
waiver of certain future compensation to SAMLP; the required distribution to
unitholders of all of NRLP's cash from operations in excess of certain
renovation costs unless the NRLP oversight committee approves alternative uses
for such cash from operations; the issuance of unit purchase warrants to
members of the plaintiff class; and the contribution by the then individual
general partners of $2.5 million to NRLP over a four-year period. In accordance
with the indemnification provisions of SAMLP's agreement of limited
partnership, SAMLP agreed to indemnify Messrs. Phillips and Friedman, the
individual general partners, at the time, of SAMLP, for the $2.5 million
payment to NRLP. The final annual installment of principal and interest was
paid by SAMLP in May 1994.

The withdrawal of SAMLP as general partner would require NRLP to purchase
SAMLP's general partner interest (the "Redeemable General Partner Interest") at
its then fair value, and to pay certain fees and other compensation as provided
in the partnership agreement. Syntek Asset Management, Inc. ("SAMI") , the
managing general partner of SAMLP, has calculated the fair value of such
Redeemable General Partner Interest to be $36.2 million at September 30, 1996,
before reduction for the principal balance ($4.2 million at September 30, 1996)
and accrued interest ($5.9 million at September 30, 1996) on the note
receivable from SAMLP for its original capital contribution to the partnership.

F-34
68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

matters under the class action settlement. On February 20, 1996, the parties to
the Implementation Agreement executed an Amended and Restated Implementation
Agreement.

Provided that the successor general partner is elected pursuant to the terms
of the amended and restated Implementation Agreement, SAMLP shall receive
$12,471,500 from NRLP. This amount represents a compromise settlement of the
net amounts owed by NRLP to SAMLP upon SAMLP's withdrawal as general partner
and any amounts which SAMLP and its affiliates may owe to NRLP. This amount
shall be paid to SAMLP pursuant to a promissory note in accordance with the
terms set forth in the Amended and Restated Implementation Agreement.

The Amended and Restated Implementation Agreement has been submitted to the
Judge appointed to supervise the class action settlement (the "Supervising
Judge") for tentative approval and approval of the notice to be sent to the
original class members. On September 23, 1996, the Supervising Judge entered an
order granting tentative approval of the Amended and Restated Implementation
Agreement and the form of notice. However, the order reserved jurisdiction to
determine other matters which must be resolved prior to final approval. Upon
final approval by the Supervising Judge, the proposal to elect the successor
general partner will be submitted to the NRLP unitholders for a vote. In
addition, the unitholders will vote upon amendments to NRLP's partnership
agreement which relate to the proposed compensation of the successor general
partner and other related matters.

On September 3, 1996, Joseph B. Moorman filed a Motion for Orders Compelling
Enforcement of the Moorman Settlement Agreement, Appointment of a Receiver and
Collateral Relief with the Superior Court of California in and for the County
of San Mateo. The motion alleges that the settling defendants had failed or
refused to perform their obligations under the Moorman Settlement Agreement.
The motion requested that SAMLP be removed as general partner and a receiver be
appointed to manage the Partnership. The motion also requested that the Company
be ordered to deliver to the court all NRLP units which had been purchased by
the Company since August 7, 1991. A hearing was held on this motion on October
4, 1996, and the court took the matter under submission. No ruling has been
made on this matter.

NOTE 3. NOTES AND INTEREST RECEIVABLE

February 1996, the Company refinanced the $7.8 million of debt collateralized
by a mortgage note receivable with a balance of $18.3 million at September 30,
1996, which is secured by the Las Vegas Shopping Center in Las Vegas, Nevada,
for $12.0 million. The Company received net refinancing proceeds of $2.3
million after the payoff of the existing debt, payment of closing costs
associated with the refinancing and making a $1.5 million paydown on the term
loan secured by land in Las Colinas, in exchange for that lender's release of
its participation interest in the note receivable. The new loan bears interest
at 15% per annum, requires monthly principal and interest payments of $152,000
and matures February 6, 1998. The Company paid Basic Capital Management, Inc.
("BCM"), the Company's advisor, a mortgage brokerage and equity refinancing fee
of $120,000 based upon the $12.0 million refinancing.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

In August 1990, the Company foreclosed on its fourth lien note receivable
secured by the Continental Hotel and Casino in Las Vegas Nevada. The Company
acquired the hotel and casino property at foreclosure subject to first and
second lien mortgages totaling $10.0 million and a disputed third-lien
mortgage. In June 1992, the Company sold the hotel and casino to the third
lien-holder accepting as partial payment a $22.0 million wraparound mortgage
note receivable. The Company's wraparound mortgage note receivable had a
principal balance of $22.7 million at September 30, 1996.

In April 1996, the underlying liens relating to this wraparound mortgage note
receivable were refinanced for $16.8 million. The Company received net cash of
$11.2 million after the payoff of the two underlying liens then totaling $2.9
million, the payment of various closing costs associated with the refinancing
and making a $1.4 million paydown on the term loan secured by land in Las
Colinas, Texas, in exchange for that lender's release of its participation
interest in the wraparound note receivable. Such paydown was credited against
the term loan payments that would have otherwise been due in May and November
1996. The new loan bears interest at 16.5% per annum, requires monthly interest
only payments at a rate of 12.5% with the remaining 4% being deferred and added
to principal. The loan matures April 16, 1998. The Company paid BCM a mortgage
brokerage and equity refinancing fee of $168,000 based upon the $16.8 million
refinancing.

At September 30, 1996, the Company held a mortgage note receivable secured by
a third lien on a commercial property in South Carolina and personal guaranties
of several individuals. The borrower had failed to make the required payments
of principal and interest since December 1, 1994. The Company accelerated the
note and instituted foreclosure proceedings, as well as actions against the
guarantors of the note. Effective September 1, 1995, the note was extended to
September 1, 1996, requiring a $68,000 principal reduction payment with the
monthly interest, quarterly principal payments and all other terms remaining
the same. The Company received $43,000 of the required principal reduction
payment in 1995 and received the remaining $25,000 in 1996 as well as the
required first and second quarterly principal reduction payments totaling
$50,000. The Company and the borrower again agreed to extend the mortgage note
receivable's maturity date to September 1, 1997. The extension required an
additional $90,000 principal reduction payment payable in three equal monthly
installments beginning November 1, 1996. The monthly interest, quarterly
principal reduction payments of $25,000 and all other terms remain the same.
The first $25,000 quarterly principal reduction payment is due December 1,
1996. The principal balance of the note was $179,000 at September 30, 1996 and
the note is performing in accordance with its amended terms.

In May 1996, the Company funded a $100,000 second lien mortgage secured by a
single-family residence in Oklahoma City, Oklahoma. The mortgage note
receivable bears interest at 10% per annum with the principal and accrued but
unpaid interest being payable in a single installment on demand. The mortgage
note receivable matures June 1, 1998.

The borrower on a $1.7 million first-lien mortgage note receivable secured by
land in Osceola, Florida, failed to pay the note on its November 1, 1993
maturity. The Company instituted foreclosure proceedings and was awarded
summary judgment in January 1994. During 1994 and 1995, the borrower paid the
Company a total of $270,000 in nonrefundable fees to delay foreclosure of the
property until April 24, 1995. On April 21, 1995, the borrower filed for
bankruptcy protection. In July 1995, the Company filed a motion with the
bankruptcy court to lift the court's stay and allow the Company to proceed with
foreclosure. In September 1995, the bankruptcy court denied the Company's
motion to lift stay and the borrower was allowed to file a plan of
reorganization. The bankruptcy court set a hearing date of May 15, 1996 for
confirmation of the borrower's plan of reorganization. The borrower failed to
present a confirmable plan of reorganization and the bankruptcy court converted
the bankruptcy proceeding to a Chapter 7 liquidation proceeding. On August 24,
1996, the bankruptcy court's stay was lifted allowing the Company to proceed
with foreclosure. The Company expects to receive title to the property in
December 1996. The note had a principal balance of $1.6 million at September
30, 1996. The Company does not expect to incur any loss resulting from
foreclosing on the collateral property, as its estimated fair value, less costs
of sale, exceeds the carrying value of the note.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 4. REAL ESTATE

In March 1996, the Company sold 2.3 acres of the 74.9 acre Las Colinas land
parcel for $961,000 in cash. In accordance with the provisions of the term loan
secured by such parcel, the Company applied the net proceeds of the sale,
$891,000, to pay down the term loan, $400,000 being applied to pay off the
remaining balance owing on the $3.0 million principal payment due March 31,
1996, with the remaining $491,000 being applied against the principal payment
of $1.5 million otherwise due in May 1996. The Company recognized a gain of
$538,000 on the sale.

In May 1996, the Company sold an additional 2.3 acres of the 74.9 acre Las
Colinas land parcel for $941,000 in cash. The Company applied the net proceeds
of the sale of $864,000 to paydown the term loan secured by such parcel in
accordance with provisions of the loan. The net proceeds were applied toward
the $3.0 million principal payment otherwise due in November 1996. The Company
recognized a gain of $538,000 on the sale. At September 30, 1996, 63.4 acres
remained to be sold.

Also in May 1996, the Company purchased a 2,271 square foot single family
residence in Dallas, Texas for $266,000 in cash. In August 1996, the Company
financed the residence for $173,000. The Company received net financing
proceeds of $168,000 after the payment of various closing costs associated with
the financing. The loan bears interest at the prime rate plus 1%, currently
9.25% per annum, requires monthly principal and interest payments of $2,000 and
matures August 16, 2008.

In June 1996, the Company purchased 442 acres of partially developed land in
Denver, Colorado for $8.5 million. In connection with the acquisition, the
Company obtained purchase money financing for $7.5 million and issued 15,000
shares of the Company's Series C 10% cumulative preferred stock with an
aggregate liquidation value of $1.5 million. See NOTE 11. "PREFERRED STOCK."
The excess financing proceeds of $500,000 were applied to the various closing
costs associated with the acquisition in addition to $272,000 of such costs
which the Company paid in cash. The loan bears interest at 15% per annum,
requires monthly interest only payments at a rate of 12% with the remaining 3%
being deferred and added to the principal balance of the loan. The principal
balance, accrued and unpaid interest and a $600,000 "maturity fee" is due at
maturity on June 1, 1998. The Company paid a real estate brokerage commission
of $255,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of BCM, the
Company's advisor, based on the $8.5 million purchase price.

Also in June 1996, the Company sold for $120,000 in cash a tract of land in
Midland, Michigan that was leased under a long-term land lease. The Company
recognized a gain of $44,000 on the sale.

In October 1995, the Company purchased a 92.6 acre tract of partially
developed land in Las Colinas, Texas. In February 1996, the Company entered
into a contract to sell 72.5 acres for $12.9 million in cash. The contract
calls for the sale to close in two phases. The first phase closed in July 1996,
as discussed below, and the second phase is to close on or before December 31,
1996.

In July 1996, the Company completed the first phase sale of 32.3 acres of the
72.5 acres for $4.9 million in cash. The Company applied the net proceeds of
the sale, $4.7 million, to paydown the term loan, in accordance with its terms,
in exchange for that lenders, release of its collateral interest in the 32.3
acres sold. The Company recognized a gain of $2.0 million on such sale.

Also in July 1996, the Company purchased 568 acres of partially developed
land in Houston, Texas for $6.2 million. The Company paid $451,000 in cash and
obtained seller mortgage financing for $5 7 million. The loan bears interest at
9% per annum, requires a $500,000 principal and interest payment on November 1,
1996 and quarterly principal and interest payments of $145,000 thereafter. The
Company made the November 1, 1996 principal and interest payment. The loan
matures August 1, 1998. The Company paid a real estate brokerage commission of
$187,000 to Carmel Realty based on the $6.2 million purchase price. In
September 1996, the Company entered into a contract to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

sell the land for a price in excess of the land's purchase price and carrying
and estimated selling costs. The sale, should it be consummated, would close on
December 1, 1997.

In August 1996, the Company purchased a pool of assets for $3.1 million from
Southmark, consisting of a total of 151 acres of raw land in California,
Indiana and Idaho, various percentage interests, ranging from 15% to 45%, in
five partnerships and trusts that hold an unsecured note receivable with a
principal balance of $3.4 million and Southmark's 19.2% limited partnership
interest in SAMLP. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P." To complete the
acquisition, the Company borrowed an additional $3.0 million from the lender
whose term loan is secured by the Company's 63.4 acres of land in Las Colinas,
Texas. The term loan was amended to increase the loan amount from $10.9 million
to $13.9 million. The $3.0 million advance is secured by the 122 acres of raw
land purchased in California and the 19.2% limited partnership interest in
SAMLP.

Also in August 1996, the Company purchased 280 acres of partially developed
land in Dallas County, Texas for $13.5 million. The Company paid $3.8 million
in cash and borrowed the remaining $9.7 million as the third advance under the
term loan from the lender discussed above. The term loan was again amended
increasing the term loan amount from $13.9 million to $19.5 million with an
additional $4.0 million being loaned on an overline advance note. The amendment
also changed the principal reduction payments to $2.0 million in November 1996
and $3.0 million on the last day of December 1996, March 1997, June 1997,
September 1997 and January 1998, and adds 240 acres of the 280 acres of the
land purchased as additional collateral on the term loan. All other terms of
the term loan remained unchanged. The Company paid a real estate brokerage
commission of $406,000 to Carmel Realty based on the $13.5 million purchase
price.

In 1991, the Company purchased all of the capital stock of a corporation
which owned 198 developed residential lots in Fort Worth, Texas. Through
December 31, 1995, 176 of the residential lots had been sold. During 1996, 12
additional lots have been sold for an aggregate gain of $24,000. At September
30, 1996, 10 lots remained to be sold.

NOTE 5. INVESTMENT IN REAL ESTATE ENTITIES

The Company's investment in real estate entities at September 30, 1996,
includes (i) equity securities of three publicly traded real estate investment
trusts (collectively the "REITs"), Continental Mortgage and Equity Trust
("CMET") , Income Opportunity Realty Investors, Inc., formerly Income
opportunity Realty Trust (collectively "IORI") and Transcontinental Realty
Investors, Inc. ("TCI"), (ii) units of limited partner interest of NRLP, (iii)
a general partnership interest in NRLP and NOLP, the operating partnership of
NRLP, through the Company's 96% limited partner interest in SAMLP and (iv)
interests in real estate joint venture partnerships. BCM, the Company's
advisor, serves as advisor to the REITs, and performs certain administrative
and management functions for NRLP and NOLP on behalf of SAMLP.

The Company accounts for its investment in the REITs, NRLP and the joint
venture partnerships under the equity method. The Company continues to account
for its investment in NRLP under the equity method due to the pending
resignation of SAMLP as general partner of NRLP. See NOTE 2. "SYNTEK ASSET
MANAGEMENT, L.P." Substantially all of the Company's equity securities of the
REITs and NRLP are pledged as collateral for borrowings. See NOTE 9. "MARGIN
BORROWINGS."

The Company's investment in real estate entities, accounted for using the
equity method, at September 30, 1996 was as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Equivalent
Percentage Carrying Investee
of the Company's Value of Book Value Market Value
Ownership at Investment at at of Investment at
Investee September 30, 1996 September 30, 1996 September 30, 1996 September 3, 1996
-------- ------------------ ------------------ ------------------ -----------------

NRLP 52.9% $ 10,682 $ * $ 41,865
CMET 39.0 14,617 31,745 17,564
IORI 28.9 2,765 6,247 4,503
TCI 29.6 6,420 23,762 11,758
--------- ---------
34,484 $ 75,690
=========
General partner interest in
NRLP and NOLP 8,847
Other equity investees 11,004
---------
$ 54,335
=========

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

* At September 30, 1996, NRLP reported a deficit partners, capital. The
Company's share of NRLP's revaluation equity at December 31, 1995, was $161.5
million. Revaluation equity is defined as the difference between the
appraised value of the partnership's real estate, adjusted to reflect the
partnership's estimate of disposition costs, and the amount of the mortgage
notes payable and accrued interest encumbering such property as reported in
NRLP's Annual Report on Form 10-K for the year ended December 31, 1995.

The difference between the carrying value of the Company's investment and the
equivalent investee book value is being amortized over the life of the
properties held by each investee.

The Company's management continues to believe that the market value of each
of the REITs and NRLP undervalues their assets and the Company may, therefore,
continue to increase its ownership in these entities in 1996.

Set forth below is summarized results of operations for the Company's equity
investees for the nine months ended September 30, 1996:

Equity investees owned over 50%:

Revenues ............................... $ 93,669
Property operating expenses ............ (60,760)
Depreciation ........................... (8,087)
Interest expense ....................... (26,019)
--------
Net (loss) ............................. $ (1,197)
========

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company's share of over 50% owned equity investees' losses was $181,000
for the nine months ended September 30, 1996.

Equity investees owned less than 50%:

Revenues ........................................................ $ 75,110
Equity in (loss) of partnerships ................................ (246)
Property operating expenses ..................................... (51,770)
Depreciation .................................................... (10,647)
Interest expense ................................................ (22,337)
Provision for loss .............................................. (759)
--------
(Loss) before gains on sale of real estate and extraordinary
gains ........................................................ (10,649)
Gain on sale of real estate ..................................... 11,410
Extraordinary gain .............................................. 1,068
--------
Net income ...................................................... $ 1,829
========

The Company's share of less than 50% owned equity investees, loss before gain
on sale of real estate and extraordinary gains was $2.9 million for the nine
months ended September 30, 1996. The Company's share of equity investees gains
on sale of real estate and extraordinary gains was $4.6 million and $381,000,
respectively, for the nine months ended September 30, 1996.

The Company's cash flow from the REITs and NRLP is dependent on the ability
of each of the entities to make distributions. In the first nine months of
1996, the Company received aggregate distributions of $8.6 million from the
REITs and NRLP.

In the first nine months of 1996, the Company purchased a total of $944,000
of equity securities of the REITs and NRLP.

In April 1996, the Company purchased a 28% general partner interest in
Campbell Center Associates, Ltd. which in turn has a 56.25% interest in
Campbell Centre I, which owns a 413,175 square foot office building in Dallas,
Texas. The purchase price of the general partner interest was $550,000 in cash
and a $500,000 note, which bears interest at 8% per annum, requires monthly
interest only payments commencing in April 1997 and matures April 2000.

In July 1996, a newly formed limited partnership, of which the Company is 1%
general partner, purchased 580 acres of land in Collin County, Texas for $5.7
million in cash. The Company paid $100,000 in cash with the remaining $5.6
million being contributed by the limited partner. The partnership agreement
designates the Company as the managing general partner. The Partnership
agreement also provides that the limited partner receive a 12% preferred
cumulative return on its investment before any sharing of partnership profits.

In January 1992, the Company entered into a partnership agreement with an
entity affiliated with the owner, at the time, of in excess of 14% of the
Company's outstanding shares of Common Stock, to acquire 287 developed
residential lots adjacent to the Company's other residential lots in Fort
Worth, Texas. The partnership agreement designates the Company as managing
general partner. The partnership agreement also provides each of the partners
with a guaranteed 10% return on their respective investments. Through December
31, 1995, 132 residential lots had been sold. In the first nine months of 1996
an additional 48 lots were sold. At September 30, 1996, 107 lots remained to be
sold. For the nine months ended September 30, 1996, each partner had received
$135,000 in return of capital distributions and $161,000 in profit
distributions from the partnership.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 6. OTHER EQUITY INVESTMENTS

In April 1996, a newly formed wholly-owned subsidiary of the Company
purchased for $10.7 million in cash 80% of the common stock of an entity which
in turn had acquired 26 operating pizza parlors in various communities in
California's San Joaquin Valley. Concurrent with the purchase, the Company
granted to an individual an option to purchase 36.25% of the Company's
subsidiary at any time for the Company's net investment in such subsidiary.
Additionally, the Company is in negotiations with underwriters to take such
subsidiary public by the first quarter of 1997. Accordingly, the Company
believes its control of such subsidiary is temporary and therefore accounts for
such subsidiary under the equity method.

NOTE 7. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO

In the first quarter of 1994, the Company began purchasing equity securities
of entities other than those of the REITs and NRLP to diversify and increase
the liquidity of its margin accounts. In the first nine months of 1996, the
Company purchased $21.3 million and sold $22.6 million of such securities.
These equity securities are considered a trading portfolio and are carried at
market value. At September 30, 1996, the Company recognized an unrealized
increase in the market value of its trading portfolio securities of $598,000.
Also in the first nine months of 1996, the Company realized a net loss of $5,
000 from the sale of trading portfolio securities and received $200,000 in
dividends. Unrealized and realized gains and losses on trading portfolio
securities are included in other income in the accompanying Consolidated
Statements of Operations.

NOTE 8. NOTES AND INTEREST PAYABLE

In April 1996, the Company refinanced the $5.1 million first and second lien
debt related to the Denver Merchandise Mart in Denver, Colorado for $15.0
million. The new loan is secured by a first lien mortgage against the Denver
Merchandise Mart and a pledge of 632,000 newly issued shares of the Company's
common stock. See NOTE 10. "COMMON STOCK." The Company received net refinancing
proceeds of $7.8 million after the payoff of the first and second lien debt,
purchasing the ground lease on Denver Merchandise Mart for $678,000 and payment
of various closing costs associated with the refinancing. The new loan bears
interest at the prime rate plus 2.25%, currently 10.5% per annum, requires
monthly principal and interest payments of $142,000 and matures October 31,
1997. The Company paid BCM a mortgage brokerage and equity refinancing fee of
$150,000 based upon the $15.0 million refinancing.

In August 1996, the Company refinanced the $2.4 million first lien mortgage
secured by the Rosedale Towers Office Building in Roseville, Minnesota for $2.8
million. The Company received net refinancing proceeds of $154,000 after the
payoff of the existing mortgage debt and payment of various closing costs
associated with the refinancing. The Company also received 282,352 shares of
Common Stock of the Company that it had pledged as additional collateral on the
refinanced mortgage debt. Such shares are held as treasury stock by the
Company. The new loan bears interest at 9.05% per annum, requires monthly
principal and interest payments of $24,000 and matures August 16, 2006. The
Company paid BCM a mortgage brokerage and equity refinancing fee of $28,000
based upon the $2.8 million refinancing.

Also in August 1996, the Company financed the Inn at the Mart in Denver,
Colorado for $2.0 million to facilitate renovation of the property. The Company
received net financing proceeds of $890,000 after the payment of various
closing costs associated with the financing and a $1.1 million renovation
holdback. The Company expects the lender to advance the $1.1 million renovation
holdback by December 1996. The new loan bears interest at the prime rate plus
2.25%., currently 10.50% per annum and requires monthly interest only payments
through February 1, 1998. Commencing March 1, 1998, monthly payments of
interest plus a $3,000 principal paydown are required until maturity on
September 1, 2001. The Company paid BCM a mortgage brokerage and equity
refinancing fee of $9,500 based upon the $2.0 million financing net of the $1.1
million renovation holdback.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

In October 1996, the Company completed the sale of $1.1 million in 11-1/2%
senior subordinated notes in a private placement. The notes require interest to
be paid semi-annually on March 31 and September 30 of each year commencing
March 31, 1997 and are due on September 30, 1999, subject to the right of the
Company to call the notes for early redemption at no penalty or premium to the
Company.

NOTE 9. MARGIN BORROWINGS

The Company has margin arrangements with various brokerage firms which
provide for borrowing of up to 50% of the market value of the Company's
marketable equity securities. The borrowings under such margin arrangements are
secured by equity securities of the REITs, NRLP and the Company's trading
portfolio and bear interest rates ranging from 6.5% to 9.25%. Margin borrowings
totaled $36.8 million at September 30, 1996.

In August 1996, the Company consolidated its existing NRLP margin debt held
by various brokerage firms into a single loan of $20.3 million. The loan is
secured by the Company's NRLP units with a market value of at least 50% of the
principal balance. The Company received $1.9 million in cash after the payment
of $617,000 in various closing costs associated with the financing and a $17.8
million holdback, pending the lender's receipt of the remaining NRLP units as
collateral. As of October 31, 1996, the Company had pledged 3,208,119 NRLP
units with a market value of $39.8 million and the lender had released $16.8
million of the holdback directly to the brokerage firms in payment of the
margin debt related to the NRLP units received. The lender is to receive the
final 200,600 NRLP units with a market value of $2.4 million in November 1996.
These NRLP units are currently being held as additional collateral on the term
loan secured by the Company's 63.4 acres of Las Colinas land and will be
released upon receipt of a $2.0 million term loan paydown in November 1996. See
NOTE 4. "REAL ESTATE." The $20.3 million margin loan bears interest at the 30
day LIBOR rate plus 4.50%, currently 9.94% per annum, requires monthly interest
only payments and matures the earlier of August 30, 1999 or the refinancing of
NRLP's secured debt. The Company paid BCM a mortgage brokerage and equity
refinancing fee of $203,300 based upon the $20.3 million financing.

Also in August 1996, the Company obtained a $2.0 million margin loan from a
financial institution secured by a pledge of $4.0 million of previously
unencumbered equity securities of the REITs owned by the Company and Common
Stock of the Company owned by BCM. The Company received $1,966,000 in net cash
after the payment of closing costs associated with the margin loan. The loan
bears interest at the prime rate plus 2.25%, currently 10.50% per annum,
requires monthly interest only payments and matures August 2, 1997.

In September 1996, the same lender made a second $2.0 million loan. The
second margin loan is secured by a pledge of $5.0 million previously
unencumbered equity securities of the REITs owned by the Company and Common
Stock of the Company owned by BCM. The Company received $1,970,000 in net cash
after the payment of closing costs associated with the margin loan. The margin
loan bears interest at the prime rate plus 2.25%, currently 10.50% per annum,
requires interest only payments and matures September 27, 1997.

NOTE 10. COMMON STOCK

At September 30, 1996 and December 31, 1995, there were authorized 16,667,000
shares of Common Stock, par value $.01 per share, of which 6,739,540 and
5,858,328 shares were outstanding at the respective dates. The increase in
Common shares outstanding is described below.

In April 1996, the Company issued 250,000 shares of Common Stock to ND
Investments, Inc., a wholly-owned subsidiary of the Company, which pledged such
shares as additional collateral for the loan secured by the 92.6 acres of
partially developed land in Las Colinas, Texas. See NOTE 4. "REAL ESTATE."

Also in April 1996, the Company issued 632,000 shares of Common Stock to
Garden Capital Merchandise Mart, Inc., a wholly-owned subsidiary of the
Company, which pledged such shares as additional collateral for the loan
secured by the Denver Merchandise Mart, in Denver, Colorado. See NOTE 8. "NOTES
AND INTEREST PAYABLE."

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

On June 12, 1996, the Company's Board of Directors announced the resumption
of the payment of dividends on the Company's Common Stock with the declaration
of a second quarter dividend of $.10 per share. The Company had last paid
dividends on May 15, 1990. The initial distribution totaling $674,000 was paid
on July 8, 1996 to stockholders of record on June 21, 1996. On September 30,
1996, the Company paid a third quarter dividend of $.10 per share totaling
$674,000 distributed to stockholders of record on September 13, 1996. Future
distributions to stockholders will be dependent upon the Company's realized
income, financial condition, capital requirements and other factors deemed
relevant by the Company's Board of Directors.

Also on June 12, 1996, the Company announced the redemption of the
outstanding share purchase rights for $.01 per right. As of the date of
redemption, each share of Common Stock represented 1.5 share rights. The
redemption proceeds totaling $101,000 were also distributed on July 8, 1996 to
stockholders of record on June 21, 1996. These rights were initially
distributed to stockholders on April 23, 1990.

NOTE 11. PREFERRED STOCK

In April 1996, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series B 10% cumulative Preferred
Stock, par value $2.00 per share, and a liquidation value of $100 per share out
of the 20,000,000 shares authorized. The Series B Preferred Stock consists of a
maximum of 4,000 shares, all of which were sold April 4, 1996 for $400,000 in
cash in a private transaction. Dividends are payable at a rate of $10.00 per
year or $2.50 per quarter to stockholders of record on the 15th day of each
March, June, September and December when and as declared by the Board of
Directors of the Company. As of September 30, 1996, the Company has paid
dividends totaling $16,000 on the Series B Preferred Stock.

In June 1996, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series C 10% cumulative Preferred
Stock, par value $2.00 per share, and a liquidation value of $100 per share out
of the 20,000,000 shares authorized. The Series C Preferred Stock consists of a
maximum of 16,500 shares, of which 15,000 were issued on June 4, 1996 in
connection with the purchase of 442 acres of partially developed land in
Denver, Colorado. See NOTE 4. "REAL ESTATE." Dividends are payable at a rate of
$10.00 per year or $2.50 per quarter to stockholders of record on the 15th day
of each March, June, September and December when and as declared by the Board
of Directors of the Company. The dividends for the first four quarters are to
be paid with additional shares of Series C Preferred Stock. On June 30, 1996,
the Company issued 111 shares of Series C Preferred Stock to stockholders of
record on June 15, 1996 and on September 30, 1996, the Company issued an
additional 378 shares of Series C Preferred Stock to stockholders of record on
September 15, 1996.

NOTE 12. INCOME TAXES

Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated
losses. The Company had no taxable income or provision for income taxes in the
nine months ended September 30, 1996.

NOTE 13. COMMITMENTS AND CONTINGENCIES

Litigation. The Company is involved in various lawsuits arising in the
ordinary course of business. In the opinion of the Company's management, the
outcome of these lawsuits will not have a material impact on the Company's
financial condition, results of operations or liquidity.

[This space intentionally left blank.]

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77

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL.

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

TABLE OF CONTENTS
PAGE
Available Information........................................1
Incorporation of Certain Information
by Reference............................................2
Ratio of Earnings to Fixed Charges...........................4
Use of Proceeds..............................................4
The Company..................................................4
The Business of the Company..................................5
Selected Financial Data.....................................14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..........................................15
Description of the Capital Stock............................24
Plan of Distribution........................................28
Legal Matters...............................................29
Experts.....................................................29
Index to Consolidated Financial
Statements.............................................F-1
Report of Independent Accountants...........................F-2
Consolidated Balance Sheets, December 31, 1995
and 1994...............................................F-3
Consolidated Statements of Operations, Three Years
Ended December 31, 1995, 1994 and 1993.................F-4
Consolidated Statements of Stockholders' Equity,
Years Ended December 31, 1995, 1994 and 1993...........F-5
Consolidated Statements of Cash Flows, Three Years
Ended December 31, 1995, 1994 and 1993.................F-6
Notes to Consolidated Financial Statements..................F-9
Consolidated Balance Sheets, September 30, 1996
and December 31, 1995..................................F-28
Statements of Operations, Nine Months Ended
September 30, 1996 and 1995............................F-30
Consolidated Statement of Stockholders' Equity,
Nine Months Ended September 30, 1996...................F-31
Consolidated Statements of Cash Flows, Nine Months
Ended September 30, 1996 and 1995......................F-32
Notes to Consolidated Financial Statements..................F-34

PREFERRED STOCK

COMMON STOCK

AMERICAN REALTY TRUST,
INC.

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

PROSPECTUS

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

FEBRUARY 11, 1997

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article Thirteen of the Company's Articles of Incorporation provides that, to
the fullest extent permitted by Georgia law, as the same exists or may be
hereafter be amended, no director of the Company shall be personally liable to
the Company or the shareholders of the Company for monetary damages for breach
of the duty of care as a director, provided that Article Thirteen does not
limit or eliminate liability for (i) a breach of duty involving an
appropriation of a business opportunity of the Company; (ii) an act or omission
not in good faith or involving intentional misconduct or a knowing violation of
law; or (iii) a transaction from which the director derived an improper
personal benefit. In addition, a director's liability will not be limited as to
any payment of a dividend or approval of a stock repurchase that is illegal
under Section 14-2-640 of the Georgia Business Corporation Code.

Article Thirteen applies only to claims against a director arising out of his
or her role as a director and not, if he or she is also an officer, his or her
role as an officer or in any other capacity. In addition, Article Thirteen does
not reduce the exposure of directors to liability under Federal securities
laws.

The Bylaws of the Company require the Company to indemnify any person who, by
reason of the fact that he is or was a director of the Company, is made or is
threatened to be made a party to an action, including an action brought by the
Company or its shareholders. The Bylaws provide that the Company will indemnify
such person against reasonably incurred expenses (including, but not limited
to, attorneys' fees and disbursements, court costs, and expert witness fees),
and against any judgments, fines and amounts paid in settlement, provided that
the Company shall not indemnify such person under circumstances in which the
Georgia Business Corporation Code, as in effect from time to time, would not
allow indemnification.

The Bylaws of the Company give the board of directors the power to cause the
Company to provide to officers, employees, and agents of the Company all or any
part of the right to indemnification afforded to directors of the Company as
set forth in the Bylaws, subject to the conditions, limitations and obligations
therein, upon a resolution to that effect identifying such officer, employee or
agent and specifying the particular rights provided.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

*3.1 -- Articles of Incorporation

*3.2 -- Amendment to Articles of Incorporation dated September 15, 1989

*3.3 -- Articles of Amendment setting forth Certificate of Designation of
Series A Cumulative Participating Preferred Stock dated as of
April 11, 1990

*3.4 -- Articles of Amendment dated December 10, 1990 to Articles of
Incorporation

*3.5 -- Amended By-laws of American Realty Trust, Inc., dated December 11,
1991

*3.6 -- Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other
Special Rights, and Qualifications, Limitations on Restrictions
thereof of Special Stock of American Realty Trust, Inc. (Series B
10% Cumulative Preferred Stock) dated as of April 4, 1996

*3.7 -- Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other
Special Rights, and Qualifications, Limitations on Restrictions
thereof of Special Stock of American Realty Trust, Inc. (Series C
10% Cumulative Preferred Stock) dated as of June 4, 1996

II-1
79

*3.8 -- Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other
Special Rights, and Qualifications, Limitations or Restrictions
thereof of Series D Cumulative Preferred Stock of American Realty
Trust, Inc. dated as of August 2, 1996

*3.9 -- Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other
Special Rights, and Qualifications, Limitations or Restrictions
thereof of Series E Cumulative Convertible Preferred Stock of
American Realty Trust, Inc. dated as of December 3, 1996

*3.10 -- Articles of Amendment of the Articles of Incorporation of
American Realty Trust, Inc. setting forth the Certificate of
Designations, Preferences and Relative Participating or Optional or
Other Special Rights, and Qualifications, Limitations or
Restrictions thereof of Series F Voting Cumulative Convertible
Preferred Stock of American Realty Trust, Inc. dated as of
January 14, 1997

*4.1 -- Instruments defining the rights of security holders (incorporated
in Exhibit 3.1)

*5.1 -- Opinion of Holt Ney Zatcoff & Wasserman, LLP as to the legality of
the Preferred Stock being offered

**11.1 -- Statement re: computation of per share earnings

**12.1 -- Statement re: computation of ratios

**15.1 -- Letter re: unaudited interim financial information

*21.1 -- Subsidiaries of the registrant

*23.1 -- Consent of BDO Seidman LLP (American Realty Trust, Inc.)

*23.2 -- Consent of BDO Seidman (Continental Mortgage and Equity Trust)

*23.3 -- Consent of BDO Seidman (Income Opportunity Realty Investors,
Inc.)

*23.4 -- Consent of BDO Seidman (Transcontinental Realty Investors, Inc.)

*23.5 -- Consent of BDO Seidman (National Realty, L.P.)

*23.6 -- Consent of Holt Ney Zatcoff & Wasserman, LLP (incorporated in
Exhibit 5.1)

#24.1 -- Power of Attorney

*29.1 -- Financial Data Schedule

- ----------

* Filed herewith.

** To be filed by amendment.

# Reference is made to the Power of Attorney contained on page II-4 of this
registration statement.

ITEM 22. UNDERTAKINGS.

(a) The undersigned Company hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the change in volume and price represent no

II-2
80

more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement;

(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;

Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) above do
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the Registration Statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.

(b) The undersigned Company hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Company's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company pursuant to Item 15, above, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.

II-3

81
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on the 11th day of
February, 1997.

AMERICAN REALTY TRUST, INC.

By: /s/ KARL L. BLAHA
----------------------------------------
Karl L. Blaha
President (Principal Executive Officer)

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Robert A.
Waldman his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.

Signature Title Date
--------- ----- ----

/s/ KARL L. BLAHA President (Principal Executive February 11, 1997
--------------------------- Officer) and Director
Karl L. Blaha

/s/ ROY E. BODE Director February 11, 1997
---------------------------
Roy E. Bode

/s/ OSCAR W. CASHWELL Director February 11, 1997
---------------------------
Oscar W. Cashwell

/s/ AL GONZALEZ Director February 11, 1997
---------------------------
Al Gonzalez

/s/ DALE A. CRENWELGE Director February 11, 1997
---------------------------
Dale A. Crenwelge

/s/ THOMAS A. HOLLAND Executive Vice President and February 11, 1997
--------------------------- Chief Financial Officer
Thomas A. Holland (Principal Financial and
Accounting Officer)

II-4
82
INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

*3.1 -- Articles of Incorporation

*3.2 -- Amendment to Articles of Incorporation dated September 15, 1989

*3.3 -- Articles of Amendment setting forth Certificate of Designation of
Series A Cumulative Participating Preferred Stock dated as of
April 11, 1990

*3.4 -- Articles of Amendment dated December 10, 1990 to Articles of
Incorporation

*3.5 -- Amended By-laws of American Realty Trust, Inc., dated December 11,
1991

*4.1 -- Instruments defining the rights of security holders (incorporated
in Exhibit 3.1)

*5.1 -- Opinion of Holt Ney Zatcoff & Wasserman, LLP as to the legality of
the Preferred Stock being offered

**11.1 -- Statement re: computation of per share earnings

**12.1 -- Statement re: computation of ratios

**15.1 -- Letter re: unaudited interim financial information

*21.1 -- Subsidiaries of the registrant

*23.1 -- Consent of BDO Seidman LLP (American Realty Trust, Inc.)

*23.2 -- Consent of BDO Seidman (Continental Mortgage and Equity Trust)

*23.3 -- Consent of BDO Seidman (Income Opportunity Realty Investors,
Inc.)

*23.4 -- Consent of BDO Seidman (Transcontinental Realty Investors, Inc.)

*23.5 -- Consent of BDO Seidman (National Realty, L.P.)

*23.6 -- Consent of Holt Ney Zatcoff & Wasserman, LLP (incorporated in
Exhibit 5.1)

#24.1 -- Power of Attorney

- ----------

* Filed herewith.

** To be filed by amendment.

# Reference is made to the Power of Attorney contained on page II-4 of this
registration statement.