1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1996

Commission File Number 1-9948

AMERICAN REALTY TRUST, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

Georgia 54-0697989
- ------------------------------- -----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

10670 North Central Expressway, Suite 300, Dallas, Texas 75231
- -------------------------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)

(214) 692-4700
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

Name of each exchange on
Title of each class which registered
- ---------------------------- ------------------------
Common Stock, $.01 par value New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:
NONE

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

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

As of March 14, 1997, the Registrant had 12,914,644 shares of Common Stock
outstanding. Of the total shares outstanding 2,728,433 were held by other than
those who may be deemed to be affiliates, for an aggregate value of $35,470,000
based on the closing price on the New York Stock Exchange on March 14, 1997.
The basis of this calculation does not constitute a determination by the
Registrant that all of such persons or entities are affiliates of the
Registrant as defined in Rule 405 of the Securities Act of 1933, as amended.

Documents Incorporated by Reference:
Consolidated Financial Statements of National Realty, L.P.; Commission
File No. 1-9648
Consolidated Financial Statements of Continental Mortgage and Equity Trust;
Commission File No. 0-10503
Consolidated Financial Statements of Income Opportunity Realty Investors, Inc.;
Commission File No. 1-9525
Consolidated Financial Statements of Transcontinental Realty Investors, Inc.;
Commission File No. 1-9240

INDEX TO
ANNUAL REPORT ON FORM 10-K

Page
----
PART I

Item 1. Business......................................... 3

Item 2. Properties....................................... 7

Item 3. Legal Proceedings................................ 31

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

PART II

Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................... 31

Item 6. Selected Financial Data.......................... 34

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........... 35

Item 8. Consolidated Financial Statements and
Supplementary Data............................ 47

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........... 92

PART III

Item 10. Directors, Executive Officers and Advisor of the
Registrant.................................... 92

Item 11. Executive Compensation........................... 101

Item 12. Security Ownership of Certain Beneficial Owners
and Management................................ 104

Item 13. Certain Relationships and Related Transactions... 106

PART IV

Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K........................... 109

Signature Page.................................................... 113

PART I

ITEM 1. BUSINESS

American Realty Trust, Inc. (the "Company" or the "Registrant"), a Georgia
corporation, is the successor to a District of Columbia business trust
organized pursuant to a declaration of trust dated July 14, 1961.

Business Plan and Investment Policy

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. Information regarding the real estate and
mortgage notes receivable portfolios of the Company is set forth in ITEM 2.
"PROPERTIES" and in Schedules III and IV to the Consolidated Financial
Statements included at ITEM 8. "CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA."

The Company's business is not seasonal. The Company has determined 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 income producing real estate
such as apartment complexes and commercial properties or equity securities of
real estate-related entities. The Company also intends to pursue higher risk,
higher reward investments, such as developed, partially developed and
undeveloped land where it can obtain financing of substantially all of a
property's purchase price. The Company intends to seek selected dispositions of
certain of its assets, in particular certain of its land holdings, where the
prices obtainable for such assets justify their disposition. The Company
intends to continue to service and hold for investment its mortgage notes. 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 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.

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
stockholders.

The specific composition of the Company's real estate and mortgage notes
receivable portfolios will depend largely on the judgment of the Company's
management as to changing investment opportunities and the

ITEM 1. BUSINESS (Continued)

Business Plan and Investment Policy (Continued)

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.

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 Continental Mortgage and Equity Trust ("CMET"), Income
Opportunity Realty Investors, Inc. ("IORI"), and Transcontinental Realty
Investors, Inc. ("TCI") and units of limited partner interest in National
Realty, L.P. ("NRLP"). See ITEM 2. "PROPERTIES - Investments in Real Estate
Investment Trusts and Real Estate Partnerships."

Management of the Company

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"), a contractual advisor under the supervision of
the Company's Board of Directors. The duties of the Advisor 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. The 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 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. Mr. Phillips 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, the son of Mr. Phillips and a
Director of the Company until June 4, 1996, is also a director of BCM and a
trustee of the trust for the benefit of the children of Mr. Phillips which owns
BCM. As of March 14, 1997, BCM owned 5,115,060 shares of the Company's Common
Stock, approximately 39.6% of the shares then outstanding. BCM is more fully
described in ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT - The Advisor." BCM has been providing advisory services to the
Company since February 6, 1989. BCM also serves as advisor to CMET, IORI and
TCI. Randall M. Paulson, Bruce A. Endendyk and Thomas A. Holland, executive
officers of the Company, are also executive officers of CMET, IORI and TCI.
Oscar W. Cashwell, a Director of the Company, served as Executive Vice
President of BCM until January 10, 1997. Randall M. Paulson, Executive Vice
President of the Company, serves as President and sole director of Syntek Asset
Management, Inc. ("SAMI"), the managing general partner of Syntek Asset
Management, L.P. ("SAMLP"), the general partner of NRLP and National Operating,
L.P. ("NOLP"), the

ITEM 1. BUSINESS (Continued)

Management of the Company (Continued)

operating partnership of NRLP. Mr. Phillips is also a general partner of SAMLP
and served as a director and Chief Executive Officer of SAMI until May 15,
1996. SAMI is a company owned by BCM. BCM performs certain administrative
functions for NRLP and NOLP on a cost reimbursement basis.

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 Mr. Phillips is the sole shareholder, (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.

Affiliates of the Advisor are also entitled to receive real estate brokerage
commissions in accordance with the terms of the Advisory Agreement as discussed
in ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT - The
Advisor."

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

Competition

The real estate business is highly competitive and the Company competes with
numerous entities engaged in real estate activities (including certain entities
described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Related
Party Transactions"), some of which may have greater financial resources than
those of the Company. The Company's management believes that success against
such competition is dependent upon the geographic location of the property, the
performance of property managers in areas such as marketing, collections and
the ability to control operating expenses, the amount of new construction in
the area and the maintenance and appearance of the property. Additional
competitive factors with respect to commercial properties are the ease of
access to the property, the adequacy of related facilities, such as parking,
and sensitivity to market conditions in setting rent levels. With respect to
apartments, competition is also based upon the design and mix of the units and
the ability to provide a community atmosphere for the tenants. With respect to
the hotels, competition is also based upon market served, i.e., transient,
commercial or group users. The Company's management believes that general
economic circumstances and trends and the development of new or renovated
properties in the

ITEM 1. BUSINESS (Continued)

Competition (Continued)

vicinity of each of the Company's properties, in particular its developed,
partially developed and undeveloped land, are also competitive factors.

To the extent that the Company seeks to sell any of its properties, the sales
prices for such properties may be affected by competition from other real
estate entities and financial institutions, also attempting to sell their
properties in areas in which the Company's properties are located.

As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Related Party Transactions," Messrs. Paulson, Endendyk and
Holland, executive officers of the Company, also serve as executive officers of
certain other entities, each of which is also advised by BCM, and each of which
has business objectives similar to the Company's. The Company's officers and
Advisor owe fiduciary duties to such other entities as well as to the Company
under applicable law. In determining to which entity a particular investment
opportunity will be allocated, the executive officers and Advisor consider the
respective investment objectives of each such entity and the appropriateness of
a particular investment in light of each such entity's existing real estate and
mortgage notes receivable portfolios. To the extent that any particular
investment opportunity is appropriate to more than one of such entities, such
investment opportunity will be allocated to the entity which has had funds
available for investment for the longest period of time or, if appropriate, the
investment may be shared among all or some of such entities.

In addition, also as described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Certain Business Relationships," the Company also competes with
other entities which are affiliates of the Advisor and which may have
investment objectives similar to the Company's and that may compete with the
Company in purchasing, selling, leasing and financing real estate and real
estate-related investments. In resolving any potential conflicts of interest
which may arise, the Advisor has informed the Company that it intends to
continue to exercise its best judgment as to what is fair and reasonable under
the circumstances in accordance with applicable law.

Certain Factors Associated with Real Estate and Related Investments

The Company is subject to all the risks incident to ownership and financing of
real estate and interests therein, many of which relate to the general
illiquidity of real estate investments. These risks include, but are not
limited to, changes in general or local economic conditions, changes in
interest rates and availability of permanent mortgage financing which may
render the acquisition, sale or refinancing of a property difficult or
unattractive and which may make debt service burdensome; changes in real estate
and zoning laws, increases in real estate taxes, federal or local economic or
rent controls, floods, earth quakes, hurricanes and other acts of God and other
factors beyond the

ITEM 1. BUSINESS (Continued)

Certain Factors Associated with Real Estate and Related Investments
(Continued)

control of the Company's management or Advisor. The illiquidity of real estate
investments generally may impair the ability of the Company to respond promptly
to changing circumstances. The Company's management believes that such risks
are partially mitigated by the diversification by geographic region and
property type of the Company's real estate and mortgage notes receivable
portfolios. However, to the extent new property acquisitions, in particular
developed, partially developed and undeveloped land, and mortgage lending are
concentrated in any particular region the advantages of geographic
diversification may be mitigated.

Virtually all of the Company's mortgage notes receivable, real estate, equity
security holdings in CMET, IORI, TCI, NRLP and its trading portfolio of equity
securities are held subject to secured indebtedness. Such borrowings increase
the Company's risk of loss because they represent a prior claim on the
Company's assets and require fixed payments regardless of profitability. If the
Company defaults on such secured indebtedness, the lender may foreclose on the
Company's assets securing such indebtedness, and the Company could lose its
investment in the pledged assets.

ITEM 2. PROPERTIES

The Company's principal offices are located at 10670 North Central Expressway,
Suite 300, Dallas, Texas 75231. In the opinion of the Company's management, the
Company's offices are suitable and adequate for its present operations.

Details of the Company's real estate and mortgage notes receivable portfolios
at December 31, 1996 are set forth in Schedules III and IV, respectively, to
the Consolidated Financial Statements included at ITEM 8. "CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The discussions set forth below
under the headings "Real Estate" and "Mortgage Loans" provide certain summary
information concerning the Company's real estate and mortgage notes receivable
portfolios.

At December 31, 1996, no single asset of the Company accounted for 10% or more
of its total assets. At December 31, 1996, 51% of the Company's assets
consisted of real estate, 23% consisted of notes and interest receivable and
24% consisted of investments in the equity securities of CMET, IORI, TCI and
NRLP. The remaining 2% of the Company's assets were invested in cash, cash
equivalents, marketable equity securities and other assets. The percentage of
the Company's assets invested in any one category is subject to change and no
assurance can be given that the composition of the Company's assets in the
future will approximate the percentages listed above.

For the year ended December 31, 1996, gross revenues for each of the Denver
Merchandise Mart in Denver, Colorado and the Kansas City Holiday Inn in Kansas
City, Missouri exceeded 10% of the Company's total

ITEM 2. PROPERTIES (Continued)

revenue. The Denver Merchandise Mart was acquired in March 1994 and the Kansas
City Holiday Inn was obtained through foreclosure in March 1993. For
information regarding occupancy and rental rates, see the table under
"Properties Held for Investment" below. Neither property had a single tenant
occupying 10% or more of their respective rentable square footage.

At December 31, 1996, the Company's real estate was located in the Midwest,
Southwest, Mountain, and Southeast regions of the continental United States, as
shown more specifically in the table under "Real Estate" below. The Company
also holds mortgage notes receivable secured by real estate located in various
geographic regions of the continental United States, with a concentration in
the Mountain region, as shown more specifically in the table under "Mortgage
Loans" below.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

ITEM 2. PROPERTIES (Continued)

Geographic Regions

The Company has divided the continental United States into the following six
geographic regions.

Northeast region comprised of the states of Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Vermont, and the District of Columbia. The
Company has no properties in this region.

Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. The
Company has one hotel in this region.

Southwest region comprised of the states of Arizona, Arkansas, Louisiana,
New Mexico, Oklahoma and Texas. The Company has one commercial property in
this region.

Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas,
Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio,
South Dakota, West Virginia and Wisconsin. The Company has three
commercial properties and one hotel in this region.

Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. The Company has one commercial property and one
hotel in this region.

Pacific region comprised of the states of California, Oregon and
Washington. The Company has no properties in this region.

Excluded from the above are 17 parcels of developed, partially developed and
undeveloped land and a single family residence in Dallas, Texas as described
below.

Real Estate

At December 31, 1996, approximately 75% 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.

Types of Real Estate Investments. The Company's real estate consists of
commercial properties (office buildings, shopping centers and a merchandise
mart), hotels and developed, partially developed and undeveloped land. 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

ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

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 stockholders.

Although the Company has typically invested in developed real estate, the
Company may also invest in new construction or development either directly or
in partnership with nonaffiliated parties or affiliates (subject to approval by
the Company's Board of Directors). To the extent that the Company invests in
construction and development projects, the Company would be subject to business
risks, such as cost overruns and construction delays, associated with such
higher risk projects.

At December 31, 1996, the Company had no properties on which significant
capital improvements were in process.

In the opinion of the Company's management, the properties owned by the Company
are adequately covered by insurance.

The following table sets forth the percentages, by property type and geographic
region, of the Company's owned real estate (excluding the 17 parcels of
developed, partially developed and undeveloped land, and a single family
residence, described below) at December 31, 1996.

Commercial
Region Properties Hotels
--------- ---------- --------
Midwest............... 60% 34%
Mountain.............. 20 33
Southwest............. 20 -
Southeast............. - 33
--- ---
100% 100%

The foregoing table is based solely on the commercial square footage and hotel
rooms owned by the Company, and does not reflect the value of the Company's
investment in each region. Excluded from the above table are a single family
residence in Dallas, Texas and 17 parcels of developed, partially developed and
undeveloped land consisting of: 10 developed residential lots in a residential
subdivision in Fort Worth, Texas, 2 parcels of partially developed land in Las
Colinas, Texas, totaling 128.3 acres, 3.5 acres of undeveloped land in downtown
Atlanta, Georgia, 42.7 acres of partially developed land in Denver, Colorado,
567.7 acres of partially developed land in Houston, Texas, 280.0 acres of
partially developed land in Dallas, Texas, 78.45 acres of partially developed
land in Lewisville, Texas, 452.0 acres of partially developed land in Irving,
Texas, 420.0 acres of undeveloped land in Duchense, Utah, 82.4 acres of
undeveloped land in Oceanside, California, and 6 additional parcels of land
totaling approximately 74.5 acres. See Schedule III to the Consolidated
Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" for a more detailed description of the Company's real
estate portfolio.

ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

A summary of the activity in the Company's owned real estate portfolio during
1996 is as follows:

Owned properties in real estate portfolio at January 1, 1996. 15*
Properties acquired through purchase......................... 12
Properties sold.............................................. (1)
--
Owned properties in real estate portfolio at
December 31, 1996.......................................... 26*
==

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

* Includes one residential subdivision with 22 developed residential lots at
January 1, 1996, and 10 developed residential lots at December 31, 1996.

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, 1996, 1995 and 1994 for commercial properties and average occupancy during
1996, 1995 and 1994 for hotels:

Rent Per Square Foot
Average Room Rate Occupancy
Square Footage/ -------------------------- -------------------------
Property Location Rooms 1996 1995 1994 1996 1995 1994
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ -----

Office Building
Rosedale Towers Minneapolis, MN 84,798 Sq.Ft. $14.88 $13.16 $14.46 91% 90% 94%

Shopping Center
Oak Tree Village Lubbock, TX 45,623 Sq.Ft. 7.98 7.34 * 89% 91% *
Park Plaza Manitowoc, WI 105,507 Sq.Ft. 5.61 5.72 5.65 100% 93% 93%

Merchandise Mart
Denver Mart Denver, CO 509,008 Sq.Ft. 15.33 14.53 14.18 95% 96% 97%

Hotels
Best Western Virginia Beach, VA 110 Rooms 41.11 * * 42% * *
Oceanside
Inn at the Mart Denver, CO 156 Rooms 46.66 44.69 42.38 36% 40% 42%
Kansas City
Holiday Inn Kansas City, MO 196 Rooms 66.46 61.66 52.47 79% 75% 75%

Single Family
Residence
Tavel Circle Dallas, TX 2,271 Sq.Ft.

* Property was acquired in 1996 or 1995.

Occupancy presented above and through this ITEM 2. is without reference to
whether leases in effect are at, below or above market rates.

ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

In April 1996, the Company refinanced the $5.1 million of mortgage debt secured
by the Denver Merchandise Mart in Denver, Colorado for $15.0 million. The new
loan is secured by a mortgage against the Denver Merchandise Mart and a pledge
of 1,264,000 newly issued shares of the Company's Common Stock. The Company
received net refinancing proceeds of $7.8 million after the payoff of the
existing mortgage debt, purchasing the ground lease on the Denver Merchandise
Mart for $678,000 and payment of various closing costs associated with the
refinancing. The new loan bears interest at a variable rate, currently 10.5%
per annum, requires monthly principal and interest payments of $142,000 and
matures in October 1997. The Company paid BCM a mortgage brokerage and equity
refinancing fee of $150,000 based upon the $15.0 million refinancing.

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 obtained
mortgage financing on the residence in the amount of $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 a
variable rate, currently 9.25% per annum, requires monthly principal and
interest payments of $2,000 and matures in August 2008. The residence is
currently being leased.

In August 1996, the Company refinanced the $2.4 million of 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 existing mortgage debt and payment of various closing costs
associated with the refinancing. The Company also received 564,704 shares of
Common Stock of the Company that it had pledged as additional collateral on the
retired mortgage debt. The new loan bears interest at 9.05% per annum, requires
monthly principal and interest payments of $24,000 and matures in August 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 previously unencumbered 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 lender advanced the $1.1 million renovation
holdback in December 1996. The new loan bears interest at a variable rate,
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.

ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

the 1% general partner and the Company is the 99% Class B limited partner. In
conjunction with the acquisition, Ocean, LP issued 1,813,660 Class A limited
partner units in Ocean LP having an agreed value of $1.00 per partnership unit
to the former owners of the property. The Class A limited partner units are
entitled to a $.095 per unit annual preferred return. The Class A limited
partners do not otherwise participate in the income, loss or cash flow of the
partnership. The Class A limited partner units may be exchanged for Series D
Cumulative Preferred Stock in the Company at a rate of 20 units per share of
Preferred Stock. See ITEM 5. "MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS." The Company obtained new mortgage financing for the
remaining $5.0 million of the purchase price. The mortgage bears interest at
9.94% per annum, requires monthly payments of principal and interest of $49,000
and matures in January 2007.

In December 1996, the Company obtained second lien financing on the Kansas City
Holiday Inn in Kansas City, Missouri, of $3.2 million. The Company received net
financing proceeds of $3.0 million after the payment of various closing costs
associated with the financing. The mortgage bears interest at 15% per annum,
requires monthly interest payments of $41,000 and matures in February 1999.

Properties Held for Sale. Set forth below are the Company's properties held for
sale, primarily undeveloped, partially developed and undeveloped land, and the
average annual rental rate and an occupancy at December 31, 1996, 1995, and
1994 of its commercial property:

Rent Per Square Foot Occupancy
Acres/Lots/ ------------------------ ------------------------
Property Location Square Footage 1996 1995 1994 1996 1995 1994
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ -----
Office Building
- ---------------

Mopac St. Louis, MO 400,000 Sq. Ft. $ .16 $ .17 $ .14 100% 100% 100%

Land
- --------------
Atlanta Atlanta, GA 3.5 Acres
Las Colinas I Las Colinas, TX 68.0 Acres
BP Las Colinas Las Colinas, TX 60.3 Acres
Rivertrails I Ft. Worth, TX 10.0 Lots
Parkfield Denver, CO 442.7 Acres
Pin Oak Houston, TX 567.7 Acres
Valwood Dallas, TX 280.0 Acres
Lewisville Lewisville, TX 78.5 Acres
Valley Ranch Irving, TX 452.0 Acres
Jeffries Ranch Oceanside, CA 82.4 Acres
Bad Lands Duchense, Utah 420.0 Acres
Other
(6 properties) Various 74.5 Acres

ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

proceeds of the sale, $4.7 million, to pay down the term loan, 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. In February 1997, the
Company completed the second phase sale of 40.2 acres for $8.0 million, of
which $7.2 million was paid in cash. Of the net sales proceeds of $6.9 million,
$1.5 million was used to payoff the underlying debt secured by the BP Las
Colinas parcel, pay a $500,000 maturity fee to the lender, make a $1.5 million
principal paydown on note secured by Parkfield land in Denver, Colorado with
the same lender, and $1.0 million was applied as a principal paydown on the
term loan secured by the Las Colinas I land parcel. In conjunction with the
sale the Company provided $800,000 in purchase money financing in the form of a
six month unsecured loan. The loan bears interest at 12% per annum, with all
accrued but unpaid interest and principal due at maturity. The Company
recognized a gain of $3.4 million on such sale, deferring an additional
$800,000 of gain until the loan is paid in full.

In March 1996, the Company sold 2.3 acres of the Las Colinas I 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. The Company recognized a gain of $538,000 on the sale.

In May 1996, the Company sold an additional 2.3 acres of the Las Colinas I land
parcel for $941,000 in cash. In accordance with the provisions of the term loan
secured by such parcel, the Company applied the net proceeds of the sale of
$864,000 to pay down the term loan. The Company recognized a gain of $534,000
on the sale.

In June 1996, the Company purchased Parkfield land, 442.7 acres of partially
developed land in Denver, Colorado, for $8.5 million. In connection with the
acquisition, the Company obtained mortgage financing of $7.5 million and issued
to the seller 15,000 shares of the Company's Series C Cumulative Convertible
Preferred Stock with an aggregate liquidation preference of $1.5 million. See
ITEM 5. "MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS".
The excess financing proceeds of $500,000 were applied to the payment of various
closing costs associated with the acquisition. The loan bears interest at 15%
per annum, requires monthly interest only payments at a rate of 12% per annum,
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 the loan's maturity in June 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 parcel of land in
Midland, Michigan that was leased under a long-term ground lease. The Company
recognized a gain of $44,000 on the sale.

ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

the remaining $5.7 million of the purchase price. The loan bears interest at 9%
per annum, required a $500,000 principal and interest payment on November 1,
1996 and requires quarterly principal and interest payments of $145,000,
thereafter. The loan matures in August 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 or
about 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 151.5 acres of
unimproved 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 partner interest in SAMLP. As more fully discussed in "Investments in
Real Estate Investment Trusts and Real Estate Partnerships," below. To complete
the acquisition, the Company borrowed an additional $3.0 million from the
lender whose term loan is secured by the Las Colinas I 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 82.4 acres of
unimproved land acquired from Southmark in Oceanside, California and the 19.2%
limited partner interest in SAMLP.

Also in August 1996, the Company purchased Valwood land, 280 acres of partially
developed land in Dallas County, Texas for $13.5 million. The Company paid $3.8
million in cash and obtained new mortgage financing for the remaining $9.7
million of the purchase price as a third advance under the term loan from the
Las Colinas I 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 March 1997, June 1997, September 1997 and
January 1998, and added 240 acres of the Valwood land 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. The $4.0 million overline advance
note was repaid in full in December 1996.

In November 1996, the Company sold an additional 2.2 acres of the Las Colinas I
land parcel for $899,000 in cash. The Company used the net proceeds of the sale
of $749,000 to pay down the term loan secured by such parcel in accordance with
provisions of the loan. The Company recognized a gain of $505,000 on the sale.
At December 31, 1996, 68 acres of the Las Colinas I land remained to be sold.

Also in November 1996, the Company purchased Lewisville land, 78.5 acres of
undeveloped land in Lewisville, Texas, for $3.6 million. The company paid $1.1
million in cash and obtained mortgage financing for the remaining $2.5 million
of the purchase price. The mortgage bears

ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

interest at 10% per annum, requires an annual interest payment of $250,000 on
November 9, 1997, and quarterly interest payments of $62,500 thereafter. The
loan matures in October 1999. The Company paid a real estate brokerage
commission of $237,000 to Carmel Realty based on the $3.6 million purchase
price.

Also in December 1996, the Company purchased Valley Ranch land, 452 acres of
partially developed land in Irving, Texas, for $15.5 million. In conjunction
with the acquisition, a wholly owned subsidiary of the Company, became the 1%
general partner and the Company became the 99% Class B limited partner in
Valley Ranch Limited Partnership ("VRLP"). VRLP ,in turn issued 8,000,000 Class
A limited partner units having an agreed value of $1.00 per partnership unit to
the former VRLP limited partners. The Class A limited partner units are
entitled to a $.10 per unit preferred annual return for 36-months and $.11 per
unit preferred annual return thereafter. The Class A limited partners do not
otherwise participate in the income, loss or cash flow of the partnership. The
Class A limited partner units may be exchanged for Series E Cumulative
Convertible Preferred Stock of the Company at a rate of 100 units per share of
Preferred Stock. See ITEM 5. "MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS." VRLP obtained new mortgage financing for the remaining
$7.7 million of the purchase price. The mortgage bears interest at a variable
rate currently 10.25% per annum, requires monthly interest payments of $70,000,
and matures in December 1999. The Company paid a real estate brokerage
commission of $135,000 to Carmel Realty based on the $15.5 million purchase
price.

In January 1997, the Company sold 3.0 acres of the Las Colinas I land in Las
Colinas, Texas, for $1.2 million in cash. The Company recognized a gain of
$697,000 on the sale.

In January 1997, the Company purchased Scout land, 546 acres of undeveloped
land in Tarrant County, Texas, for $2.2 million. The Company paid $725,000 in
cash and obtained mortgage financing for the remaining $1.5 million of the
purchase price. The mortgage bears interest at 16% per annum, requires
quarterly interest payments of $61,000 beginning on April 15, 1997, and matures
in January 2000. The Company paid a real estate brokerage commission of
$135,000 to Carmel Realty based on $2.2 million purchase price.

In March 1997, the Company purchased Katy Road land, 130.6 acres of undeveloped
land in Harris County, Texas for $5.0 million. The Company paid $958,000 in
cash and obtained seller financing for the remaining $4.0 million of the
purchase price. The mortgage bears interest at 9% per annum, requires quarterly
interest payments of $92,000, and matures in March 2000. The Company paid a
real estate brokerage commission of $209,000 to Carmel Realty based on the $5.0
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 were sold for an aggregate gain of $24,000. At December 31, 1996, 10 lots
remained to be sold.

ITEM 2. PROPERTIES (Continued)

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.

Types of Mortgage Activity. 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.

Types of Properties Subject to Mortgages. The types of properties securing the
Company's mortgage notes receivable portfolio at December 31, 1996 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 stockholders.

At December 31, 1996, the obligors on $13.5 million or 24% of the Company's
mortgage notes receivable portfolio were affiliates of the Company. Also at
that date, $1.6 million or 3% of the Company's mortgage notes receivable
portfolio was in default.

The following table sets forth the percentages (based on the outstanding
mortgage note balance at December 31, 1996), by both property type and
geographic region, of the properties that serve as collateral for the Company's
mortgage notes receivable at December 31, 1996. See Schedule IV to the
Consolidated Financial Statements included in ITEM 8. "CONSOLIDATED FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA" for additional details of the Company's
mortgage notes receivable portfolio.

Commercial
Region Apartments Properties Total
- ---------- ----------- ---------- -------

Mountain ....... -- % 72.79% 72.79%
Southeast....... -- 18.38 18.38
Southwest....... 2.47 -- 2.47
Midwest......... 6.36 -- 6.36
Northeast....... -- -- --
---- ----- -----
8.83% 91.17% 100.0%

A summary of the activity in the Company's mortgage notes receivable portfolio
during 1996 is as follows:

Loans in mortgage notes receivable portfolio at
January 1, 1996.................................... 10*
Loans funded........................................... 1
Loan paid in full...................................... (1)
----
Loans in mortgage notes receivable portfolio
at December 31, 1996............................... 10
====

ITEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

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

* Includes a mortgage note receivable collateralized by three condominium
mortgage loans.

During 1996, the Company collected $4.3 million in interest and $1.5 million in
principal on its mortgage notes receivable. The Company plans, for the
foreseeable future, to hold, to the extent its liquidity permits, rather than
to sell in the secondary market, the mortgage notes in its portfolio.

First Mortgage Loans. 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 1996.

The borrower on a $1.7 million 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. On
August 24, 1996, the bankruptcy court's stay was lifted allowing the Company to
proceed with foreclosure. The note had a principal balance of $1.6 million at
December 31, 1996. On February 21, 1997, the Company sold its note for $1.8
million in cash. The Company will recognize a gain of approximately $150,000 on
the sale.

Wraparound Mortgage Loans. 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 amortization of
principal. The Company's policy is to make wraparound mortgage loans in amounts
and on properties as to which it would other-

TEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

wise make a first mortgage loan. The following discussion briefly describes
events that affected previously funded wraparound mortgage loans during 1996.

In February 1996, the Company refinanced the $7.8 million of debt
collateralized by a mortgage note receivable with a principal balance of $18.2
million at December 31, 1996, which is secured by a 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 various
closing costs associated with the refinancing and making a $1.5 million paydown
on the term loan secured by the Las Colinas I land in Las Colinas, Texas, in
exchange for that lender's release of its participation in the note receivable.
The new loan bears interest at 15% per annum, requires monthly principal and
interest payments of $152,000 and matures in February 1998.

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 through foreclosure subject to first and second
lien mortgages totaling $10.0 million. In June 1992, the Company sold the hotel
and casino for a $22.0 million wraparound mortgage note receivable, a $500,000
unsecured note receivable, which was collected in full, and $100,000 in cash.
The $22.0 million note bears interest at 11% and was scheduled to mature in
July 1995. The Company recorded a deferred gain of $4.6 million in connection
with the sale of the hotel and casino resulting from a disputed third lien
mortgage being subordinated to the Company's wraparound mortgage note
receivable. The Company and the borrower agreed to extend the Company's
wraparound mortgage note receivable to December 31, 1995. A one percent
extension fee was added to the principal balance of the wraparound mortgage
note. The monthly payments on the note remained at $175,000 per month as did
the other terms of the note. At the note's extended maturity, the Company and
the borrower again agreed to extend the Company's wraparound mortgage note to
July 1, 1996. A one percent extension fee was again added to the principal
balance of the Company's wraparound mortgage note. The monthly payments on the
wraparound mortgage note remained at $175,000 per month as did the other terms
of the note. The Company's modified wraparound note continued to accrue
interest at 11% per annum with any unpaid interest being added monthly to the
principal balance. In March 1997, the wraparound note was again modified and
extended. The wraparound note now matures in June 1999 with the borrower having
two one year extension options. The modified wraparound note bears interest at
10.5% per annum the first year, 11.5% per annum the second year and $12.5% per
annum the third year and in any extension period and requires an annual
$500,000 principal paydown. The borrower is also required to invest $2.0
million in improvements to the hotel and casino within four months of the March
1997 modification and an additional $2.0 million prior to December 1997. The
borrower has also pledged 1,500,000 shares of common stock in Crowne Ventures,
Inc., as additional collateral. 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 $27.6 million at December 31, 1996. Prior
to the March 1997 modifica-

ITEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

tion and extension, the Company recognized interest income on this wraparound
mortgage note only to the extent interest was collected.

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 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 the Las Colinas I
land in Las Colinas, Texas, in exchange for that lender's release of its
participation in the wraparound note receivable. The new underlying lien bears
interest at 16.5% per annum, requires monthly interest only payments of
$180,000, at a rate of 12.5% per annum, with the remaining 4% being deferred
and added to the loan's principal balance. The loan matures in April 1998. The
Company paid BCM a mortgage brokerage and equity refinancing fee of $168,000
based upon the $16.8 million refinancing.

Junior Mortgage Loans. 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
1996 and the events that affected previously funded junior mortgage notes
during 1996.

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 all accrued
but unpaid interest being payable in a single installment on demand or the
note's June 1, 1998 maturity.

At December 31, 1996, the Company held a mortgage note receivable secured by a
third lien mortgage secured by a commercial property in South Carolina and
personal guaranties of several individuals. The note had an extended maturity
date of September 1, 1996. 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 Company
received $85,000 of the required principal reduction payments in 1996 and the
remaining $5,000 in 1997. The monthly interest, quarterly principal reduction
payments of $25,000 and all other terms remained the same. The principal
balance of the note was $93,000 at December 31, 1996 and the note is performing
in accordance with its modified terms.

The Company holds a junior mortgage note receivable secured by the Williamsburg
Hospitality House in Williamsburg, Virginia, that is subject to a first lien
mortgage of $12.0 million at December 31, 1996. In October 1993, the then first
lien debt was restructured and split into three pieces. During 1995, the
Company advanced the borrower $3.3 million to payoff the then second lien,
allowing the borrower to receive

ITEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

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 date of its
note to April 1, 1996. All other terms of the note remained unchanged. In
December 1996, the underlying lien debt was refinanced for $12.0 million. Of
the loan proceeds, $9.0 million was used to payoff the existing underlying
lien, $700,000 was applied to the principal and interest due the Company with
the remainder of the loan proceeds being used to fund a repair escrow and pay
various closing costs associated with the refinancing. The new first mortgage
bears interest at 9.85% per annum, requires monthly payments of principal and
interest of $120,000 and matures in December 2001. The Company is the 1%
general partner in the partnership owning the property. The partnership paid a
mortgage brokerage and equity refinancing fee of $128,000 to BCM based on the
$12.0 million purchase price.

At December 31, 1996, the Company held a mortgage note receivable secured by an
apartment complex in Merriville, Indiana, with a principal balance of $3.5
million. The property is owned by a subsidiary of Davister Corp. ("Davister"),
a general partner in a partnership that owns approximately 5.2% of the
Company's outstanding shares of Common Stock. The note matured in December
1996. The Company and borrower have agreed to a modification and extension of
the note. The modified note receivable continues to bear interest at 10% per
annum, requires monthly payments of principal and interest of $42,000 and has
an extended maturity date of December 2000. As additional collateral for this
loan, the Company has received a second lien on another property owned by
Davister as well as Davister's guarantee of the loan. The note is performing in
accordance with its modified terms. See ITEM 13. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."

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 Real Estate Investment Trusts ("REIT") (collectively
the "REITs"), 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 Director of the Company until November 16, 1992,
served until May 15, 1996, as a director and Chief Executive Officer of SAMI, a
company owned by BCM, which serves as SAMLP's managing general partner. Mr.
Paulson, Executive Vice President of the Company, serves as the sole director
and as President of SAMI. Mr. Phillips is also a general partner of SAMLP. 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.

Since acquiring its initial investments in the equity securities of the REITs
and NRLP in 1989, the Company has made additional investments in the equity
securities of these entities through private and open market purchases. The
Company's cost with respect to shares of the REITs at

ITEM 2. PROPERTIES (Continued)

Investments in Real Estate Investment Trusts and Real Estate
Partnerships (Continued)

December 31, 1996 totaled $27.0 million, and its cost with respect to units of
limited partner interest in NRLP totaled $29.7 million. The aggregate carrying
value (cost plus or minus equity in income or losses and less distributions
received) of such equity securities of the REITs and NRLP was $37.7 million at
December 31, 1996 and the aggregate market value of such equity securities was
$81.8 million. The aggregate investee book value of the equity securities of
the REITs and the Company's share of NRLP's revaluation equity based upon the
December 31, 1996 financial statements of each such entity was $63.0 million
and $188.5 million, respectively. See ITEM 13. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."

The Company's Board of Directors authorized the expenditure by the Company of
up to an aggregate of $25.0 million to acquire, in open market purchases, units
of NRLP and shares of the REITs, excluding private purchase transactions which
were separately authorized. In February 1997, the Company's Board of Directors
increased such authorization to $35.0 million. As of December 31, 1996, the
Company had expended $3.8 million to units of NRLP and an aggregate of $5.6
million to acquire shares of the REITs, in open market purchases, in accordance
with these authorizations. The Company expects to make additional investments
in the equity securities of the REITs and NRLP.

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.

The purchases of the equity securities of the REITs 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 REITs 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
REITs and NRLP owned by the Company are pledged as collateral for borrowings.
Pertinent information regarding the Company's investment in the equity
securities of the REITs and NRLP, at December 31, 1996, is summarized below
(dollars in thousands):

Percentage Carrying Equivalent
of the Company's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee December 31, 1996 December 31, 1996 December 31, 1996 December 31, 1996
- -------- ----------------- ----------------- ----------------- -----------------

NRLP.... 54.5% 14,421 $ * $ 44,997
CMET.... 40.6 14,141 32,148 18,789
IORI.... 29.6 2,719 6,625 4,838
TCI..... 30.5 6,318 24,204 13,131
--------- -----------
$ 37,599 $ 81,755
========= ============

ITEM 2. PROPERTIES (Continued)

Investments in Real Estate Investment Trusts and Real Estate
Partnerships (Continued)

- ---------------
* At December 31, 1996, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity, however, was $188.5
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, 1996.

Each of the REITs 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 REITs 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 REITs, and that the REITs have the same advisor as the
Company and that Mr. Paulson, an Executive Vice President of the Company, is
also the President of the REITs and BCM, the Company's advisor, and is the
President and sole 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, as more fully discussed in "NRLP" below. The carrying value of
the Company's investment in these entities, as set forth in the table above, 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.

The following is a summary description of each of NRLP and the REITs, based
upon information publicly reported by such entities.

NRLP. NRLP is a publicly traded master limited partnership which was formed
under the Delaware Uniform Limited Partnership Act on January 29, 1987. It
commenced operations on September 18, 1987 when, through NOLP, it acquired all
of the assets, and assumed all of the liabilities, of 35 public and private
limited partnerships sponsored by or otherwise related to Southmark. NRLP is
the sole limited partner of NOLP and owns

ITEM 2. PROPERTIES (Continued)

Investments in Real Estate Investment Trusts and Real Estate
Partnerships (Continued)

99% of the beneficial interest in NOLP. NRLP and NOLP operate as an economic
unit and, unless the context otherwise requires, all references herein to the
Partnership shall constitute references to NRLP and NOLP as a unit. The general
partner and owner of 1% of the beneficial interest in each of NRLP and NOLP is
SAMLP, a Delaware limited partnership. SAMI, a company owned by BCM, is the
managing general partner of SAMLP. In November 1992, NOLP transferred 52
apartment complexes and a wraparound mortgage note receivable to Garden
Capital, L.P. ("GCLP"), a Delaware limited partnership in which NOLP owns a
99.3% limited partner interest. Concurrent with such transfer, GCLP refinanced
all of the mortgage debt associated with the transferred properties and the
wraparound mortgage note under a new first mortgage in the amount of $223.0
million.

The Company is a limited partner in SAMLP, holding a 96% limited partner
interest therein, which the Company consolidates for financial statement
purposes. As discussed in more detail under "Real Estate" above, in August
1996, the Company purchased Southmark's 19.2% limited partner interest in
SAMLP. Gene E. Phillips and SAMI are the general partners of SAMLP.

SAMI, as the managing general partner of SAMLP, has discretion in determining
methods of obtaining funds for the Partnership's operations, and the
acquisition and disposition of its assets. The Partnership's governing
documents place no limitation on the amount of leverage that the Partnership
may incur either in the aggregate or with respect to any particular property or
other investment. At December 31, 1996, the aggregate loan-to-value ratio of
the Partnership's real estate portfolio was 44.6% computed on the basis of the
ratio of total property-related debt to aggregate appraised values.

As of December 31, 1996 NRLP owned 83 properties located in 22 states. These
properties consisted of 67 apartment complexes comprising 16,848 units, seven
office buildings with an aggregate 495,594 square feet and nine shopping
centers with an aggregate of 1.1 million square feet.

For the year ended December 31, 1996, the Partnership reported a net loss of
$375,000 compared to net income of $3.8 million for the year ended December 31,
1995. The Partnership's net income in 1995 was attributable to a $7.7 million
gain on the sale of two apartment complexes. The Partnership's loss from
operations of $436,000 in 1996 was a 89% decrease when compared to its $3.9
million loss from operations in 1995. The improvement in the Partnership's 1996
operating results is due to a 1.2% increase in rents due to increased rental
rates at the Partnership's apartments and commercial properties coupled with
1.5% decrease in operating expenses, primarily interest.

The Partnership has paid quarterly distributions to unitholders since the
fourth quarter of 1993. In 1996, the Company received a total of $6.9 million
in distributions from the Partnership. In 1995, the Company accrued 3.3 million
in distributions from the Partnership that were received January 1996.

ITEM 2. PROPERTIES (Continued)

Investments in Real Estate Investment Trusts and Real Estate
Partnerships (Continued)

The Partnership, SAMLP, Mr. Phillips and William S. Friedman, a general partner
of SAMLP until March 4, 1994, were among the defendants in a class action
lawsuit arising out of the transactions discussed above whereby the Partnership
was formed. An agreement settling such lawsuit as to the defendants, the
Partnership, SAMLP and Messrs. Phillips and Friedman (the "Moorman Settlement
Agreement"), became effective on July 5, 1990. The Moorman Settlement Agreement
provided for, among other things, the appointment of an oversight committee for
NRLP; the establishment of specified annually increasing targets for a
five-year period relating to the price of NRLP units; a limitation and deferral
or waiver of NRLP's reimbursement to SAMLP of certain future salary costs; and
a deferral or waiver of certain future compensation to SAMLP; the required
distribution to unitholders of all of the Partnership'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; the contribution by certain
co-defendants of cash and notes payable to the Partnership aggregating $5.5
million including a $2.5 million contributed by SAMLP. The Partnership also
agreed to pay certain settlement costs, including plaintiffs' attorneys' fees
in the amount of $3.4 million. The settlement plan remains in effect until the
withdrawal of SAMLP as general partner of NRLP and NOLP.

The Moorman Settlement Agreement provides for the resignation and replacement
of SAMLP as general partner if the price targets are not met for two
consecutive anniversary dates. The Partnership 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 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 the Partnership 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. SAMI, the managing
general partner of SAMLP, has calculated the fair value of such Redeemable
General Partner Interest to be $42.0 million at December 31, 1996 before
reduction for the principal balance ($4.2 million at December 31, 1996) and
accrued interest ($6.2 million at December 31, 1996) on the note receivable
from SAMLP for its original capital contribution to the Partnership.

In January 1995, NRLP, SAMLP, the NRLP oversight committee and William H.
Elliott executed an Implementation Agreement which provides for the nomination
of an entity controlled by Mr. Elliott as successor general partner and for the
resolution of all related matters under the Moorman Settlement Agreement. On
February 20, 1996, the parties to the Implementation Agreement executed an
Amended and Restated Implementation Agreement.

ITEM 2. PROPERTIES (Continued)

Investments in Real Estate Investment Trusts and Real Estate
Partnerships (Continued)

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. 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.

In September 1996, the Judge supervising the implementation of the Moorman
Settlement Agreement (the "Supervising Judge") entered an order granting
tentative approval of the Amended and Restated Implementation Agreement and the
form of notice to be sent to the original class members. 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 NRLP's unitholders
for a vote. In addition, the unitholders will vote upon amendments to the
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 quarter of 1997.

The Amended and Restated Implementation Agreement provides that SAMLP, and its
affiliates owning units in the Partnership 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 the election and taking office of the successor general partner, the class
action settlement plan and the NRLP oversight committee shall terminate. If the
successor general partner 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, of amounts owed by SAMLP and the Partnership to each other.

On September 3, 1996, Joseph B. Moorman filed a Motion for Orders Compelling
Enforcement of the Moorman Settlement Agreement, Appointment to a Receiver and
Collateral Relief with the Court. The motion alleged that the settling
defendants had failed or refused to perform their obligations under the Moorman
Settlement Agreement and had breached the Moorman Settlement Agreement. The
motion also 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

ITEM 2. PROPERTIES (Continued)

Investments in Real Estate Investment Trusts and Real Estate
Partnerships (Continued)

Company since August 7, 1991. A hearing was held on this motion in October
1996. In January 1997, the Supervising Judge entered an order denying the
motion.

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

A hearing on the motions to discharge or disband the Oversight Committee and to
vacate the Court's orders was held on March 21, 1997, and the Supervising Judge
ruled that neither Mr. McNeil nor Mr. Moorman had standing to bring the
motions. The Supervising Judge also set June 27, 1997 as the hearing date for
final approval of the Amended and Restated Implementation Agreement.

In April 1995, the Company's Board of Directors approved the Company's entering
into a comfort and indemnification letter whereby the Company would agree to
indemnify Mr. Elliott and any entity controlled by Mr. Elliott which is elected
to serve as the successor general partner of NRLP and NOLP. Such
indemnification will stand behind any indemnification to which Mr. Elliott or
any entity controlled by Mr. Elliott may be entitled to under the NRLP
partnership agreement.

CMET. CMET is a California business trust which was organized on August 27,
1980 and commenced operations on December 3, 1980. CMET's primary business is
investing in real estate through direct equity investments and partnerships and
financing real estate and real estate related activities through investments in
mortgage notes. CMET holds equity investments in apartment complexes and
commercial properties (office buildings, industrial warehouses and shopping
centers) throughout the continental United States. CMET's apartment complexes
and commercial properties are concentrated in the Southeast, Southwest and
Midwest regions of the continental United States. CMET also holds mortgage
notes receivable secured by real estate located in the Southeast, Southwest and
Midwest regions of the continental United States, with a concentration in the
Southeast and Southwest regions.

For the year ended December 31, 1996, CMET reported a net income of $8.7
million as compared with a net loss of $1.4 million for the year ended December
31, 1995. CMET's 1996 net income includes gains on the sale of real estate and
marketable equity securities of $10.1 million and an extraordinary gain of
$812,000, whereas CMET's net loss for 1995 included no such gains. CMET's cash
flow from property operations (rents collected less payments for property
operating expenses) improved to $19.8 million in 1996 compared to $15.1 million
in 1995. At consisted of $7.4 million in mortgage notes and interest receivable
(net

ITEM 2. PROPERTIES (Continued)

Investments in Real Estate Investment Trusts and Real Estate
Partnerships (Continued)

of allowance for estimated losses), $214.5 million in real estate held for
investment, $5.4 million in real estate held for sale, $19.8 million in
investments in partnerships and other assets and $3.0 million in cash and cash
equivalents.

CMET has paid regular quarterly distributions since the first quarter of 1993.
The Company received a total of $1.5 million in distributions from CMET in
1996.

IORI. IORI is a Nevada corporation which was originally organized on December
14, 1984 as a California business trust and commenced operations on April 10,
1985. Like CMET, IORI's primary business is investing in real estate through
direct equity investments and partnerships and financing real estate and real
estate related activities through investments in mortgage notes. IORI holds
equity investments in apartment complexes and commercial properties (office
buildings) in the Pacific, Southeast, Southwest, and Midwest regions of the
continental United States. IORI holds one mortgage note receivable which is
secured by a shopping center in the Midwest region.

For the year ended December 31, 1996, IORI reported a net loss of $568,000 as
compared with a net loss of $906,000 for the year ended December 31, 1995. The
decrease in IORI's net loss is due to a decrease in equity losses of
partnerships which improved from a loss of $744,000 in 1995 to income of
$85,000 in 1996. The equity loss in 1995 was primarily due to the writedown of
a wraparound mortgage note receivable by a partnership in which IORI has a 40%
general partner interest. IORI's cash flow from property operations decreased
to $3.5 million in 1996 from $3.9 million in 1995. At December 31, 1996, IORI
had total assets of $63.6 million which consisted of $46.7 million in real
estate held for investment, $6.6 million of real estate held for sale, $2.0
million in notes and interest receivable, $5.1 million in investments in
partnerships and other assets and $3.2 million in cash and cash equivalents.

IORI has paid regular quarterly dividends since the first quarter of 1993. The
Company received a total of $186,000 in dividends from IORI in 1996.

TCI. TCI is a Nevada corporation which was originally organized on September 6,
1983, as a California business trust, and commenced operations on January 31,
1984. TCI also has investment policies similar to those of CMET and IORI. TCI
holds equity investments in a hotel, apartment complexes and commercial
properties (office buildings, industrial warehouses and shopping centers)
throughout the continental United States with a concentration in the Northeast,
Southeast and Southwest regions. TCI also holds mortgage notes receivable
secured by real estate located in the Northeast, Midwest, Southeast and
Southwest regions of the continental United States, with a concentration in the
Northeast and Southeast regions.

ITEM 2. PROPERTIES (Continued)

Investments in Real Estate Investment Trusts and Real Estate
Partnerships (Continued)

For the year ended December 31, 1996, TCI reported a net loss of $7.8 million
as compared with a net loss of $3.7 million for the year ended December 31,
1995. TCI's net loss for 1996 includes gains on the sale of real estate of $1.6
million and extraordinary gains of $256,000, whereas TCI's 1995 net loss
included gains on the sale of real estate of $5.8 million and an extraordinary
gain of $1.4 million. TCI's cash flow from property operations decreased to
$12.6 million in 1996 as compared to $15.3 million in 1995. At December 31,
1996, TCI had total assets of $245.4 million, which consisted of $8.6 million
in notes and interest receivable (net of allowance for estimated losses),
$216.4 million in real estate held for investment, $4.0 million in real estate
held for sale, $15.4 million in investments in real estate entities and other
assets and $1.0 million in cash and cash equivalents. At December 31, 1996, TCI
owned 341,500 shares of IORI's common stock, approximately 22.5% of IORI's
shares then outstanding.

TCI resumed the payment of quarterly dividends in the fourth quarter of 1995.
The Company received $373,000 in dividends from TCI in 1996.

SAMLP. As discussed in more detail under "Real Estate" above, in August 1996,
the Company purchased a pool of assets from Southmark for $3.1 million.
Included in the asset pool was Southmark's 19.2% limited partner interest in
SAMLP. Such purchase increased the Company's limited partner interest in SAMLP
from 76.8% to 96%. Prior to February 25, 1992, the Company had owned a 96%
limited partner interest in SAMLP. In accordance with the settlement of
adversary proceedings with Southmark on February 25, 1992 the Company assigned
to Southmark a 19.2% limited partner interest in SAMLP. SAMLP is the 1% general
partner of and holder of a 1% interest in each of NRLP and NOLP. 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.

The Company consolidates SAMLP for financial statement purposes and accordingly
SAMLP's accounts and operations are included in the accompanying Consolidated
Financial Statements. See ITEM 8. "CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA." As a limited partner, the Company has no role in the
management of the business affairs of SAMLP. Rather, Gene E. Phillips, as a
general partner of SAMLP, and SAMI, the managing general partner of SAMLP, have
full and complete authority to manage SAMLP.

River Trails II. In January 1992, the Company entered into a partnership
agreement with an entity affiliated with the owner of, at the time, 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

ITEM 2. PROPERTIES (Continued)

Investments in Real Estate Investment Trusts and Real Estate
Partnerships (Continued)

31, 1995, 132 residential lots had been sold. In 1996, an additional 52 lots
were sold and at December 31, 1996 103 lots remained to be sold. Through
December 31, 1996, each partner had received $172,000 in return of capital
distributions and $181,000 in profit distributions from the partnership.

R. G. Bond, Ltd. 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
corporate general partner has a 1% interest in the partnership which is
subordinated to a priority return of the limited partner.

Campbell Center Associates, Ltd. 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 Joint Venture, 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 January 1997, the Company exercised its option
to purchase an additional 28% general partner interest in Campbell Center
Associates, Ltd. The purchase price was $300,000 in cash and a $750,000 note,
which bears interest at 8% per annum, requires monthly interest only payments
commencing in April 1997 and matures in April 2000.

Highway 380/Preston Partners, Ltd. In July 1996, a newly formed limited
partnership, of which the Company is 1% general partner, purchased 580 acres of
undeveloped land in Collin County, Texas for $5.7 million in cash. The Company
contributed $100,000 in cash to the partnership with the remaining $5.6 million
being contributed by the limited partner. The partnership agreement designates
the Company as the managing general partner. In September 1996, the partnership
obtained financing of $2.8 million secured by the 580 acres of land and
personal guarantees of the limited partner. The loan bears interest at a
variable rate currently 9.75% per annum, requires monthly interest only
payments of $23,000 and matures in September 1998. The partnership agreement
also provides that the limited partner receive a 12% preferred cumulative
return on his investment before any sharing of partnership profits occurs.

Other Equity Investments

Pizza World Supreme, Inc. In April 1996, a 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 36.25% of the Company's net investment in
such subsidiary. The Company anticipates taking such entity public during 1997.
Accordingly, the Company believes its control of such entity is temporary and
accounts for such entity under the equity method.

ITEM 3. LEGAL PROCEEDINGS

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.

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

Not applicable.

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

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock is traded on the New York Stock Exchange using the
symbol "ARB". The following table sets forth the high and low sales prices as
reported in the consolidated reporting system of the New York Stock Exchange.

QUARTER ENDED HIGH LOW
- ------------------------------------- ----------- -----------

March 31, 1997....................... $14 1/4 * $ 6 3/8 *
(through March 14, 1997)

March 31, 1996....................... 4 13/16 * 3 3/4 *
June 30, 1996........................ 4 13/16 * 4 5/8 *
September 30, 1996................... 5 1/16 * 4 15/16 *
December 31, 1996.................... 5 3/8 * 4 13/16 *

March 31, 1995....................... 3 7/16 * 3 7/32 *
June 30, 1995........................ 3 15/32 * 3 9/32 *
September 30, 1995................... 3 29/32 * 3 9/32 *
December 31, 1995.................... 3 27/32 * 3 9/16 *

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

* Adjusted for the 2 for 1 forward Common Stock splits effected January 2,
1996 and February 17, 1997.

As of March 14, 1997, the closing market price of the Company's Common Stock on
the New York Stock Exchange was $13.00 per share.

As of March 14, 1997, the Company's Common Stock was held by 2,524 stockholders
of record.

On December 6, 1988, the Company's Board of Directors authorized the repurchase
of up to $5.0 million of the Company's Common Stock. No shares had been
repurchased pursuant to such authorization. On February 27, 1997, the Company's
Board of Directors rescinded such authorization.

On June 12, 1996, the Company's Board of Directors announced the resumption of
the payment of regular quarterly dividends on the

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (Continued)

Company's Common Stock. 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.

The Company paid quarterly dividends in 1996 as follows:

Amount
Date Declared Record Date Payable Date Per Share
- ----------------- ------------------ ------------------ ---------

June 12, 1996 June 21, 1996 July 8, 1996 $ .05
August 30, 1996 September 13, 1996 September 30, 1996 .05
December 2, 1996 December 13, 1996 December 31, 1996 .05

In April 1990, the Company's Board of Directors adopted a Preferred Share
Purchase Rights Plan (the "Rights Plan") and approved the distribution to
stockholders of one share purchase right (the "Rights") for each then
outstanding share of the Company's Common Stock. Each Right entitled
stockholders, in certain circumstances, to purchase one one-hundredth of a
share of a new series of Preferred Stock at an exercise price of $25.00. In
June 1996, the Company announced the redemption of the Rights. The Company's
Board of Directors having determined that the Rights were no longer necessary
to protect the Company from coercive tender offers. On July 8, 1996,
stockholders of record on June 21, 1996, received $.0075 per share of Common
Stock.

In April 1996, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series B 10% Cumulative Convertible
Preferred Stock, par value $2.00 per share, with a liquidation preference of
$100.00 per share. The Series B Preferred Stock consists of a maximum of 4,000
shares, all of which were sold in April 1996 for $400,000 in cash in a private
transaction. Dividends are payable at the 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
Series B Preferred Stock may be converted to Common Stock of the Company at 90%
of the average closing price of the Company's Common Sock on the prior 20
trading days.

In June 1996, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series C 10% Cumulative Convertible
Preferred Stock, par value $2.00 per share, with a liquidation preference of
$100.00 per share. The Series C Preferred Stock consists of a maximum of 16,500
shares, of which 15,000 were issued in June 1996 in connection with the purchase
of the Parkfield land in Denver, Colorado. See ITEM 2. "PROPERTIES - Real
Estate." Dividends are payable at the 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
Series C Preferred Stock may be converted to Common Stock of the Company at 90%
of the average closing price of the Company's Common Stock on the prior 20
trading days. The dividends for the first four quarters are to be paid in shares
of Series C Preferred Stock. As of December 31, 1996, 15,489 shares have been
issued and are outstanding.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (Continued)

Stock consists of a maximum of 91,000 shares. Dividends are payable at a rate
of $1.90 per year or $.475 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 Class A limited partner units of Ocean
L.P. may be exchanged for Series D Preferred Stock at a rate of 20 Class A
units per share of Series D Preferred Stock. No more than one-third of the
Class A units held may be exchanged between January 1, 1997 and May 31, 2001.
Between June 1, 2001 and May 31, 2006 all unexchanged Class A units are
exchangeable. See ITEM 2. "PROPERTIES - Real Estate."

Also in December 1996 the Company field Articles of Amendment to its Articles
of Incorporation, creating and designating a Series E 10% Cumulative
Convertible Preferred Stock, par value $2.00 per share, with a liquidation
preference of $100.00 per share. The Series E Preferred Stock consists of a
maximum of 80,000 shares. 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, for the period from November 4, 1996 to November 4, 1999 and
$11.00 per year, $2.75 per quarter thereafter. The Class A limited partner
units of VRLP may be exchanged for Series E Preferred Stock at a rate of 100
Class A units per share of Preferred Stock. No more than one-half of the Class
A units may be exchanged prior to May 4, 1996, thereafter all unexchanged Class
A units are exchangeable. Beginning November 4, 1998, the Series E Cumulative
Preferred Stock may be converted to Common Stock of the Company at 80% of the
average closing price of the Company's Common Stock on the prior 20 trading
days. Up to 37.50% of the Series E Preferred Stock may be converted between
November 4, 1998 and November 3, 1999. Between November 4, 1999 and November 3,
2001 an additional 12.50% of the preferred shares may be converted, and any
remaining preferred shares can be converted as of November 4, 2001 and
thereafter. See ITEM 2. "PROPERTIES - Real Estate."

[THIS SPACE INTENTIONALLY LEFT BLANK.]

ITEM 6. SELECTED FINANCIAL DATA

For the Years Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ----------- ------------ ----------- ------------
EARNINGS DATA (dollars in thousands, except per share)

Revenue ................................ $ 26,979 $ 22,952 $ 23,070 $ 13,427 $ 11,481
Expense ................................ 38,577 28,314 26,490 18,128 18,243
----------- ----------- ------------ ----------- -----------

(Loss) from operations ................. (11,598) (5,362) (3,420) (4,701) (6,762)
Equity in income (losses)
of investees ........................ 2,004 (851) 292 (4,014) (3,388)
Gain on sale of real
estate .............................. 3,659 2,594 379 481 566
----------- ----------- ------------ ----------- -----------
(Loss) before extraordinary
gain .................................. (5,935) (3,619) (2,749) (8,234) (9,584)
Extraordinary gain ..................... 381 783 323 3,807 --
----------- ----------- ------------ ----------- -----------
Net(loss) .............................. (5,554) (2,836) (2,426) (4,427) (9,584)

Preferred dividend
requirement ......................... (113) -- -- -- --
Redeemable Common Stock,
accretion of discount ............... -- -- -- (129) (258)
(Loss) applicable to
----------- ----------- ------------ ----------- ------------
Common shares ....................... $ (5,667) $ (2,836) $ (2,426) $ (4,556) $ (9,842)
=========== =========== ============ =========== ============

PER SHARE DATA
(Loss) before extra-
ordinary gain ....................... $ (.46) $ (.31) $ (.23) $ (.68) $ (.98)
Extraordinary gain ..................... .03 .07 .03 .31 .-
----------- ----------- ------------ ----------- -----------
Net (loss) ............................. (.43) (.24) (.20) (.37) (.98)

Redeemable Common Stock,
accretion of discount ............... -- -- -- (.01) (.03)
(Loss) applicable to
------------ ------------ ------------- ------------- ------------
Common shares ....................... $ (.43) $ (.24) $ (.20) $ (.38) $ (1.01)
=========== =========== ============ ============ ============
Dividends per share .................... $ .15 $ -- $ -- $ -- $ --

Weighted average shares
outstanding ......................... 12,765,082 11,716,656 12,208,876 12,101,100 9,813,168

December 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------ ----------- ----------- --------------
BALANCE SHEET DATA (dollars in thousands, except per share)

Notes and interest
receivable, net...................... $ 48,485 $ 49,741 $ 45,664 $ 51,769 $ 72,808
Real estate, net........................ 119,035 59,424 47,526 52,437 45,317
Total assets............................ 235,037 162,033 137,362 139,861 151,010
Notes and interest
payable.............................. 127,863 61,163 45,695 53,693 63,698
Margin borrowings....................... 40,044 34,017 26,391 16,147 9,681
Stockholders' equity.................... 47,786 53,058 55,894 56,120 60,476

Book value per share.................... $ 3.74 $ 4.53 $ 4.77 $ 5.56 $ 5.94

Shares and per share data have been adjusted for the 2 for 1 forward Common
Stock splits effected January 2, 1996 and February 17, 1997.

ITEM 7. 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 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 December 31, 1996 aggregated $1.3
million, compared with $1.1 million at December 31, 1995. Although the Company
anticipates that during 1997 it will generate excess cash from operations, as
discussed below, such excess cash is not sufficient to discharge all of the
Company's debt obligations as they mature. The Company will therefore again
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 and necessary,
borrowings from its advisor to meet its debt service obligations, pay taxes,
interest and other non-property related expenses.

Notes payable totaling $36.0 million are scheduled to mature during 1997.
Included in scheduled 1997 maturities is $4.0 million secured by the BP Las
Colinas land in Las Colinas, Texas. In February 1997, the Company sold 40.2
acres of the BP Las Colinas land for $8.0 million consisting of $7.2 million in
cash and the Company accepting an $800,000 purchase money note for the
remainder of the sales price. The Company used $4.0 million of the cash
received to payoff such debt. In July 1996, the Company purchased Pin Oak land
in Houston, Texas. The Company borrowed $5.7 million of the land's purchase
price. In September 1996, the Company entered into a contract to sell the land
for cash in an amount in excess of its purchase price. See NOTE 4. "REAL
ESTATE." The Company intends to either payoff, extend the maturity dates or
obtain alternate financing for the remainder of its debt obligations that
mature in 1997. There can be no assurance, however, that these efforts to
obtain alternate financing or debt extensions will be successful.

The Company expects an increase in cash flow from property operations in 1997.
Such increase is expected to be derived from operations of the Inn at the Mart,
the Kansas City Holiday Inn, Best Western Oceanside Hotel and Rosedale Towers
Office Building. The Company is also expecting continued lot sales at its Texas
residential subdivision and substantial sales of the land to generate
additional cash flow.

In 1996, the Company sold a total of 39.1 acres of land in Las Colinas, Texas
in four separate transactions for a total of $6.8 million. The Company applied
the $6.5 million net sales proceeds to paydown the term loans secured by such
land. In January 1997, the Company sold an additional 3.0 acres of land in Las
Colinas, Texas for $1.2 million in cash.

In 1996, the Company purchased a total of 1,368.5 acres of land in Denver,
Colorado, Houston, Texas, Dallas County, Texas and Lewisville,

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Texas, for a total of $32.1 million. The Company paid $5.4 million in cash,
obtained new or seller financing of $25.4 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.

In April 1996, 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 a partnership which has an
interest in an office building in Dallas, Texas, for $550,000 in cash and a
$500,000 note.

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.

In June 1996, the Company sold a tract of land that had been 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 1%
general partner acquired 580 acres of land in Collin County, Texas, for $5.7
million in cash. The Company contributed $100,000 in cash to the partnership.

In August 1996, the Company purchased a pool of assets for $3.1 million, from
Southmark Corporation ("Southmark") consisting of undeveloped land totaling
151.5 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 Syntek Asset Management, L.P. ("SAMLP"). In
connection with the acquisition, the Company borrowed $3.0 million.

In December 1996, a newly formed partnership, of which the Company is the
general partner and Class B limited partner, acquired the Best Western
Oceanside Hotel in Virginia Beach, Virginia for $6.8 million. In conjunction
with the acquisition, the partnership issued 1,813,660 Class A limited partner
units having an agreed value of $1.00 per unit, with the remaining $5.0 million
of the purchase price being obtained through a mortgage financing.

Also in December 1996, the Company acquired 452 acres of partially developed
land in Irving, Texas, for $15.5 million. In conjunction with the acquisition,
the Company became the general partner and Class B limited partner in the
partnership that owned the land. Of the purchase price $7.7 million was
financed with a mortgage loan and the remainder of the purchase price by the
issuance of 8,000,000 Class A limited partner units with an agreed value of
$1.00 per partner unit.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

In January 1997, the Company purchased 546 acres of undeveloped land in Tarrant
County, Texas, for $2.2 million and in March 1997, the Company purchased 130.6
acres of undeveloped land in Harris County, Texas, for $5.0 million. The
Company paid a total of $1.7 million in cash (which was advanced by the
Company's Advisor) borrowing the remaining $5.5 million of the purchase prices.

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,
if required, 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
developed, partially developed and undeveloped 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 $32.0 million,
$47.6 million, and $15.3 million of such land during each of the next three
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. Scheduled principal maturities of $20.4 million are due in
1997 of which $1.9 million is due on nonperforming notes receivable. In
February 1997, the Company sold one of the nonperforming notes with a principal
balance at December 31, 1996 of $1.6 million for $1.8 million in cash. The
balance of the Company's mortgage notes receivable are due over the next one to
ten years and provide for "balloon" principal payments. It may be necessary for
the Company to consider extending certain notes if the borrowers do not have
the resources to repay the loans, are unable to sell the property securing such
loans, or are unable to refinance the debt owed.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

the second year and 12.5% per annum the third year, and any extension periods
and requires an annual $500,000 paydown. The borrower is also required to
invest $2.0 million in improvements to the hotel and casino within four months
of the March 1997 modification and an additional $2.0 million prior to December
1997. The note is performing in accordance with its modified terms. The
Company's wraparound mortgage note receivable had a principal balance of $27.6
million at December 31, 1996.

At December 31, 1996, the Company held a mortgage note receivable secured by an
apartment complex in Merriville, Indiana, with a principal balance of $3.5
million. The note matured in December 1996. The Company and borrower have
agreed to a modification and extension of the note. The modified note
receivable continues to bear interest at 10% per annum, requires monthly
payments of principal and interest of $42,000 and has an extended maturity date
of December 2000.

The Company anticipates a continued improvement in the operations of the
properties securing its mortgage notes receivable in certain regions of the
continental United States. In spite of this perceived improvement in the real
estate market in general, the Company can give no assurance that it will not
continue to experience deterioration in cash flow from notes receivable due to
new problem loans.

Loans Payable. The Company has margin arrangements with various brokerage firms
which provide for borrowings up to 50% of the market value of marketable equity
securities. The borrowings under such margin arrangements are secured by such
equity securities and bear interest rates ranging from 7.0% to 11.0%. Margin
borrowings were $40.0 million (approximately 34.5% of market value) at December
31, 1996, compared to $34.0 million at December 31, 1995.

In August 1996, the Company consolidated its existing National Realty, L.P.
("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 of the loan. As of December 31,
1996, 3,418,319 NRLP units with a market value of $44.9 million were pledged as
security for such loan.

Also in August 1996, the Company obtained a $2.0 million loan from a financial
institution secured by a pledge of equity securities of Continental Mortgage
and Equity Trust ("CMET"), Income Opportunity Realty Investors, Inc. ("IORI")
and Transcontinental Realty Investors, Inc. ("TCI") (collectively the "REITs")
owned by the Company and Common Stock of the Company owned by Basic Capital
Management, Inc. ("BCM"), the Company's Advisor with a market value of $4.0
million. The Company received $2.0 million in net cash after the payment of
closing costs associated with the loan.

In September 1996, the same lender made a second $2.0 million loan. The second
loan is also secured by a pledge of equity securities of the

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

REITs owned by the Company and Common Stock of the Company owned by BCM with a
market value of $5.0 million. The Company received $2.0 million in net cash
after the payment of closing costs associated with the loan.

In February 1996, the Company refinanced $7.8 million of underlying 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 the Las Colinas I
land in Las Colinas, Texas in exchange for that lender's release of its
participation in the note receivable.

In April 1996, the Company refinanced the first and second lien mortgage debt
underlying 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
the Las Colinas I land in Las Colinas, Texas in exchange for that lender's
release of its participation 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 existing 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 existing debt and payment of various closing costs associated
with the refinancing.

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.

In December 1996, the Company obtained second lien mortgage financing of $3.2
million on the Kansas City Holiday Inn in Kansas City, Missouri. The Company
received net financing proceeds of $3.0 million after the payment of various
closing costs associated with the financing.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Equity Investments. During the fourth quarter of 1988, the Company began
purchasing shares of the REITs, which have the same advisor as the Company, and
units of limited partner interest in NRLP. It is anticipated that additional
equity securities of NRLP and the REITs will be acquired in the future through
open-market and negotiated transactions to the extent the Company's liquidity
permits.

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
("Securities Act"). 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 in a short period of time.

The Company's cash flow from these investments is dependent on the ability of
each of the entities to make distributions. In 1996, the Company received total
distributions from the REITs of $2.1 million and $6.9 million from NRLP. The
Company accrued $3.3 million in distributions from NRLP at December 31, 1995
which were paid January 2, 1996. The Company anticipates receiving
distributions totaling $1.4 million from the REITs and $1.3 million from NRLP
in 1997.

On June 12, 1996, the Company's Board of Directors announced the resumption of
dividend payments on the Company's Common Stock at the initial rate of $.05 per
share. The Company paid dividends totaling $1.5 million or $.15 per share in
1996.

Also on June 12, 1996, the Company announced the redemption of its share
purchase rights for $.0075 per right. The redemption price, totaling $101,000,
was paid on July 8, 1996 to stockholders of record on June 21, 1996.

The Company's management reviews the carrying values of the Company's
properties and mortgage note receivable at least annually and whenever events
or a change in circumstances indicate that impairment may exist. Impairment is
considered to exist if, in the case of a property, the future cash flow from
the property (undiscounted and without interest) is less than the carrying
amount of the property. For notes receivable impairment is considered to exist
if it is probable that all amounts due under the terms of the note will not be
collected. In those instances where impairment is found to exist, a provision
for loss is recorded by a charge against earnings. The Company's mortgage note
receivable review includes an evaluation of the collateral property securing
such 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, a
review of the property's cash flow, discussions with the manager of the
property and a review of properties in the surrounding area.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Results of Operations

1996 Compared to 1995. The Company reported a net loss of $5.6 million in 1996
as compared to a net loss of $2.8 million in 1995. 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) increased from $4.6
million in 1995 to $4.8 million in 1996. This increase is primarily
attributable to increased rents at the Denver Merchandise Mart and increased
room rates and occupancy at the Kansas City Holiday Inn. Net rental income is
expected to increase in 1997 from continued improvement at the Kansas City
Holiday Inn and from a full years operations of the Best Western Oceanside
Hotel which was acquired in December 1996.

Interest income decreased from $4.9 million in 1995 to $4.7 million in 1996.
This decrease is primarily attributable to a note receivable being paid off in
1995. Interest income in 1997 is expected to approximate that of 1996.

Other income increased from $154,000 in 1995 to $1.6 million in 1996. This
increase is due to recognizing an unrealized gain of $486,000 on the Company's
trading portfolio of equity securities in 1996 compared to recognizing an
unrealized loss of $1.4 million in 1995. This increase was offset in part by
dividend income and gain on marketable equity securities decreasing by $689,000
and $292,500 respectively.

Interest expense increased from $8.9 million in 1995 to $16.5 million in 1996.
The increase is 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. Offsetting the increase
was a $161,000 decrease in interest expense due to the sale of an apartment
complex in February 1995. Interest expense for 1997 is expected to increase
from the continued acquisition of properties on a leveraged basis.

Advisory and mortgage servicing fees increased from $1.2 million in 1995 to
$1.5 million in 1996. The increase is primarily attributable to the Company's
increase in gross assets, the basis for such fee. Such fee will continue to
increase as the Company's gross assets increase.

Depreciation increased from $1.7 million in 1995 to $2.0 million in 1996 due to
$2.9 million in property improvements made in 1996.

Equity in income of investees improved from a loss of $851,000 in 1995 to
income of $2.0 million in 1996. The increase in equity income is primarily
attributable to an improvement in income from property operations for both CMET
and NRLP, from increased rental rates and a decrease in operating expenses. 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

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

apartment complex in the fourth quarter of 1995, a $4.6 million gain
representing the Company's equity share of the REIT's gain on sale of real
estate.

Gains on the sale of real estate increased from $2.6 million in 1995 to $3.7
million in 1996. In 1996, the Company recognized a $2.0 million gain on the
sale of 32.3 acres of the BP Las Colinas land in Las Colinas, Texas, and a $1.1
million gain on the sale of 4.6 acres of the Las Colinas I land also in Las
Colinas, Texas. The 1995 gains are attributable to a $1.6 million gain
recognized on the sale of 6.9 acres of Las Colinas I land and a $924,000 gain
recognized on the sale of the Boulevard Villas Apartments in February 1995. See
NOTE 4. "REAL ESTATE."

The Company reported $783,000 in extraordinary gains in 1995 compared to
$381,000 in extraordinary gains in 1996. The 1996 extraordinary gain is the
Company's share of TCI's extraordinary gain from the early payoff of debt and
CMET's extraordinary gain from an insurance settlement. The 1995 extraordinary
gain is the Company's equity share of TCI's extraordinary gain from the early
payoff of mortgage 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 decrease 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.

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 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 $998,000 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

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

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.

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 income of investees decreased from a income of $292,000 in 1994 to a
loss of $851,000 in 1995. This decrease in equity income is primarily
attributable to an increase in 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 the sole partners. Offsetting such losses in part, is 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.

Gains on the sale of real estate increased from $292,000 in 1994 to $2.6
million in 1995. The 1995 gains are attributable to a $1.6 million gain
recognized on the sale of 6.9 acres of Las Colinas I 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 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.

Contingencies

In January 1995, NRLP, SAMLP, the NRLP oversight committee and William H.
Elliott executed an Implementation Agreement which provides for the nomination
of an entity controlled by Mr. Elliott as successor general partner of NRLP and
National Operating, L.P. ("NOLP"), the operating partnership of NRLP and for
the resolution of all related matters under

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Contingencies (Continued)

the 1990 settlement of a class action lawsuit. In February 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 $12.5
million from 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.

In September 1996, the Judge appointed to supervise the class action settlement
(the "Supervising Judge") entered an order granting tentative approval of the
Amended and Restated Implementation Agreement and the form of notice to be sent
to the original class members. 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'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.

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 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 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.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Contingencies (Continued)

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 in October 1996. In January
1997, the Supervising Judge entered an order denying the motion.

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 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

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Inflation (Continued)

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 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.

47
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

Report of Independent Certified Public Accountants........ 48

Consolidated Balance Sheets -
December 31, 1996 and 1995............................. 49

Consolidated Statements of Operations -
Years Ended December 31, 1996, 1995 and 1994.......... 51

Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1996, 1995 and 1994........... 53

Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995 and 1994........... 55

Notes to Consolidated Financial Statements................ 58

Schedule III - Real Estate and Accumulated Depreciation... 86

Schedule IV - Mortgage Loans on Real Estate.............. 89

All other schedules are omitted because they are not required, are not
applicable or the information required is included in the Consolidated
Financial Statements or the notes thereto.

REPORT OF INDEPENDENT CERTIFIED PUBLIC 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, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. 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, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, 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 26, 1997

AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS

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

Assets

Notes and interest receivable
Performing (including $13,563 in 1996 and
$14,657 in 1995 from affiliate)............. $ 50,784 $ 51,840
Nonperforming, nonaccruing ..................... 1,627 1,827
-------- --------

52,411 53,667

Less - allowance for estimated losses ............. (3,926) (3,926)
-------- --------

48,485 49,741

Real estate held for sale, net of accumulated
depreciation ($5,098 in 1996 and 1995) ......... 77,688 32,627

Less - allowance for estimated losses ............. -- (3,328)
-------- --------

77,688 29,299

Real estate held for investment net of accumu-
lated depreciation ($4,234 in 1996 and $2,646
in 1995) ....................................... 41,347 30,125

Marketable equity securities, at market value ..... 2,186 2,093
Cash and cash equivalents ......................... 1,254 1,054
Investments in equity investees ................... 55,880 41,072
Other assets (including $3,336 in 1995 from
affiliate ...................................... 8,197 8,649
-------- --------

$235,037 $162,033
======== ========

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

AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS - Continued

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

Liabilities and Stockholders' Equity

Liabilities
Notes and interest payable (including $8,973 in
1996 and $8,556 in 1995 to affiliates) ....... $127,863 $ 61,163
Margin borrowings ............................... 40,044 34,017
Accounts payable and other liabilities
(including $4,584 in 1995 to affiliate)....... 8,433 12,698
-------- --------

176,340 107,878

Minority interest ............................... 10,911 1,097

Commitments and contingencies

Stockholders' equity
Preferred Stock, $2.00 par value, authorized
20,000,000 shares, issued and outstanding
4,000 shares Series B .................... 8 --
15,877 shares Series C ................... 32 --
Common stock, $.01 par value, authorized
16,666,667 shares; issued 13,479,348 shares in
1996 and 11,716,656 share in 1995 ............ 129 117
Paid-in capital ................................. 68,601 66,661
Accumulated (deficit) ........................... (20,978) (13,720)
Treasury stock at cost, 564,704 shares .......... (6) --
-------- --------

47,786 53,058
-------- --------

$235,037 $162,033
======== ========

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

AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,
---------------------------------
1996 1995 1994
--------- -------- --------
(dollars in thousands, except per share)

Income
Rents ....................................... $ 20,658 $ 17,869 $ 18,013
Interest (including $539 in 1996, $506 in
1995 and $366 in 1994 from affiliates) ... 4,724 4,929 3,959
Other ....................................... 1,597 154 1,098
-------- -------- --------

26,979 22,952 23,070

Expenses
Property operations (including $892 in
1996, $1,200 in 1995 and $899 in 1994
to affiliates) ........................... 15,874 13,260 13,013
Interest (including $418 in 1996, $437 in
1995 and $589 in 1994 to affiliates) ..... 16,450 8,941 7,875
Advisory and servicing fees to affiliate..... 1,539 1,195 1,242
General and administrative (including
$691 in 1996, $516 in 1995 and $434
in 1994 to affiliate)..................... 2,712 2,554 2,562
Depreciation and amortization ............... 2,002 1,691 1,620
Minority interest ........................... -- 671 169
-------- -------- --------

38,577 28,312 26,481
-------- -------- --------

(loss) from operations ......................... (11,598) (5,360) (3,411)
Equity in income [losses] of investees ......... 2,004 (851) 292
Gain on sale of real estate .................... 3,659 2,594 379
-------- -------- --------

(loss) before income taxes ..................... (5,935) (3,617) (2,740)
Income tax expense ............................. -- 2 9
-------- -------- --------

(loss) before extraordinary gain ............... (5,935) (3,619) (2,749)

Extraordinary gain ............................. 381 783 323
-------- -------- --------

Net (loss) ..................................... (5,554) (2,836) (2,426)

Preferred dividend requirement ................. (113) -- --
-------- -------- --------

Net (loss) applicable to Common shares ......... $ (5,667) $ (2,836) $ (2,426)
======== ======== ========

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

AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

Years Ended December 31,
-----------------------------------------------
1996 1995 1994
----------- ----------- ------------

Earnings per share
(loss) before extraordinary gain ........ $ (.46) $ (.31) $ (.23)
Extraordinary gain ...................... .03 .07 .03
----------- ----------- ------------

Net (loss) applicable to Common
shares .................................. $ (.43) $ (.24) $ (.20)
=========== =========== ============

Weighted average Common shares used in
computing earnings per share .......... 12,765,082 11,716,656 12,208,876
=========== =========== ============

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

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

Series B Series C
Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Capital (Deficit) Equity
--------- ---------- ------- -------- -------- ---------- -------------
(dollars in thousands)

Balance,

January 1, 1994..... $ - $ - $ 102 $ - $ 64,476 $ (8,458) $ 56,120

Reclassification of
Redeemable Common
Stock............... - - 14 - 2,186 - 2,200

Common Stock issued.... - - 9 - (9) - -

Common Stock retired... - - (8) - 8 - -

Net (loss)............. - - - - - (2,426) (2,426)
--------- ------- ----- ---- -------- -------- -------

Balance,
December 31, 1994... - - 117 - 66,661 (10,884) 55,894

Net (loss)............. - - - - - (2,836) (2,836)
--------- ------- ------ ---- -------- -------- ------

Balance,
December 31, 1995... - - 117 - 66,661 (13,720) 53,058

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

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

Common Stock issued.......... $ - $ - $ 12 $ - $ (12) $ - $ -

Series B Preferred Stock
issued.................... 8 - - - 392 - 400

Series C Preferred Stock
issued.................... - 30 - - 1,469 - 1,499

Common Stock cash dividend
($.15 per share).......... - - - - - (1,491) (1,491)

Redemption of share
purchase rights ($.0075
per right)................ - - - - - (101) (101)

Series B Preferred Stock
cash dividend ($6.46
per share)................ - - - - - (25) (25)

Series C Preferred Stock
stock dividend ($5.74
per share)................ - 2 - - 85 (87) -

Treasury stock, at cost...... - - - (6) 6 - -

Net (loss)................... - - - - - (5,554) (5,554)
---- ------ ---- ---- -------- ------- -------

Balance, December 31,
1996...................... $ 8 $ 32 $129 $ (6) $68,601 $(20,978) $47,786
===== ====== ==== ==== ======== ======== =======

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

AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(dollars in thousands)

Cash Flows From Operating Activities
Rents collected ........................... $ 19,013 $ 18,473 $ 17,130
Interest collected ($385 in 1996, $399
in 1995 and $366 in 1994 from
affiliates) ............................ 4,304 4,845 3,829
Distributions from equity investees'
operating activities ................... 9,054 1,464 1,642
Interest paid ($19 in 1995 and $213 in
1994 to affiliate) ..................... (9,601) (8,296) (4,286)
Payments for property operations
(including $892 in 1996, $1,200 in
1995 and $899 in 1994 to affiliate) .... (15,034) (13,442) (13,162)
Advisory fee paid to affiliate ............ (1,539) (1,195) (1,242)
General and administrative expenses paid
(including $691 in 1996, $516 in 1995
and $434 in 1994 to affiliate) ......... (3,095) (2,448) (2,384)
Litigation settlement ..................... -- (100) (750)
Other ..................................... (1,084) 500 235
-------- -------- --------

Net cash provided by (used in) operating
activities .......................... 2,018 (199) 1,012

Cash Flows From Investing Activities
Collections on notes receivable (including
$1,166 in 1996 and $394 in 1995 from
affiliates) ............................ 1,495 1,604 2,757
Purchase of marketable equity securities .. (22,613) (19,394) (16,518)
Proceeds from sale of marketable
equity securities ...................... 23,557 18,374 15,123
Notes receivable funded ................... (250) (3,295) (700)
Proceeds from sale of real estate ......... 3,129 11,992 4,058
Return of capital distributions ........... -- -- 514
Acquisitions of real estate ............... (6,698) (21,394) --
Real estate improvements .................. (2,862) (1,802) (2,168)
Investment in equity investees ............ (15,471) (7,169) (6,884)
-------- -------- --------

Net cash (used in) investing activities (19,713) (21,084) (3,818)

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

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

For The Years Ended December 31,
----------------------------------
1996 1995 1994
-------- -------- ----------
(dollars in thousands)

Cash Flows From Financing Activities
Proceeds from notes payable .................. $ 58,520 $ 36,211 $ 710
Margin borrowings, net ....................... 2,981 7,626 8,598
Proceeds from issuance of Preferred Stock .... 400 -- --
Payments on notes payable (including
$990 in 1995, and $1,320 in 1994 to
affiliate ................................. (32,382) (22,268) (5,151)
Southmark settlement payments ................ -- -- (435)
Deferred borrowing costs ..................... (5,028) (2,475) --
Net advances (payments) to/from affiliates ... (4,979) 3,050 (1,566)
Dividends paid ............................... (1,617) -- --
-------- -------- --------
Net cash provided by financing
activities ............................. 17,895 22,144 2,156
-------- -------- --------

Net increase (decrease) in cash and cash
equivalents .................................. 200 861 (650)
Cash and cash equivalents, beginning of year .... 1,054 193 843
-------- -------- --------

Cash and cash equivalents, end of year .......... $ 1,254 $ 1,054 $ 193
======== ======== ========

Reconciliation of net (loss) to net cash
provided by (used in) operating activities
Net (loss) ...................................... $ (5,554) $ (2,836) $ (2,426)
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating
activities
Extraordinary gain ........................ (381) (783) (323)
Gain on sale of real estate ............... (3,659) (2,594) (379)
Depreciation and amortization ............. 2,002 1,691 1,620
Equity in (income) losses of investees .... (2,004) 851 (292)
Distributions from equity investees'
operating activities ................... 9,054 1,464 1,642
(Increase) decrease in accrued interest
receivable ............................. (117) 79 (18)
Decrease in other assets .................. 452 1,439 228
Increase (decrease) in accrued interest
payable ................................ 1,417 (5) 575
Increase in accounts payable and other
liabilities ............................ 733 495 150
Other ..................................... 75 -- 235
-------- -------- --------
Net cash provided by (used in)
operating activities ................. $ 2,018 $ (199) $ 1,012
======== ======== ========

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

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

For The Years Ended December 31,
-------------------------------
1996 1995 1994
--------- --------- --------
(dollars in thousands)

Schedule of noncash investing and
financing activities

Acquisition of real estate financed by debt ....$ 9,099 $ 21,394 $ 6,800

Stock dividends on Series C Preferred Stock .... 87 -- --

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

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) --

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 ................... --
Carrying value of notes receivable
returned ................................. -- (32) --
Carrying value of real estate returned ...... -- (2,183) --

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

57
58

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.

Certain balances for 1994 and 1995 have been reclassified to conform to the
1996 presentation. Shares and per share data have been restated for the 2 for 1
forward Common Stock splits effected February 17, 1997 and January 2, 1996.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and company business. American Realty Trust, Inc. ("ART"),
a Georgia corporation, 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 ART, and all majority-owned subsidiaries and
partnerships other than National Realty, L.P. ("NRLP") and Pizza World
Supreme, Inc. ("PWS"). The Company uses the equity method to account for
its investment in NRLP and PWS as control is considered to be temporary.
See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P." and NOTE 6. "INVESTMENTS IN
EQUITY INVESTEES." 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 considered to be impaired. Impair-

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

ment is considered to exist when it is probable that all amounts due under the
terms of the note will not be collected. Valuation allowances are provided for
estimated losses on notes receivable to the extent that the Company's
investment in the note exceeds the Company's estimate of net realizable value
of the collateral securing such note, or fair value of the collateral if
foreclosure is probable.

Real Estate Held for Investment and Depreciation. Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
121 ("SFAS No. 121") requires that a property 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 property. If impairment
exists, an impairment loss is recognized by a charge against earnings, equal to
the amount by which the carrying amount of the property exceeds the fair value
of the property. If impairment of a property is recognized, the carrying amount
of the property is reduced by the amount of the impairment, and a new cost for
the property is established. Such new cost is depreciated over the property's
remaining useful life. Depreciation is provided by the straight-line method
over estimated useful lives, which range from 10 to 40 years.

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. SFAS No. 121 also requires that properties held for sale be reported
at the lower of carrying amount or fair value less costs of sale. If a
reduction in a held for sale property's carrying amount to fair value less
costs of sale 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 property's estimated fair value less costs of sale is recorded as an
adjustment to the property's carrying amount, but not in excess of the
property's carrying amount when originally classified as held for sale. A
corresponding charge against or credit to earnings is recognized. Properties
held for sale are not to be depreciated.

Investments in equity investees. 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.

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

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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. 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 splits effected
February 17, 1997 and 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. Included in the asset pool was
Southmark's 19.2% limited partner 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 NRLP and National
Operating, L.P. ("NOLP"), the operating partnership of NRLP. Gene E. Phillips,
a Director and Chairman of the Board of 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 a
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 agree-

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued)

ment 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 $40.2 million at December 31, 1996,
before reduction for the principal balance ($4.2 million at December 31, 1996)
and accrued interest ($6.2 million at December 31, 1996) on the note receivable
from SAMLP for its original capital contribution to the Partnership.

In January 1995, NRLP, SAMLP, the NRLP oversight committee and William H.
Elliott executed an Implementation Agreement which provides for the nomination
of an entity controlled by Mr. Elliott as successor general partner 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 with-

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued)

drawal 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.

In September 1996, the Judge appointed to supervise the class action settlement
(The "Supervising Judge") entered an order granting tentative approval of the
Amended and Restate Implementation Agreement and the form of notice to be sent
to the original class members. 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.

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 third 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 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.

On September 3, 1996, Joseph B. Moorman filed a Motion for Orders Compelling
Enforcement of the existing settlement agreement, appointment of a receiver and
collateral relief with the court. The motion alleges that the settling
defendants had failed or refused to perform their obligations under the
existing settlement agreements. 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. 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 NRLP
Oversight Committee and (ii) vacate the Court's orders and

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. SYNTEK ASSET MANAGEMENT, L.P. (Continued)

renewed his prior motions to compel enforcement of the Moorman Settlement
Agreement, appoint a receiver over the Partnership, and for collateral relief
against the Company. Also on January 27, 1997, Robert A. McNeil filed motions
to (i) be installed as receiver for the Partnership, (ii) vacate the Court's
orders, and (iii) disband the NRLP Oversight Committee.

NOTE 3. NOTES AND INTEREST RECEIVABLE

1996 1995
------------------------ -----------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
----- ----- ----- -----

Notes Receivable
Performing (including $13,563
in 1996 and $14,657 in 1995
from affiliates) ..................................... $ 52,939 $ 55,161 $ 60,121 $ 56,335
Nonperforming, nonaccruing .............................. 1,884 1,584 1,784 1,784
---------- ---------- ---------- ----------
$ 54,823 56,745 $ 61,905 58,119
========== ==========

Interest receivable ..................................... 445 267
Unamortized premiums/
(discounts) .......................................... (162) (102)
Deferred gains ........................................... (4,617) (4,617)
---------- ----------
$ 52,411 $ 53,667
========== ==========

The Company recognizes interest income on nonperforming notes receivable on a
cash basis. For the years 1996, 1995 and 1994 unrecognized interest income on
such nonperforming notes receivable totaled $1.6 million, $1.2 million and $2.0
million, respectively.

Notes receivable at December 31, 1996, mature from 1997 to 2014 with interest
rates ranging from 6.0% to 12.9% and a weighted average rate of 9.84%. A small
percentage of these notes receivable carry a variable interest rate. Notes
receivable include notes generated from property

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)

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
$20.4 million are due in 1997 of which $1.9 million is due on nonperforming
notes receivable. See NOTE 21. "SUBSEQUENT EVENTS."

Nonrecourse participations totaling $1.6 million and $1.1 million at December
31, 1996 and 1995, respectively, have been deducted from notes receivable.

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 through foreclosure subject to first and second
lien mortgages totaling $10.0 million. In June 1992, the Company sold the hotel
and casino accepting as partial payment a $22.0 million wraparound mortgage
note receivable. The $22.0 million note bears interest at 11% and was scheduled
to mature in July 1995. The Company recorded a deferred gain of $4.6 million in
connection with the sale of the hotel and casino resulting from a disputed
third lien mortgage being subordinated to the Company's wraparound mortgage
note receivable. The Company and the borrower agreed to extend the Company's
wraparound mortgage note receivable to December 31, 1995. A one percent
extension fee was added to the principal balance of the wraparound mortgage
note. The monthly payments on the note remained at $175,000 per month as did
the other terms of the note. At the note's extended maturity, the Company and
the borrower again agreed to extend the Company's wraparound mortgage note to
July 1, 1996. A one percent extension fee was again added to the principal
balance of the Company's wraparound mortgage note. The monthly payments on the
wraparound mortgage note remained at $175,000 per month as did the other terms
of the note. The Company's modified wraparound note continued to accrue
interest at 11% per annum with any unpaid interest being added monthly to the
principal balance. In March 1997, the wraparound note was again modified and
extended. The wraparound note now matures in June 1999 with the borrower having
two one year extension options. The modified wraparound note bears interest at
10.5% per annum the first year, 11.5% per annum the second year and $12.5% per
annum the third year and in any extension periods, and requires an annual
$500,000 principal paydown. The borrower is also required to invest $2.0
million in improvements to the hotel and casino within four months of the March
1997 modification and an additional $2.0 million prior to December 1997. The
borrower has also pledged 1,500,000 shares of common stock in Crowne Ventures,
Inc., as additional collateral. 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 $27.6 million at December 31, 1996. Prior
to the modification and extension, the Company recognized interest income on
this wraparound mortgage note only to the extent interest was collected.

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)

At December 31, 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 note had an extended maturity date of September 1,
1996. 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 Company received $85,000 of the
required principal reduction payments in 1996 and the remaining $5,000 in 1997.
The monthly interest, quarterly principal reduction payments of $25,000 and all
other terms remained the same. The principal balance of the note was $93,000 at
December 31, 1996 and the note is now performing in accordance with its
modified 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 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 of the property until April
24, 1995. On April 25, 1995, the borrower filed for bankruptcy protection. On
August 24, 1996, the bankruptcy court's stay was lifted allowing the Company to
proceed with foreclosure. The note had a principal balance of $1.6 million at
December 31, 1996. On February 2, 1997, the Company sold its note for $1.8
million in cash. See NOTE 21. "SUBSEQUENT EVENTS."

Related Party. The Company holds a junior mortgage note receivable secured by
the Williamsburg Hospitality House in Williamsburg, Virginia, that is subject
to a first lien mortgage of $12.0 million at December 31, 1996. In October
1993, the then first lien debt was restructured and split into three pieces.
During 1995, the Company advanced the borrower $3.3 million to payoff the then
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 date of its note to April 1, 1996. All other
terms of the note remained unchanged. In December 1996, the underlying lien
debt was refinanced for $12.0 million. Of the loan proceeds, $9.0 million was
used to payoff the existing underlying lien, $700,000 was applied to the
principal and interest due the Company with the remainder of the loan proceeds
being used to fund a repair escrow and pay various closing costs associated
with the refinancing. The Company is the 1% general partner of the partnership
owning the property.

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)

NOTE 4. REAL ESTATE

In May 1996, the Company sold an additional 2.3 acres of the Las Colinas I land
parcel for $941,000 in cash. In accordance with the provisions of the term loan
secured by such parcel, the Company applied the net proceeds of the sale of
$864,000 to paydown the term loan. The Company recognized a gain of $534,000 on
the sale.

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 a variable rate, currently 9.25% per
annum, requires monthly principal and interest payments of $2,000 and matures
in August 2008. The residence is currently being leased.

In June 1996, the Company purchased Parkfield land, 442.7 acres of partially
developed land in Denver, Colorado, for $8.5 million. In connection with the
acquisition, the Company obtained mortgage financing of $7.5 million and issued
to the seller 15,000 shares of the Company's Series C Cumulative Convertible
Preferred Stock with an aggregate liquidation preference of $1.5 million. See
NOTE 9. "PREFERRED STOCK." The excess financing proceeds of $500,000 were
applied to the payment of various closing costs associated with the acquisition.
The loan bears interest at 15% per annum, requires monthly interest only
payments at a rate of 12% per annum, 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" are due at the loan's maturity in
June 1998.

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. REAL ESTATE (Continued)

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

In October 1995, the Company purchased BP Las Colinas, a 92.6 acre parcel 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. The contract
called for the sale to close in two phases. In July 1996, the Company completed
the first phase sale of 32.3 acres for $4.9 million in cash. In accordance with
the terms of the term loan secured by the property, the Company applied the net
proceeds of the sale, $4.7 million, to paydown the term loan, 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. In February 1997, the
Company completed the second phase sale of 40 acres for $8.0 million. See NOTE
21. "SUBSEQUENT EVENTS."

In July 1996, the Company purchased Pin Oak land, 567.7 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 the remaining $5.7 million of
the purchase price. The loan bears interest at 9% per annum, required a
$500,000 principal and interest payment on November 1, 1996 and requires
quarterly principal and interest payments of $145,000, thereafter. The loan
matures in August 1998. 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 or about 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 151.5 acres of
unimproved 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 partner 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 Las Colinas I 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
82.4 acres of unimproved land acquired from Southmark in Oceanside, California
and the 19.2% limited partner interest in SAMLP.

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. REAL ESTATE (Continued)

line advance note. The amendment also changed the principal reduction payments
to $3.0 million on the last day of March 1997, June 1997, September 1997 and
January 1998, and added 240 acres of the 280 acres of the Valwood land as
additional collateral on the term loan. All other terms of the term loan
remained unchanged. The $4.0 million overline advance was repaid in full in
December 1996.

In November 1996, the Company sold an additional 2.2 acres of the 74.9 acre Las
Colinas I land parcel for $899,000 in cash. The Company used the net proceeds
of the sale of $749,000 to pay down the term loan secured by such parcel in
accordance with provisions of the loan. The Company recognized a gain of
$505,000 on the sale.

Also in November 1996, the Company purchased Lewisville land, 78.5 acres of
undeveloped land in Lewisville, Texas for $3.6 million. The Company paid $1.1
million in cash and financed the remaining $2.5 million of the purchase price.
The mortgage bears interest at 10% per annum, requires an annual interest
payment of $250,000 on November 9, 1997, and quarterly interest payments of
$62,500 thereafter and matures in October 1999.

In December 1996, the Company purchased the Best Western Oceanside Hotel in
Virginia Beach, Virginia, for $6.8 million. The Company acquired the property
through Ocean Beach Partners, L.P. ("Ocean L.P."), a newly formed partnership
of which a wholly-owned subsidiary of the Company, is the 1% general partner
and the Company is the 99% Class B limited partner. In conjunction with the
acquisition, Ocean L.P. issued 1,813,660 Class A limited partner units in Ocean
L.P. having an agreed value of $1.00 per partnership unit to the former owners
of the property. The Class A limited partner units are entitled to a $.095 per
unit preferred annual return. The Class A limited partners do not otherwise
participate in the income, loss or cash flow of the partnership. The Class A
limited partner units may be exchanged for Series D Cumulative Preferred Stock
in the Company at a rate of 20 units per share of Preferred Stock. The Company
obtained new mortgage financing for the remaining $5.0 million of the purchase
price. The mortgage bears interest at 9.94% per annum, requires monthly
payments of principal and interest of $49,000 and matures in January 2007.

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. REAL ESTATE (Continued)

Class A limited partner units may be exchanged for Series E Preferred
Cumulative Convertible Stock of the Company at a rate of 100 units per share of
Preferred Stock. The Company obtained new mortgage financing for the remaining
$7.7 million of the purchase price. The mortgage bears interest at a variable
rate, currently 10.25% per annum, requires monthly interest only payments of
$70,000 and matures in December 1999.

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 December 31, 1996, 10
lots remained to be sold.

In February 1995, the Company sold the Boulevard Villas Apartments in Las
Vegas, Nevada, for $9.6 million. The Company received net cash of $3.4 million,
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 Las Colinas I, 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. In September 1995, the Company sold 6.9 acres of the Las Colinas I
land 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.

In October 1995, the Company purchased BP Las Colinas land, a 92.6 acre parcel
of partially developed land in Las Colinas, Texas, for $7.1 million. The
Company paid $959,000 in cash and borrowed the remaining $6.1 million of the
purchase price. The Company also pledged to the lender, as additional
collateral for the loan, $2.0 million of newly issued shares of the Company's
Common Stock.

NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES

Activity in the allowance for estimated losses was as follows:

1996 1995 1994
-------- -------- -------

Balance January 1, ...... $ 7,254 $ 8,201 $ 9,913
Amounts charged off ..... -- (947) (1,712)
Writedown of property ... (3,328) -- --
------- ------- -------
Balance December 31, .... $ 3,926 $ 7,254 $ 8,201
======= ======= =======

NOTE 6. INVESTMENTS IN EQUITY INVESTEES

Real estate entities. The Company's investment in real estate entities at
December 31, 1996, includes (i) equity securities of three publicly traded real
estate investment trusts Continental Mortgage and Equity

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. INVESTMENTS IN EQUITY INVESTEES (Continued)

Trust ("CMET"), Income Opportunity Realty Investors, Inc. ("IORI"), and
Transcontinental Realty Investors, Inc. ("TCI") (Collectively the "REITs"),
(ii) units of limited partner interest of NRLP, (iii) a general partner
interest in NRLP and NOLP, the operating partnership of NRLP, through its 96%
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 was a director and Chief Executive
Officer of SAMI until May 15, 1996. Randall M. Paulson, an Executive Vice
President of the Company, serves as the sole director of SAMI and as President
of the REITs, SAMI and BCM. In addition, BCM 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 using the equity method as more fully described in NOTE 1.
"SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Investments in equity investees."
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 December 31, 1996 was as follows:

Equivalent
Percentage Carrying Investee
of the Company's Value of Book Value Market Value
Ownership at Investment at at of Investment at
Investee December 31, 1996 December 31, 1996 December 31, 1996 December 31, 1996
- -------- ----------------- ----------------- ----------------- -----------------

NRLP 54.5% $ 14,421 $ * $ 44,997
CMET 40.6 14,141 32,148 18,789
IORI 29.6 2,719 6,625 4,838
TCI 30.5 6,318 24,204 13,131
---------- --------
$ 81,755
=========
General partner
interest in NRLP and NOLP 6,607
Other (2,234)
----------
$ 41,972
==========

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. INVESTMENTS IN EQUITY INVESTEES (Continued)

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, 1996.

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

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

NRLP 51.1% $ 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. 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 management continues to believe that the market value of each of
the REITs and NRLP undervalues their assets and the Company has, therefore,
continued to increase its ownership in these entities in 1996, as its liquidity
has permitted.

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
Joint Venture, 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
January 1997, the Company exercised its option to purchase an additional 28%
general partner interest in Campbell Center Associates, Ltd. The purchase price
was $300,000 in cash and a $750,000 note, which bears interest at 8% per annum,
requires monthly interest only payments commencing in April 1997 and matures in
April 2000.

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. INVESTMENTS IN EQUITY INVESTEES (Continued)

In July 1996, a newly formed limited partnership, of which the Company is 1%
general partner, purchased 580 acres of undeveloped land in Collin County,
Texas for $5.7 million in cash. The Company contributed $100,000 in cash to the
partnership with the remaining $5.6 million being contributed by the limited
partner. The partnership agreement designates the Company as the managing
general partner. In September 1996, the Partnership obtained financing of $2.8
million secured by the 580 acres of land and personal guarantees of the limited
partners. The Partnership agreement also provides that the limited partner
receive a 12% preferred cumulative return on its investment before any sharing
of partnership profits occurs.

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.

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.

In January 1992, the Company entered into a partnership which acquired 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 of the residential lots owned by the partnership were sold.
During 1996, an additional 52 lots were sold with 103 lots remaining to be sold
at December 31, 1996. Through December 31, 1996, each partner had received
$172,000 in return of capital distributions and $181,000 in profit
distributions from the partnership.

Other equity investees. In April 1996, a 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. The
Company anticipates taking such entity public during 1997. Accordingly, the
Company believes its control of such entity is temporary and accounts for such
entity under the equity method.

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. INVESTMENTS IN EQUITY INVESTEES (Continued)

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

1996 1995
--------- ---------

Property and notes
receivable, net .............. $ 240,552 $ 239,728
Other assets ................... 59,409 53,202
Notes payable .................. (352,441) (338,534)
Other liabilities .............. (19,294) (53,663)
--------- ---------
Equity ......................... $ (71,774) $ (99,267)
========= =========

1996 1995 1994
--------- --------- --------
Revenues ....................... $ 124,044 $ 110,892 %107,546
Depreciation ................... (11,148) (10,268) (10,034)
Interest ....................... (34,640) (34,956) (34,145)
Operating expenses ............. (78,043) (69,572) (66,602)
--------- --------- --------

Income (loss) before gains on
sale of real estate and
extraordinary gains .......... 213 (3,904) (3,235)
Gains on sale of real estate ... 61 7,701 8,252
--------- --------- ---------
Net income ..................... $ 274 $ 3,797 $ 5,017
========= ========= =========

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 equity share of:

1996 1995 1994
------- ------- -------

Income (loss) before gains on
sale of real estate ......... $ 270 $(1,767) $(1,279)
Gains on sale of real estate ... -- 1,884 1,923
------- ------- -------
Net income ..................... $ 270 $ 117 $ 644
======= ======= =======

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

1996 1995
--------- ---------
Property and notes
receivable, net $ 501,097 $ 466,220
Other assets ....... 57,877 61,697
Notes payable ...... (358,203) (318,161)
Other liabilities... (19,849) (20,396)
--------- ---------
Equity ............. $ 180,922 $ 189,360
========= =========

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. INVESTMENTS IN EQUITY INVESTEES (Continued)

1996 1995 1994
--------- --------- ---------

Revenues ..................... $ 101,246 $ 94,730 $ 74,093
Depreciation ................. (14,408) (13,950) (10,276)
Provision for losses ......... 844 (541) (1,429)
Interest ..................... (30,401) (28,102) (20,264)
Operating expenses ........... (69,698) (65,471) (54,213)
--------- --------- ---------
(loss) before gains on sale of
real estate and extra-
ordinary gains ............ (12,417) (13,334) (12,089)
Gains on sale of real estate . 11,701 5,822 6,375
Extraordinary gains .......... 1,068 1,437 1,189
--------- --------- ---------
Net income (loss) ............ $ 352 $ (6,075) $ (4,525)
========= ========= =========

The Company's equity share of:

1996 1995 1994
--------- --------- ---------
(loss) before gains on sale of
real estate and extra-
ordinary gains ............ $ (2,911) $ (3,356) $ (1,250)
Gains on sale of real estate . 4,645 2,463 895
Extraordinary gains .......... 381 783 273
--------- --------- ---------
Net income (loss) ............ $ 2,115 $ (110) $ (82)
========= ========= =========

The Company's cash flow from the REITs and NRLP is dependent on the ability of
each of the entities to make distributions. CMET and IORI have been making
regular quarterly distributions since the first quarter of 1993, NRLP since the
fourth quarter of 1993 and TCI since the fourth quarter of 1995. In 1996, the
Company received distributions from the REITs totaling $ 2.1 million and $6.9
million from NRLP. At December 31, 1995, the Company accrued $3.3 million in
NRLP distributions which were paid January 2, 1996. In 1995, the Company
received total distributions from the REITs of $641,000 and $719,000 from NRLP.

The Company's investments in the REITs and NRLP were initially acquired in
1989. In 1996, the Company purchased an additional $2.2 million of equity
securities of the REITs and NRLP.

NOTE 7. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO

In 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 1996, the Company purchased $22.6 million and sold $23.6
million of such securities. These equity securities are considered a trading
portfolio and are carried at market value. At December 31, 1996, the Company
recognized an unrealized decline in the market value of the equity securities
in its trading portfolio of $486,000. In 1996, the Company realized a net gain
of $29,000 from the sale of trading portfolio securities and received $163,000
in dividends. At December 31, 1995, the Company recognized an

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO (Continued)

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 $24,000. In
1994, the Company 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:

1996 1995
--------------------- -----------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
----- ----- ----- -----

Notes payable
Mortgage loans ................$ 40,680 $ 68,385 $ 18,376 $ 22,086
Borrowings from financial
institutions ............... 78,812 48,929 27,052 29,945
Notes payable to affiliates ... 1,658 4,176 1,554 4,176
-------- -------- -------- --------
$121,150 121,490 $ 46,982 56,207
======== ========
Interest payable (including
$4,798 in 1996 and $4,380
in 1995 to affiliate) ...... 6,373 4,956
-------- --------
$127,863 $ 61,163
======== ========

Scheduled principal payments on notes payable are due as follows:

1997............................................... $ 36,022
1998............................................... 47,552
1999............................................... 15,387
2000............................................... 1,108
2001 .............................................. 2,538
Thereafter......................................... 18,883
--------
$121,490
========

Stated interest rates on notes payable ranged from 6.0% to 14% at December 31,
1996, and mature in varying installments between 1997 and 2007. At December 31,
1996, notes payable were collateralized by mortgage notes receivable with a net
carrying value of $18.2 million and by deeds of trust on real estate with a net
carrying value of $122.2 million.

In February 1996, the Company refinanced the $7.8 million of debt
collateralized by a mortgage note receivable with a principal balance of

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8. NOTES AND INTEREST PAYABLE (Continued)

$18.2 million at December 31, 1996, which is secured by a 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
various closing costs associated with the refinancing and making a $1.5 million
paydown on the term loan secured by the Las Colinas I land in Las Colinas,
Texas, in exchange for that lender's release of its participation in the note
receivable. The new loan bears interest at 15% per annum, requires monthly
principal and interest payments of $152,000 and matures in February 1998.

In April 1996, the Company refinanced the $2.9 million of underlying debt
collateralized by a wraparound mortgage note receivable with a principal
balance of $27.6 million at December 31, 1996, which is secured by a 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 underlying liens, the payment of various
closing costs associated with the refinancing and making a $1.4 million paydown
on the term loan secured by the Las Colinas I land in Las Colinas, Texas, in
exchange for that lender's release of its participation in the wraparound note
receivable. 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 in April 1998.

Also in April 1996, the Company refinanced the $5.1 million mortgage debt
secured by the Denver Merchandise Mart in Denver, Colorado, for $15.0 million.
The Company pledged 1,264,000 newly issued shares of the Company's common stock
as additional collateral for such loan. See NOTE 10. "COMMON STOCK." The
Company received net refinancing proceeds of $7.8 million after the payoff of
the existing mortgage 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 a variable rate, currently 10.5%
per annum, requires monthly principal and interest payments of $142,000 and
matures in October 1997.

In August 1996, the Company refinanced the $2.4 million 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 existing mortgage debt and payment of various closing costs
associated with the refinancing. The Company also received 564,704 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 in August 2006.

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8. NOTES AND INTEREST PAYABLE (Continued)

the financing and a $1.1 million renovation holdback. Upon completion of the
renovations, the lender advanced the $1.1 million renovation holdback in
December 1996. The loan bears interest a variable rate, 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 the loan's maturity in September 2001.

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

Notes payable to affiliates at December 31, 1996 and 1995 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."

NOTE 9. MARGIN BORROWINGS

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 REITs, NRLP and the Company's trading portfolio and
bear interest rates ranging from 7.0% to 11.0%. Margin borrowings were $40.0
million at December 31, 1996, and $34.0 million at December 31, 1995, 34.5% and
47%, respectively, of the market values of such equity securities at such
dates.

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 of the loan. As of December 31, 1996, 3,418,319 NRLP units
with a market value of $44.9 million were pledged as security for such loan.

Also in August 1996, the Company obtained a $2.0 million loan from a financial
institution secured by a pledge of equity securities of REITs owned by the
Company and Common Stock of the Company owned by

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. MARGIN BORROWINGS (Continued)

Basic Capital Management, Inc. ("BCM"), the Company's Advisor, with a
market value of $4.0 million. The Company received $2.0 million in net
cash after the payment of closing costs associated with the loan.

In September 1996, the same lender made a second $2.0 million loan. The second
loan is also secured by a pledge of equity securities of the REITs owned by the
Company and Common Stock of the Company owned by BCM with a market value of
$5.0 million. The Company received $2.0 million in net cash after the payment
of closing costs associated with the loan.

NOTE 10. COMMON STOCK

In April 1996, the Company issued 500,000 newly issued shares of Common Stock
to ND Investments, Inc., a wholly-owned subsidiary of the Company, which in
turn pledged such shares as additional collateral for the loan secured by the
BP Las Colinas land in Las Colinas, Texas. See NOTE 4. "REAL ESTATE."

Also in April 1996, the Company issued 1,264,000 newly issued 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 Denver Merchandise Mart, in Denver, Colorado. See NOTE 8. "NOTES AND
INTEREST PAYABLE."

NOTE 11. DIVIDENDS

In June 1996, the Company's Board of Directors resumed the payment of dividends
on the Company's Common Stock with the declaration of a second quarter dividend
of $.05 per share. The Company had last paid dividends on May 15, 1990. The
Company paid common dividends totaling $1.5 million or $.15 per share in 1996.
The Company reported to the Internal Revenue Service that 100% of the dividends
paid in 1996 represented a return of capital.

NOTE 12. PREFERRED STOCK

In April 1996, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series B 10% Cumulative Convertible
Preferred Stock, par value $2.00 per share, with a liquidation preference of
$100.00 per share. 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 the 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 Series B Preferred Stock may be converted to Common Stock of the
Company at 90% of the average closing price of the Company's Common Stock on
the prior 20 trading days.

In June 1996, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series C 10% Cumulative Con-

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12. PREFERRED STOCK (Continued)

vertible Preferred Stock, par value $2.00 per share, with a liquidation
preference of $100.00 per share. 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 Parkfield 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 in shares of
Series C Preferred Stock. In 1996, the Company issued a total of 877 shares of
Series C Preferred Stock to the Series C Preferred Stock stockholders in lieu
of cash dividends. The Series C Preferred Stock may be converted to Common
Stock of the Company at 90% of the average closing price of the Company's
Common Stock on the prior 20 trading days. At December 31, 1996, 15,877 shares
of Series C Preferred Stock was issued and outstanding.

In December 1996, the Company filed Articles of Amendment to its Articles of
Incorporation, creating and designating a Series D 9.50% Cumulative Preferred
Stock, par value of $2.00 per share, with a liquidation preference of $20.00
per share. The Series D Preferred Stock consists of a maximum of 91,000 shares.
Dividends are payable at a rate of $1.90 per year of $.475 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
Class A limited partner units of Ocean L.P. may be exchanged for Series D
Preferred Stock at a rate of 20 units per share of Series D Preferred Stock. No
more than one-third of the Class A units held may be exchanged between January
1, 1997 and May 31, 2001. Between June 1, 2001 and May 31, 2006 all unexchanged
Class A units are exchangeable. At December 31, 1996, none of the Series D
Preferred Stock was issued. See NOTE 4. "REAL ESTATE."

Also in December 1996 the Company field Articles of Amendment to its Articles
of Incorporation, creating and designating a Series E 10% Cumulative
Convertible Preferred Stock, par value $2.00 per share, with a liquidation
preference of $100.00 per share. The Series E Preferred Stock consists of a
maximum of 80,000 shares. 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, for the period from November 4, 1996 to November 4, 1999 and
$11.00 per year, $2.75 per quarter thereafter. The Class A limited partner
units of VRLP may be exchanged for Series E Preferred Stock at a rate of 100
Class A units per share of Preferred Stock. No more than one-half of the Class
A units may be exchanged prior to May 4, 1997, thereafter all unexchanged Class
A units are exchangeable. Beginning November 4, 1998, the Series E Preferred
Stock may be converted to Common Stock of the Company at 80% of the average
closing price of the Company's Common Stock on the prior 20 trading days. Up to
37.50% of the preferred shares may be converted between November 4, 1998 and
November 3, 1999. Between November 4, 1999

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12. PREFERRED STOCK (Continued)

and November 3, 2001 an additional 12.50% of the original preferred
shares may be converted, and the remaining can be converted as of
November 4, 2001 and thereafter. At December 31, 1996, none of the
Series E Preferred Stock was issued. See NOTE 4. "REAL ESTATE."

NOTE 13. 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, 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
until June 6, 1996, is a director of BCM and a trustee of the trust that owns
BCM. Oscar W. Cashwell, a Director of the Company, served as Executive Vice
President of BCM until January 10, 1997.

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 $.50 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.

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13. ADVISORY AGREEMENT (Continued)

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 14. 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, Ltd. is BCM. The limited partners of Carmel,
Ltd. are (i) Syntek West, Inc. ("SWI"), of which Mr. Phillips is the
sole shareholder, (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.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.

Fees and cost reimbursements to BCM and its affiliates were as follows:

1996 1995 1994
------ ------ ------

Fees
Advisory and mortgage
servicing ............ $1,539 $1,195 $1,242
Brokerage commissions ... 1,889 905 497
Property and construction
management and leasing
commissions* ......... 892 1,200 899
Loan arrangement ........ 806 95 25
------ ------ ------
$5,126 $3,395 $2,663
====== ====== ======

Cost reimbursements .... $ 691 $ 516 $ 434
====== ====== ======

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

NOTE 16. 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, 1996, the Company had a tax net operating loss
carryforward of $17.7 million expiring through 2010.

At December 31, 1996, the Company has a deferred tax benefit of $5.2 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:

1996 1995 1994
------- ------- -----

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

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 17. EXTRAORDINARY GAIN

In 1996, the Company recognized an extraordinary gain of $381,000 representing
its equity share of TCI's extraordinary gain from the early payoff of debt and
CMET's extraordinary gain from an insurance settlement.

In 1995, the Company recognized an extraordinary gain of $783,000 representing
its equity share of TCI's extraordinary gain from 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 settlement of claims against
it by a lender. The Company also recognized $50,000 from forgiveness of a
portion of a first mortgage due to the early payoff of the second mortgage.

NOTE 18. RENTS UNDER OPERATING LEASES

The Company's operations include the leasing of an office building, a
merchandise mart 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, 1996:

1997.................................. $ 1,889
1998.................................. 1,555
1999.................................. 1,075
2000.................................. 740
2001.................................. 599
Thereafter............................ 1,444
-------
$ 7,302
=======

NOTE 19. COMMITMENTS AND CONTINGENCIES

[THIS SPACE INTENTIONALLY LEFT BLANK.]

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 20. QUARTERLY RESULTS OF OPERATIONS

The following is a tabulation of the Company's quarterly results of operations
for the years 1996 and 1995:

Three Months Ended
------------------------------------------------
1996 March 31, June 30, September 30, December 31,
- ---------- ---------- -------- ------------ ------------

Revenue ................... $ 6,790 $ 5,346 $ 7,306 $ 7,537
Expense ................... 8,255 8,555 9,279 12,488
-------- -------- -------- --------
(loss) from operations .... (1,465) (3,209) (1,973) (4,951)
Equity in income of
investees .............. 678 271 661 394
Gains on sale of
real estate ............ 559 547 1,961 592
Extraordinary gain ........ 13 247 121 --
-------- -------- -------- --------
Net income (loss) ......... (215) (2,144) 770 (3965)

Preferred dividend
requirement .............. -- (17) (48) (48)
-------- -------- -------- --------

Net income (loss) appli-
cable to common shares ... $ (215) $ (2,161) $ 722 $ (4,013)
======== ======== ======== ========

Earnings per share
Income (loss) before extra-
ordinary gain .......... $ (.02) $ (.19) $ .05 $ (.28)
Extraordinary gain ........ -- .02 .01 --
-------- -------- -------- --------

Net income (loss) ......... $ (.02) $ (.17) $ .06 $ (.28)
======== ======== ======== ========

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

Revenue .................... $ 6,080 $ 5,552 $ 7,066 $ 4,254
Expense .................... 6,940 7,311 6,523 7,540
------- ------- ------- -------
Income (loss) from
operations .............. (860) (1,759) 543 (3,286)
Equity in income (losses)
of investees ............ (1,260) (1,699) (1,410) 3,518
Gains on sale of real estate 924 24 1,596 50
Extraordinary gain ......... 315 12 431 25
------- ------- ------- -------

Net income (loss) .......... $ (881) $(3,422) $ 1,160 $ 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
======= ======= ======= =======

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 21. SUBSEQUENT EVENTS

In February 1997, the Company completed the second phase of the BP Las Colinas
land sale of 40.2 acres for $8.0 million, of which $7.2 million was in cash. In
conjunction with the sale, the Company provided $800,000 of purchase money
financing in the form of a six month unsecured loan. The loan bears interest at
12% per annum, with all accrued but unpaid interest and principal due at
maturity. Of the net sales proceeds of $6.9 million, $1.5 million was used to
payoff the underlying debt secured by the land in Las Colinas, pay a $500,000
maturity fee to the lender, make a $1.5 million principal paydown on the note
secured by the Parkfield land in Denver, Colorado with the same lender, and
$1.0 million was applied as a principal paydown on the term loan secured by the
Las Colinas I land parcel. The Company will recognize a gain of $3.4 million on
the sale, deferring the gain associated with the $800,000 loan until it is paid
in full.

In February 1997, the Company sold its mortgage note receivable secured by land
in Osceola, Florida for $1.8 million in cash. The note receivable had a
principal balance of $1.6 million at December 31, 1996 and had been in default
since November 1993. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." The Company
will recognize a gain of approximately $150,000 on the sale.

In January 1997, the Company sold 3.0 acres of the Las Colinas I Land in Las
Colinas, Texas, for $1.2 million in cash. The Company recognized a gain of
$697,000 on the sale.

86
SCHEDULE III

AMERICAN REALTY TRUST, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996

Cost
Capitalized Gross Amounts of
Subsequent Which Carried
Initial Cost to Company to Acquisition at End of Year
----------------------- -------------- ------------------------ --------
Buildings & Buildings & (1)
Property/Description Encumbrances Land Improvements Improvements Land Improvements Total
- ---------------------- ------------ ---------- ------------ ------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)

PROPERTIES HELD FOR INVESTMENT
OFFICE BUILDING
Rosedale Towers ................... $ 2,713 $ 665 $ 3,769 $ 993 $ 715 $ 4,712 $ 5,427
Roseville, MN

SHOPPING CENTERS
Oaktree Shopping Village .......... 1,477 192 1,431 -- 192 1,431 1,623
Lubbock, TX
Park Plaza ........................ 3,212 891 3,584 1,058 891 4,642 5,533
Manitowoc, WI

MERCHANDISE MART
Denver Mart ....................... 15,588 4,824 5,184 5,007 5,963 9,052 15,015
Denver, CO

HOTELS
Best Western Hotel ................ 5,065 1,521 6,082 -- 1,521 6,082 7,603
Virginia Beach, VA
Inn at the Mart ................... 2,000 -- 302 2,149 -- 2,451 2,451
Denver, CO
KC Holiday Inn .................... 9,124 1,110 4,535 2,016 1,110 6,551 7,661
Kansas City, MO

SINGLE FAMILY RESIDENCE
Tavel Circle ...................... 168 53 214 -- 53 214 267
Dallas, TX ------ ----- ------ ------ ------ ------ ------
39,347 9,256 25,101 11,223 10,445 35,135 45,580

PROPERTIES HELD FOR SALE
OFFICE BUILDING
Mopac ............................. -- 677 5,098 (2) 675 5,098 5,773
St. Louis, MO

LAND
Las Colinas I, .................... 9,865 14,076 -- (1,919)(4) 12,157 -- 12,157
Las Colinas, TX
BP Las Colinas, ................... 1,535 7,318 -- (2,448)(4) 4,870 -- 4,870
Las Colinas, TX
Atlanta, Atlanta, GA .............. --(2) 11,052 -- (3,328)(3) 7,723 -- 7,723
Rivertrails I, .................... -- 1,139 -- (1,007) 132 -- 132
Ft. Worth, TX
Parkfield, Denver, CO ............. 7,600 9,112 -- -- 9,112 -- 9,112
Pin Oak, Houston, TX .............. 5,375 6,781 -- 119 6,900 -- 6,900
Valwood, Dallas, TX ............... 9,650 13,969 -- -- 13,969 -- 13,969

Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
PROPERTIES HELD FOR INVESTMENT Depreciation Construction Acquired is Computed
OFFICE BUILDING ------------ ------------ -------- -------------

Rosedale Towers ................... $ 933 1974 1990 10 - 40 years
Roseville, MN

SHOPPING CENTERS
Oaktree Shopping Village .......... 40 1995 10 - 40 years
Lubbock, TX
Park Plaza ........................ 850 1957 1992 10 - 40 years
Manitowoc, WI

MERCHANDISE MART
Denver Mart ....................... 1,215 1965/ 1992 10 - 40 years
Denver, CO 1986

HOTELS
Best Western Hotel ................ 89 1983 1996 10 - 40 years
Virginia Beach, VA
Inn at the Mart ................... 116 1974 1994 10 - 40 years
Denver, CO
KC Holiday Inn .................... 986 1974 1993 10 - 40 years
Kansas City, MO

SINGLE FAMILY RESIDENCE
Tavel Circle ...................... 4
Dallas, TX ------
4,233

PROPERTIES HELD FOR SALE
OFFICE BUILDING
Mopac ............................. 5,098 1925 1965 10 - 40 years
St. Louis, MO

LAND
Las Colinas I, .................... -- N/A 1995 --
Las Colinas, TX
BP Las Colinas, ................... -- N/A 1995 --
Las Colinas, TX
Atlanta, Atlanta, GA .............. -- N/A 1990 --
Rivertrails I, .................... -- N/A 1991 --
Ft. Worth, TX
Parkfield, Denver, CO ............. -- N/A 1996 --
Pin Oak, Houston, TX .............. N/A 1996 --
Valwood, Dallas, TX ............... -- N/A 1996 --

SCHEDULE III

AMERICAN REALTY TRUST, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31, 1996

Cost
Capitalized Gross Amounts of
Initial Cost to Company Subsequent Which Carried
----------------------- to Acquisition at End of Year
Buildings & -------------- Buildings & (1)
Property/Description Encumbrances Land Improvements Improvements Land Improvements Total
-------------------- ------------ --------------------- ------------- ----- ------------ -----
(dollars in thousands)

Properties Held for Sale - Continued

>Land - Continued
Lewisville, .................. $ 2,500 $ 4,195 $ -- $ -- $ 4,195 $ -- $ 4,195
Lewisville, TX
Valley Ranch, Irving, TX ..... 7,700 16,592 -- 16,592 16,592 -- 16,592
Jeffries Ranch, .............. -- 1,178 -- -- 1,178 -- 1,178
Oceanside, CA
Bad Lands, Duchesne, UT ...... -- 25 -- -- 25 -- 25
Other (6 properties) ......... -- 160 -- -- 160 -- 160
-------- -------- ------- -------- -------- -------- --------
44,225 86,274 5,098 8,001 77,689 5,098 82,786
-------- -------- -------- -------- -------- -------- --------
$ 83,572 $ 95,530 $ 30,199 $ 19,230 $ 88,133 $ 40,233 $128,366
======== ======== ======== ======== ======== ======== ========

Life On Which
Depreciation
in Latest
Statement
Accumulated Date of Date of Operations
Depreciation Construction Acquired is Computed
------------ ------------ -------- -------------

Land - Continued
Lewisville, .................. $ -- N/A 1996 --
Lewisville, TX
Valley Ranch, Irving, TX ..... -- N/A 1996 --
Jeffries Ranch, .............. -- 1996 --
Oceanside, CA
Bad Lands, Duchesne, UT ...... -- 1992 --
Other (6 properties) ......... -- N/A Various --
--------
5,098
--------

$ 9,331
========

(1) The aggregate cost for federal income tax purposes is $125.1 million.
(2) Property is pledged as additional collateral for a note payable with a
principal balance of $15.5 million.
(3) Writedown of property to estimated net realizable value.
(4) Cost basis of assigned to portion of property sold.

AMERICAN REALTY TRUST, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION

1996 1995 1994
---- ---- ----
(dollars in thousands)

Reconciliation of Real Estate

Balance at January 1, .................... $ 70,495 $ 58,517 $ 59,181

Additions
Acquisitions and improvements ......... 61,649 23,196 9,714
Foreclosures .......................... -- -- --
Property received in settlement
with insurance company ............. -- 1,622 --

Deductions
Sales of real estate .................. (3,778) (9,813) (10,378)
Property transferred in settlement
with insurance company ............. -- (3,027) --
-------- -------- --------

Balance at December 31, .................. $128,366 $ 70,495 $ 58,517
======== ======== ========

Reconciliation of Accumulated Depreciation

Balance at January 1, .................... $ 7,744 $ 6,819 $ 6,744

Additions
Depreciation .......................... 1,587 1,250 1,026

Deductions
Sales of real estate .................. -- (325) (951)
-------- -------- --------

Balance at December 31, .................. $ 9,331 $ 7,744 $ 6,819
======== ======== ========

89
SCHEDULE IV

AMERICAN REALTY TRUST, INC.
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996

Periodic Face
Interest Maturity Payment Prior Amount of
Description Rate (1) Date (1) Terms Liens Mortgages
-------- -------- ------------------------- ------- ----------
(dollars in thousands)
FIRST MORTGAGE LOANS

Hall Land......................... 10.00% 08/94 Principal and interest $ - $ 250
Secured by 4.2 acres of due at maturity.
residential land in Maricopa
County, Arizona.

Osceola Land...................... 12.00% 11/93 Principal and interest due - 1,960
Secured by unimproved land in due monthly.
Osceola County, Florida.

Webster & Banc Boston............. Various Various Principal and interest - 158
Secured by condominiums in Ft. monthly.
Lauderdale, Florida.

J. W. Sherman..................... 7.00% 08/98 Principal and interest - 32
Secured by 1 co-op apartment in payments due monthly.
Brooklyn, NY.

Nak Chung Building................ 8.00% 04/99 Interest due monthly. - 100
Secured by restaurant in Principal to be paid down
Los Angeles, California. to $50,000 by May 1, 1997,
balance due at maturity.

WRAPAROUND MORTGAGE LOANS

Las Vegas Plaza................... 9.74% 12/97 Principal and interest due 7,758 17,600
Secured by 93,320 square foot monthly of $168,000 based
retail shopping center in Las on 25 year amortization.
Vegas, Nevada

Continental Hotel................. 10.50% 06/99 Principal and interest 3,542 27,600
Secured by a hotel and casino due monthly. $500,000
in Las Vegas, Nevada. principal payment due
annually.
JUNIOR MORTGAGE LOANS

Williamsburg Hospitality
House(3).......................... 9.75% 04/96 Pay greater of available cash 11,677 8,862
Secured by 297 room hotel in or 6% from 2/1/94 to 7/1/94.
Williamsburg, Virginia. Thereafter, pay greater of
available cash or 8%.

NO. SO. II........................ 12.00% 09/97 Interest due monthly, with 1,317 852
Secured by shopping center in principal reductions of
Columbia, South Carolina. $25,000 due quarterly.
Principal balance due at
maturity.

Principal Amount of
Carrying Loan Subject to
Amount of of Delinquent Principal
Description Mortgages(2) or Interest
---------- ------------------------
(dollars in thousands)
FIRST MORTGAGE LOANS

Hall Land........................ $ 262 $ 112
Secured by 4.2 acres of
residential land in Maricopa
County, Arizona.

Osceola Land..................... 1,593 1,593
Secured by unimproved land in
Osceola County, Florida.

Webster & Banc Boston............ 81
Secured by condominiums in Ft.
Lauderdale, Florida.

J. W. Sherman.................... 31 -
Secured by 1 co-op apartment in
Brooklyn, NY.

Nak Chung Building............... 20 -
Secured by restaurant in
Los Angeles, California.

WRAPAROUND MORTGAGE LOANS

Las Vegas Plaza.................. 18,249 -
Secured by 93,320 square foot
retail shopping center in Las
Vegas, Nevada

Continental Hotel................ 22,713 -
Secured by a hotel and casino
in Las Vegas, Nevada.

JUNIOR MORTGAGE LOANS

Williamsburg Hospitality
House(3)......................... 8,721 -
Secured by a 297 room hotel in
Columbia, South Carolina.

No. So. II ...................... 93 -
Secured by Shopping Center in
Columbia, South Carolina

90
SCHEDULE IV
(Continued)

AMERICAN REALTY TRUST, INC.
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996

Principal Amount of
Periodic Face
Interest Maturity Payment Prior Amount of
Description Rate (1) Date (1) Terms Liens Mortgages
---------- --------- --------------------------- ----------- ----------
(dollars in thousands)
JUNIOR MORTGAGE LOANS - Continued

Hall Land.................... 10.00% 08/94 Principal and interest due $ 112 $ 71
Secured by 4.2 acres of at maturity.
residential land in Maricopa
County, Arizona.

R. Brooks Douglas............
Secured by a single family 10.00% 06/98 Principal and interest due - 100
residence in Oklahoma. at maturity.

OTHER

Tiberon Trails(3)............ 10.00% 12/00 Interest only monthly. 7,014 4,000
Secured by assignment of Principal at maturity.
capital stock of a corpora-
tion owning a 375 unit apart-
ment complex in Merrillville,
Indiana.

Mediterranean Villas(4)...... 09/04 Interest only monthly. - 1,000
Secured by second and third 09/04 Principal at maturity. - 300
liens on an apartment complex
in San Antonio, Texas.

Tanglewood Partnership....... Variable 09/03 Interest only monthly. - 3,400
Secured by a partnership
interest.
---------- -------
$ 31,420 $66,285
========== =======
Interest receivable

Deferred gains

Discounts

Allowance for estimated losses

Principal Amount of
Carrying Loan Subject to
Amount of Delinquent Principal
Description Mortgages (2) or Interest
------------- -----------------------
(dollars in thousands)
JUNIOR MORTGAGE LOANS - Continued

Hall Land.................... $ 79 $ 79
Secured by 4.2 acres of
residential land in Maricopa
County, Arizona.

R. Brooks Douglas............
Secured by a single family 100 -
residence in Oklahoma.

OTHER

Tiberon Trails(3)............ 3,503 -
Secured by assignment of
capital stock of a corpora-
tion owning a 375 unit apart-
ment complex in Merrillville,
Indiana.

Mediterranean Villas(4)...... 1,000 -
Secured by second and third 300 -
liens on an apartment complex
in San Antonio, Texas.

Tanglewood Partnership....... - -
Secured by a partnership
interest.
-------- -----------
56,745 $ 1,785
===========
Interest receivable 445

Deferred gains (4,617)

Discounts (162)

Allowance for estimated losses (3,926)
-------
$48,485
=======

- ---------------
(1) Interest rates and maturity dates shown are as stipulated in the loan
documents at December 31, 1996. Where applicable, these rates have
been adjusted at issuance to yield between 8% and 12%.
(2) The aggregate cost for federal income tax purposes is $57.2 million.
(3) Mortgage note is receivable from a related party.
(4) Mortgage note is receivable from a partnership in which the Company is a
27% limited partner.

90
91

SCHEDULE IV
(Continued)

AMERICAN REALTY TRUST, INC.
MORTGAGE LOANS ON REAL ESTATE

1996 1995 1994
------- ------- -------
(dollars in thousands)

Balance at January 1, ....................... $58,119 $54,050 $56,018

Additions
New mortgage loans ....................... 100 -- 1,400
Compounding of interest .................. -- -- --
Funding on existing loans ................ 150 3,295 600

Deductions
Collections of principal ................. (1,495) 1,590 (2,446)
Settlement of term loan obligation
in exchange for receivable
participation ......................... -- -- --
Transfer in settlement with
insurance company ..................... -- -- --
Write-off of principal ................... (129) (816) (1,522)
Foreclosures ............................. -- -- --
------- ------- ------

Balance at December 31, ..................... $56,745 $58,119 $54,050
======= ======= =======

92
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

Not applicable.

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

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT

Directors

The affairs of American Realty Trust, Inc. (the "Company" or the "Registrant")
are managed by a Board of Directors. The Company's Bylaws provide for three
classes of Directors to serve for staggered three-year terms. The Directors are
elected at the annual meeting of stockholders or are appointed by the Company's
incumbent Board of Directors and serve until their respective terms expire or
until a successor has been elected or appointed.

The Directors of the Company are listed below, together with their ages, terms
of service, all positions and offices with the Company or its advisor, Basic
Capital Management, Inc. ("BCM" or the "Advisor"), their principal occupations,
business experience and directorships with other companies during the last five
years or more. The designation "Affiliate" when used below with respect to a
Director means that the Director is an officer, director or employee of the
Advisor or an officer or employee of the Company. The designation
"Independent", when used below with respect to a Director, means that the
Director is neither an officer or employee of the Company nor a director,
officer or employee of the Advisor, although the Company may have certain
business or professional relationships with such Director, as discussed in ITEM
13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Certain Business
Relationships."

[THIS SPACE INTENTIONALLY LEFT BLANK.]

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)

Directors (Continued)

KARL L. BLAHA: Age 49, Director (Class III) (Affiliated) (since June
1996). President (since October 1993) and Executive Vice President and
Director of Commercial Management (April 1992 to October 1993).

Executive Vice President and Director of Commercial Management (April
1992 to August 1995) of BCM, Continental Mortgage and Equity Trust
("CMET"), Income Opportunity Realty Investors, Inc. ("IORI")
Transcontinental Realty Investors, Inc. ("TCI"), and Syntek Asset
Management, Inc. ("SAMI"), the managing general partner of National
Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP") and a
corporation owned by BCM; Executive Vice President (since October
1992 of Carmel Realty, Inc. ("Carmel Realty"), a company affiliated
with BCM which provides real estate brokerage services and commercial
property management services; Executive Vice President and Director
of Commercial Management (April 1992 to February 1994) of National
Income Realty Trust ("NIRT") and Vinland Property Trust ("VPT");
Partner - Director of National Real Estate Operations of First
Winthrop Corporation (August 1988 to March 1992); Corporate Vice
President of Southmark Corporation ("Southmark") (April 1984 to
August 1988); and President of Southmark Commercial Management (March
1986 to August 1988).

ROY E. BODE: Age 49, Director (Class II) (Independent) (since September
1996).

Vice President of Public Affairs (since May 1992) of University of
Texas Southwestern Medical Center; Editor (June 1988 to December
1991) of Dallas Times Herald; and Director (since 1991) of the DFW
Metroplex Chapter of St. Jude's Children's Research Hospital.

OSCAR W. CASHWELL: Age 69, Director (Class I) (Affiliated) (since
November 1992).

President (February 1994 to August 1995) of CMET, IORI and TCI;
Executive Vice President (August 1995 to January 1997), President and
Director of Property and Asset Management (January 1994 to August
1995) and Assistant to the President, Real Estate Operations (July
1989 to December 1993) of BCM; President (February 1994 to August
1995) and Director (March 1994 to August 1995) of SAMI; and Assistant
to the President, Real Estate Operations (March 1982 to June 1989) of
Southmark.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)

Directors (Continued)

DALE A. CRENWELGE: Age 38, Director (Class III) (Independent) (since
December 1994).

President (since 1989) of Longhorn Consultants
Commercial Real Estate Group, Inc. and Crenwelge
Commercial Consultants, Inc. real estate marketing and
management firms; and Assistant to the President (1985
to 1989) of Thompson Properties, a commercial real
estate development, brokerage, management and
investment company.

AL GONZALEZ: Age 60, Director (Class II) (Independent) (since 1989).

President (since March 1991) of AGE Refining, Inc., a petroleum
refining and marketing firm; President (January 1988 to March 1991)
of Moody-Day Inc., which sells and leases construction equipment and
supplies; owner and President of Gulf-Tex Construction Company
("Gulf-Tex"); owner and lessor of two restaurant sites in Dallas,
Texas; Director (since April 1990) of Avacelle, Inc. ("Avacelle");
Director (1988 to 1992) of Greenbriar Corp., formerly Medical
Resource Companies of America; and member (1987 to 1989) of the
Dallas City Council.

On March 18, 1992, Avacelle filed a voluntary petition under Chapter 11 of the
United States Bankruptcy Code and an Order confirming its plan of
Reorganization was entered October 18, 1993 by the United States Bankruptcy
Court, Northern Division of Oklahoma.

Board Meetings and Committees

The Company's Board of Directors held four meetings during 1996. For such year,
no incumbent Director attended fewer than 75% of (i) the total number of
meetings held by the Board of Directors during the period for which he had been
a Director and (ii) the total number of meetings held by all committees of the
Board of Directors on which he served during the periods that he served.

The Company's Board of Directors has an Audit Committee the function of which
is to review the Company's operating and accounting procedures. The members of
the Audit Committee are Messrs. Gonzalez (Chairman), Bode and Crenwelge. The
Audit Committee met twice during 1996.

The Company's Board of Directors does not have nominating or compensation
committees.

Executive Officers

The following persons currently serve as executive officers of the
Company: Karl L. Blaha, President; Bruce A. Endendyk, Executive Vice

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)

Executive Officers (Continued)

President; Thomas A. Holland, Executive Vice President and Chief Financial
Officer; and Randall M. Paulson, Executive Vice President. Their positions with
the Company are not subject to a vote of the Company's stockholders. The age,
terms of service, all positions and offices with the Company or BCM, other
principal occupations, business experience and directorships with other
companies during the last five years or more of Messrs. Endendyk, Holland and
Paulson is set forth below.

BRUCE A. ENDENDYK: Age 48, Executive Vice President (since January
1995).

President (since January 1995) of Carmel Realty; Executive Vice
President (since January 1995) of BCM, SAMI, CMET, IORI and TCI;
Management Consultant (November 1990 to December 1994); Executive
Vice President (January 1989 to November 1990) of Southmark;
President and Chief Executive Officer (March 1988 to January 1989) of
Southmark Equities Corporation; and Vice President/Resident Manager
(December 1975 to March 1988) of Coldwell Banker Commercial/Real
Estate Services in Houston, Texas.

THOMAS A. HOLLAND: Age 54, Executive Vice President and Chief Financial
Officer (since August 1995) and Senior Vice President and Chief Accounting
Officer (July 1990 to August 1995).

Executive Vice President and Chief Financial Officer (since August
1995) and Senior Vice President and Chief Accounting Officer (July
1990 to August 1995) of BCM, SAMI, CMET, IORI and TCI; Secretary
(since February 1997) of CMET, IORI and TCI; Senior Vice President
and Chief Accounting Officer (July 1990 to February 1994) of NIRT and
VPT; Vice President and Controller (December 1986 to June 1990) of
Southmark; Vice President-Finance (January 1986 to December 1986) of
Diamond Shamrock Chemical Company; Assistant Controller (May 1976 to
January 1986) of Maxus Energy Corporation (formerly Diamond Shamrock
Corporation); Trustee (August 1989 to June 1990) of Arlington Realty
Investors; and Certified Public Accountant (since 1970).

[THIS SPACE INTENTIONALLY LEFT BLANK.]

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)

Executive Officers (Continued)

RANDALL M. PAULSON: Age 50, Executive Vice President (since January
1995).

President (since August 1995) and Executive Vice President (January
1995 to August 1995) of SAMI, CMET, IORI and TCI and (October 1994 to
August 1995) of BCM; Director (since August 1995) of SAMI; Vice
President (1993 to 1994) of GSSW, LP, a joint venture of Great
Southern Life and Southwestern Life; Vice President (1990 to 1993) of
Property Company of America Realty, Inc.; President (1990) of Paulson
Realty Group; President (1983 to 1989) of Johnstown Management
Company; and Vice President (1979 to 1982) of Lexton-Ancira.

Officers

Although not executive officers of the Company, the following persons currently
serve as officers of the Company: Mark W. Branigan, Senior Vice President -
Residential Asset Management; Lynn W. Humphries, Senior Vice President -
Commercial Asset Management; Robert A. Waldman, Senior Vice President, General
Counsel and Secretary; and Drew D. Potera, Vice President and Treasurer. Their
positions with the Company are not subject to a vote of the Company's
stockholders. Their ages, terms of service, all positions and offices with the
Company or BCM, other principal occupations, business experience and
directorships with other companies during the last five years or more are set
forth below.

MARK W. BRANIGAN: Age 42, Senior Vice President - Residential Asset
Management (since December 1996) and Vice President (February 1994 to
December 1996).

Senior Vice President - Residential Asset Management (since December
1996) and Vice President (February 1994 to December 1996) of SAMI,
CMET, IORI and TCI; Executive Vice President (since May 1995) and
Real Estate Analyst (January 1992 to May 1995) of BCM; Executive Vice
President (1984 to 1991) of Byron Investments, Inc.; Director (May
1989 to August 1990) and Manager of Treasury Services (May 1981 to
1983) of Southmark; and Director (1977 to April 1981) of Investor
Relations for Syntek Corp.

LYNN W. HUMPHRIES: Age 46, Senior Vice President - Commercial Asset
Management (since May 1996).

Senior Vice President - Commercial Asset Management (since May 1996)
of BCM, CMET, TCI, IORI and SAMI; Vice President (January 1994 to May
1996) of the Amend Group; Vice President (1980 to 1993) of Equitable
Real Estate Investment Management, Inc.; and Senior Vice President
(1975 to 1980) of Sanders Campbell & Company.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)

Officers (Continued)

ROBERT A. WALDMAN: Age 44, Senior Vice President and General Counsel
(since January 1995), Vice President (January 1993 to January 1995) and
Secretary (since December 1989).

Senior Vice President and General Counsel (since January 1995); Vice
President (December 1990 to January 1995) and Secretary (December
1993 to February 1997) of CMET, IORI and TCI; Senior Vice President
and General Counsel (since November 1994), Vice President and
Corporate Counsel (November 1989 to November 1994) and Secretary
(since November 1989) of BCM; Senior Vice President and General
Counsel (since January 1995), Vice President (April 1990 to January
1995) and Secretary (since December 1990) of SAMI; Vice President
(December 1990 to February 1994) and Secretary (December 1993 to
February 1994) of NIRT and VPT; and Director (February 1987 to
October 1989) and General Counsel and Secretary (1985 to October
1989) of Red Eagle Resources Corporation (oil and gas); Assistant
General Counsel, Senior Staff Attorney and Staff Attorney (1981 to
1985) of Texas International Company (oil and gas).

DREW D. POTERA: Age 37, Vice President (since December 1996), Treasurer
(since August 1991) and Assistant Treasurer (December 1990 to August
1991).

Vice President (since December 1996) and Treasurer (since December
1990) of CMET, IORI and TCI; Treasurer (December 1990 to February
1994) of NIRT and VPT; Vice President, Treasurer and Securities
Manager (since July 1990) of BCM; Vice President and Treasurer (since
February 1992) of SAMI; and Financial Consultant with Merrill Lynch,
Pierce, Fenner & Smith, Incorporated (June 1985 to June 1990).

In addition to the foregoing officers, the Company has several vice presidents
and assistant secretaries who are not listed herein.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Under the securities laws of the United States, the Company's Directors,
executive officers, and any persons holding more than ten percent of the
Company's shares of Common Stock are required to report their ownership of the
Company's shares and any changes in that ownership to the Securities and
Exchange Commission (the "Commission"). Specific due dates for these reports
have been established and the Company is required to report any failure to file
by these dates during 1996. All of these filing requirements were satisfied by
the Company's Directors and executive officers and ten percent holders. In
making these

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)

Compliance with Section 16(a) of the Securities Exchange Act of 1934
(Continued)

statements, the Company has relied on the written representations of its
incumbent Directors and executive officers and its ten percent holders and
copies of the reports that they have filed with the Commission.

The Advisor

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

BCM has served as advisor to the Company since February 1989. BCM is a company
owned by a trust for the benefit of the children of Gene E. Phillips, who
served as Chairman of the Board and a Director of the Company until November
16, 1992 and who also served as a director of BCM until December 22, 1989 and
as Chief Executive Officer of BCM until September 1, 1992. Ryan T. Phillips,
the son of Mr. Phillips and a Director of the Company until June 1996, is also
a director of BCM and a trustee of the trust for the benefit of the children of
Mr. Phillips which owns BCM. Mr. Cashwell, a Director of the Company, served as
Executive Vice President of BCM until January 10, 1997. Mr. Paulson, an
Executive Vice President of the Company, also serves as President of BCM, SAMI,
CMET, IORI and TCI and as the sole director of SAMI. Gene E. Phillips serves as
a representative of the trust for the benefit of his children which 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. As
of March 14, 1997, BCM owned 5,115,060 shares of the Company's Common Stock,
approximately 39.6% of the shares then outstanding.

The Advisory Agreement provides for the advisor to receive monthly base
compensation at the rate of 0.125% per month (1.5% on an annualized basis) of
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 the advisor's base 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 $.50 per share.

In addition to base compensation, BCM, or an affiliate of BCM, receives the
following forms of additional compensation:

(a) an acquisition fee for locating, leasing or purchasing real estate
for the Company in an amount equal to the lesser of (i) the amount

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)

The Advisor (Continued)

of compensation customarily charged in similar arm's-length
transactions or (ii) up to 6% of the costs of acquisition, inclusive
of commissions, if any, paid to non-affiliated brokers;

(b) a disposition fee for the sale of each equity investment in real
estate in an amount equal to the lesser of (i) the amount of
compensation customarily charged in similar arm's-length transactions
or (ii) 3% of the sales price of each property, exclusive of fees, if
any, paid to non-affiliated brokers;

(c) a loan arrangement fee in an amount equal to 1% of the principal
amount of any loan made to the Company arranged by BCM;

(d) 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, realized from sales of
assets made under contracts entered into after April 15, 1989; and

(e) a mortgage placement fee, on mortgage loans originated or purchased,
equal to 50%, measured on a cumulative basis, of the total amount of
mortgage origination and placement fees on mortgage loans advanced by
the Company for the fiscal year.

The Advisory Agreement further provides that BCM shall bear the cost of certain
expenses of its employees, excluding fees paid to the Company's Directors; rent
and other office expenses of both BCM and the Company (unless the Company
maintains office space separate from that of BCM); costs 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.

Pursuant to the Advisory Agreement, BCM serves as the loan
administration/servicing agent for the Company, under an agreement dated as of
October 4, 1989, and terminable by either party upon thirty days'

100

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)

The Advisor (Continued)

notice, under which BCM services most of the Company's mortgage notes and
receives as compensation a monthly fee of 0.125% of the month-end outstanding
principal balances of the mortgage loans serviced.

Situations may develop in which the interests of the Company are in conflict
with those of one or more Directors or officers in their individual capacities
or of BCM, or of their respective affiliates. In addition to services performed
for the Company, as described above, BCM actively provides similar services as
agent for, and advisor to, other real estate enterprises, including persons and
entities involved in real estate development and financing, including CMET,
IORI and TCI. BCM also performs certain administrative services for NRLP and
NOLP, the operating partnership of NRLP, on behalf of NRLP's and NOLP's general
partner, SAMLP. The Advisory Agreement provides that BCM may also serve as
advisor to other entities. As advisor, BCM is a fiduciary of the Company's
public investors. In determining to which entity a particular investment
opportunity will be allocated, BCM will consider the respective investment
objectives of each entity and the appropriateness of a particular investment in
light of each such entity's existing mortgage note and real estate portfolios
and business plan. To the extent any particular investment opportunity is
appropriate to more than one such entity, such investment opportunity will be
allocated to the entity that has had funds available for investment for the
longest period of time, or, if appropriate, the investment may be shared among
various entities. See ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - Certain Business Relationships."

The directors and principal officers of BCM are set forth below:

MICKEY N. PHILLIPS: Director

RYAN T. PHILLIPS: Director

RANDALL M. PAULSON: President

MARK W. BRANIGAN: Executive Vice President - Residential Asset
Management

BRUCE A. ENDENDYK: Executive Vice President

THOMAS A. HOLLAND: Executive Vice President and Chief Financial
Officer

COOPER B. STUART: Executive Vice President

CLIFFORD C. TOWNS, JR.: Executive Vice President - Finance

DAN S. ALLRED: Senior Vice President - Land Development

ROBERT A. WALDMAN: Senior Vice President, General Counsel and
Secretary

100

101

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)

The Advisor (Continued)

LYNN W. HUMPHRIES: Senior Vice President - Commercial Asset
Management

DREW D. POTERA: Vice President, Treasurer and Securities
Manager

Mickey N. Phillips is the brother of Gene E. Phillips and Ryan T. Phillips is
the son of Gene E. Phillips. Gene E. Phillips serves as a representative of the
trust established for the benefit of his children which owns BCM and, in such
capacity, has substantial contact with the management of BCM and input with
respect to its performance of advisory services to the Company.

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 such property management services for a
fee of 5% or less of the monthly gross rents collected on the properties
under management. 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) SWI, of which Mr. Phillips is the sole
shareholder, (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, which is
company owned by SWI. Carmel Realty is entitled to receive property and
construction management fees and leasing commissions in accordance with
terms of its property-level management agreement with Carmel, Ltd.

Real Estate Brokerage

Affiliates of BCM provide real estate brokerage services to the Company and
receive brokerage commissions in accordance with the Advisory Agreement.

ITEM 11. EXECUTIVE COMPENSATION

The Company has no employees, payroll or benefit plans and pays no compensation
to the executive officers of the Company. The Directors and executive officers
of the Company who are also officers or employees of the Company's Advisor are
compensated by the Advisor. Such affiliated Directors and executive officers of
the Company perform a variety of services for the Advisor and the amount of
their compensation is determined solely by the Advisor. BCM does not allocate
the cash compensation of its officers among the various entities for which it
serves as advisor. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF
THE REGISTRANT - The Advisor" for a more detailed discussion of compensation
payable to BCM by the Company.

101

102

ITEM 11. EXECUTIVE COMPENSATION (Continued)

The only direct remuneration paid by the Company is to those Directors who are
not officers or employees of BCM or its affiliated companies. The Company
compensates such Independent Directors at a rate of $5,000 per year, plus $500
per Board of Directors meeting attended and $300 per Audit Committee meeting
attended. During 1996, $21,950 was paid to Independent Directors in total
Directors' fees for all meetings as follows: Roy E. Bode, $3,000; Dale A.
Crenwelge, $8,350; Al Gonzalez, $7,600; and Ryan T. Phillips, $3,000.

In July 1987, the Company's Board of Directors, including all of the
Independent Directors, approved the Company's 1987 Stock Option Plan (the
"Plan"). The Plan was approved by the Company's Stockholders at the Company's
annual meeting of stockholders held on June 8, 1988. As of December 31, 1996,
there were no stock options outstanding under the Plan. In February 1997, the
Company's Board of Directors approved the termination of the Company's 1987
Stock Option Plan.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

102

103

ITEM 11. EXECUTIVE COMPENSATION (Continued)

Performance Graph

The following graph compares the cumulative total stockholder return on the
Company's shares of Common Stock with the Dow Jones Equity Market Index ("DJ
Equity Index") and the Dow Jones Real Estate Investment Index ("DJ Real Estate
Index"). The comparison assumes that $100 was invested on December 31, 1991 in
shares of the Company's Common Stock and in each of the indices and further
assumes the reinvestment of all dividends. Past performance is not necessarily
an indicator of future performance.

[PERFORMANCE GRAPHIC]

- ----------------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----

THE COMPANY 100 119 231 248 281 509
DJ EQUITY INDEX 100 109 119 120 166 206
DJ REAL ESTATE INDEX 100 90 106 100 124 166
- ----------------------------------------------------------------------------------------

103

104

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

Security Ownership of Certain Beneficial Owners. The following table sets forth
the ownership of the Company's Common Stock both beneficially and of record,
both individually and in the aggregate, for those persons or entities known by
the Company to be the owner of more than 5% of the shares of the Company's
Common Stock as of the close of business on March 14, 1997.

Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership Class (1)
- ------------------------------------ ---------------------- ---------

Basic Capital Management, Inc. 5,115,060 (2) 39.6%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231

Davister Corp./Nanook Partners, L.P. 669,436 (3) 5.2%
10670 N. Central Expressway
Suite 640
Dallas, TX 75231

Rosedale Equities, Inc. 960,000 (4) 7.4%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231

Garden Capital Merchandise Mart, Inc. 1,264,000 (4) 9.8%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231

Continental Mortgage and Equity Trust 818,088 (5) 6.3%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231

Ryan T. Phillips 5,213,392 (2)(6) 40.4%
10670 N. Central Expressway
Suite 600
Dallas, Texas 75231

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

(1) Percentages are based upon 12,914,644 shares outstanding as of
March 14, 1997.

(2) Includes 5,115,060 shares owned by BCM over which Ryan T. Phillips
may be deemed to be the beneficial owner by virtue of his position
as a director of BCM. Mr. Phillips disclaims beneficial ownership
of such shares.

(3) Each of the directors of Davister Corp., Ronald F. Akin, Ronald F.
Bruce and Richard A. Green, may be deemed to be the beneficial
owners by virtue of their positions as directors of Davister Corp.
Messrs. Akins, Bruce and Green disclaim beneficial ownership of
such shares.

104

105

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (Continued)

(4) Rosedale Equities, Inc. and Garden Capital Merchandise Mart, Inc.
are wholly owned subsidiaries of the Company. Such shares are
pledged as additional collateral for loans to the Company.

(5) Each of the Trustees of CMET, Ted P. Stokely, Edward L. Tixier,
Martin L. White and Edward G. Zampa, may be deemed to be the
beneficial owners by virtue of their positions as Trustees of CMET.
The Trustees of CMET disclaim such beneficial ownership.

(6) Includes 98,332 shares owned by the Gene E. Phillips' Children's
Trust. Ryan T. Phillips is a beneficiary of such trust.

Security Ownership of Management. The following table sets forth the ownership
of shares of the Company's Common Stock, both beneficially and of record, both
individually in the aggregate, for the Directors and executive officers of the
Company, as of the close of business on March 14, 1996.

Number of
Shares Beneficially Percent of
Name of Beneficial Owner Owned Class (1)
- ------------------------ -------------------- ---------

All Directors and 8,855,644 (2)(3)(4) 68.6%
Executive Officers as a (5)(6)
group (8 persons)

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

(1) Percentage is based upon 12,914,644 shares outstanding as of March
14, 1997.

(2) Includes 818,088 shares owned by CMET over which the executive
officers of the Company may be deemed to be beneficial owners by
virtue of their positions as executive officers of CMET. Also
includes 195,732 shares owned by NOLP over which the executive
officers of the Company may be deemed to be beneficial owners by
virtue of their positions as executive officers of SAMI, the
managing general partner of SAMLP, the general partner of NOLP. The
executive officers of the Company disclaim beneficial ownership of
such shares.

(3) Includes 5,115,060 shares owned by BCM over which Ryan T. Phillips
may be deemed to be the beneficial owner by virtue of his position
as a director of BCM. Mr. Phillips disclaim beneficial ownership
of such shares.

(4) Includes 2,432 shares owned directly over which Thomas A. Holland and
his wife jointly hold voting and dispositive power and an additional
332 shares held by Mr. Holland in an individual retirement account.

105

106

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (Continued)

(5) Includes 960,000 shares issued to Rosedale Equities, Inc., 500,000
shares owned by ND Investments, Inc. and 1,264,000 shares owned by
Garden Capital Merchandise Mart, Inc., wholly-owned subsidiaries of the
Company. Such shares are pledged as additional collateral for loans to
the Company.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Policies with Respect to Certain Activities

The By-laws of the Company as amended, provide, in accordance with Georgia law,
that no contract or transaction between the Company and one or more of its
Directors or officers, or between the Company and any other corporation,
partnership, association or other organization in which one or more of its
Directors or officers are directors or officers, or have a financial interest,
shall be void or voidable solely for that reason, or solely because the
Director or officer is present at or participates in the meeting of the
Company's Board of Directors or committee thereof which authorizes the contract
or transaction, or solely because his or her votes are counted for such
purpose, if one or more of the following three conditions are met: (i) the
material facts as to his or her interest and as to the contract or transaction
are disclosed or are known to the Company's Board of Directors or the
committee, and Board or committee in good faith authorizes the contract or
transaction by the affirmative vote of a majority of the disinterested
Directors, even though the disinterested Directors constitute less than a
quorum; (ii) the material facts as to his or her interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved or
ratified in good faith by vote of such stockholders; or (iii) the contract or
transaction is fair to the Company as of the time it is authorized, approved or
ratified by the Company's Board of Directors, a committee thereof, or the
stockholders.

The Company's policy is to have such contracts or transactions approved or
ratified by a majority of the disinterested Directors of the Company with full
knowledge of the character of such transactions, as being fair and reasonable
to the stockholders at the time of such approval or ratification under the
circumstances then prevailing. Such Directors also consider the fairness of
such transactions to the Company. The Company's management believes that, to
date, such transactions have represented the best investments available at the
time and that they were at least as advantageous to the Company as other
investments that could have been obtained.

The Company expects to enter into future transactions with entities the
officers, trustees, directors or stockholders of which are also officers,
Directors or stockholders of the Company, if such transactions would be
beneficial to the operations of the Company and consistent with the Company's
then-current investment objectives and policies, subject to approval by a
majority of disinterested Directors as discussed above.

106

107

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Policies with Respect to Certain Activities (Continued)

The Company does not prohibit its officers, Directors, stockholders or related
parties from engaging in business activities of the types conducted by the
Company.

Certain Business Relationships

BCM, the Company's advisor, is a company of which Messrs. Paulson,
Endendyk and Holland serve as executive officers. BCM is a company
owned by a trust for the benefit of the children of Gene E. Phillips,
a trustee of which is Ryan T. Phillips. Ryan T. Phillips is the son of
Gene E. Phillips, and served as a Director of the Company until June
1996 and serves as director of BCM.

Mr. Paulson, an Executive Vice President of the Company, is the President of
CMET, IORI and TCI, and owes fiduciary duties to such entities as well as to
BCM under applicable law. CMET, IORI and TCI have the same relationship with
BCM as does the Company. In addition, BCM has been engaged to perform certain
administrative functions for NRLP and NOLP. Gene E. Phillips is a general
partner of SAMLP, NRLP's and NOLP's general partner, and until May 15, 1996,
serviced as director and Chief Executive Officer of SAMLP's managing general
partner, SAMI. Mr. Paulson serves as President and sole director of SAMI. BCM
is the sole shareholder of SAMI. The Company owns a 96% limited partner
interest in SAMLP.

In March 1994, an entity affiliated with Ryan Phillips, a Director of the
Company until June 1996, advanced BCM $893,000 on an unsecured demand note. The
note bears interest at 10% per annum with interest only payable monthly. During
1995 and 1996, BCM made several principal reduction payments. The principal
balance of the loan was $83,000 at December 31, 1996.

BCM has advanced an entity affiliated with Ryan Phillips $1.1 million on an
unsecured demand note. The note bears interest at 10% per annum with interest
only payable monthly which has not been paid since February 1994. The principal
balance of the loan was $1.1 million at December 31, 1996.

Since February 1, 1990, the Company has contracted with affiliates of
BCM for property management services. Currently, Carmel, Ltd. provides
such property management services. The general partner of Carmel, Ltd.
is BCM. The limited partners of Carmel, Ltd. are (i) SWI, a company of
which Gene E. Phillips is the sole shareholder, (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 Denver Merchandise
Mart to Carmel Realty, which is a company owned by SWI.

Affiliates of BCM provide real estate brokerage services to the Company and
receive brokerage commissions in accordance with the Advisory Agreement.

107

108

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)

Certain Business Relationships (Continued)

The Company owns an equity interest in each of CMET, IORI, TCI, NRLP and
SAMLP. In addition, CMET and NRLP own an equity interest in the Company
and SAMLP owns an equity interest in TCI. See ITEM 1. "PROPERTIES -
Investments in Real Estate Investment Trusts and Real Estate
Partnerships."

Related Party Transactions

At December 31, 1996, the Company held a mortgage note receivable secured by an
apartment complex in Merriville, Indiana, with a principal balance of $3.5
million. The property is owned by a subsidiary of Davister Corp. ("Davister"),
a general partner in a partnership that owns approximately 5.2% of the
Company's outstanding shares of Common Stock.
The note matured in December 1996. The Company and borrower have agreed to a
modification and extension of the note. The modified note receivable continues
to bear interest at 10% per annum, requires monthly payments of principal and
interest of $42,000 and has an extended maturity date of December 2000. As
additional collateral for this loan, the Company has received a second lien on
another property owned by Davister as well as Davister's guarantee of the loan.

In 1996, the Company paid BCM and its affiliates $1.5 million in advisory and
mortgage servicing fees; $1.9 million in real estate brokerage commissions;
$806,000 in loan arrangement fees and $892,000 in property and construction
management fees and leasing commissions, net of property management fees paid
to subcontractors, other than Carmel Realty. In addition, as provided in the
Advisory Agreement, BCM received cost reimbursements from the Company of
$691,000 in 1996.

BCM has entered into put agreements with certain holders of the Class A limited
partner units of Ocean Beach Partners, L.P. which are convertible into Series D
Cumulative Preferred Stock of the Company. The put price of the Series D
Preferred Stock is $20.00 per share plus accrued but unpaid dividends.

BCM has also entered into put agreements with the holders of the Class A
limited partner units of Valley Ranch Limited Partnership. Such Class A units
are convertible into Series E Cumulative Convertible Preferred Stock of the
Company which is further convertible into Common Stock of the Company. The put
price for the Class A units is $1.00 per unit and the put price for either the
Series E Preferred Stock or the Common Stock is 80% of the average daily
closing price of the Company's Common Stock on the 20 previous trading days.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

108

109

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K

(a) The following documents are filed as part of this Report:

1. Consolidated Financial Statements

Report of Independent Certified Public Accountants

Consolidated Balance Sheets -
December 31, 1995 and 1994

Consolidated Statements of Operations -
Years Ended December 31, 1995, 1994 and 1993

Consolidated Statements of Stockholders' Equity Years Ended December 31, 1995,
1994 and 1993

Consolidated Statements of Cash Flows Years Ended December 31, 1995, 1994 and
1993

Notes to Consolidated Financial Statements

2. Financial Statement Schedules

Schedule III - Real Estate and Accumulated Depreciation

Schedule IV - Mortgage Loans on Real Estate

All other schedules are omitted because they are not applicable or because the
required information is shown in the financial statements or the notes thereto.

3. Incorporated Financial Statements

Consolidated Financial Statements of National Realty, L.P. (Incorporated by
reference to Item 8 of National Realty, L.P.'s Annual Report on Form 10-K for
the year ended December 31, 1996).

Consolidated Financial Statements of Continental Mortgage and Equity Trust
(Incorporated by reference to Item 8 of Continental Mortgage and Equity Trust's
Annual Report on Form 10-K for the year ended December 31, 1996).

Consolidated Financial Statements of Income Opportunity Realty
Investors, Inc. (Incorporated by reference to Item 8 of Income
Opportunity Realty Investors, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1996).

Consolidated Financial Statements of Transcontinental Realty Investors, Inc.
(Incorporated by reference to Item 8 of Transcontinental Realty Investors,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996).

109

110

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)

4. Exhibits

The following documents are filed as Exhibits to this Report:

Exhibit
Number Description
- ------ -----------

3.0 Articles of Incorporation dated November 24, 1987 and By-laws
dated December 30, 1987 of American Realty Trust, Inc.
(Incorporated by reference to Exhibits No. 3.1 and No. 3.1(a),
respectively, of Registrant's Registration Statement No. 33-
19636 on Form S-4).

3.1 Amendment to Articles of Incorporation dated September 15, 1989
of American Realty Trust, Inc. (Incorporated by reference to
Exhibit No. 3.2 of the Registrant's Registration Statement No.
33-19920 on Form S-11).

3.2 Articles of Amendment of American Realty Trust, Inc. setting
forth Certificate of Designation of Series A Cumulative
Participating Preferred Stock dated as of April 11, 1990
(Incorporated by reference to Exhibit No. 3-1 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990).

3.3 Articles of Amendment dated December 10, 1990 to Articles of
Incorporation of American Realty Trust, Inc. (Incorporated by
reference to Exhibit No. 3.4 of Registrant's Current Report on
Form 8-K dated December 5, 1990).

3.4 Amended By-laws of American Realty Trust, Inc., dated December
11, 1991. (Incorporated by reference to Exhibit No. 3.5 of
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991).

3.5 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 Series
B 10% Cumulative Preferred Stock, dated as of April 4, 1996
(incorporated by Reference to Exhibit 3.6 to the Registrant's
Registration Statement No. 333-21591, dated February 11, 1997).

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 Series
C 10% Cumulative Preferred Stock, dated as of June 4, 1996
(incorporated by Reference to Exhibit 3.7 to the Registrant's
Registration Statement No. 333-21591, dated February 11, 1997).

110

111

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)

Exhibit
Number Description
- ------ -----------

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 or Restrictions thereof of Series D Cumulative
Convertible Preferred Stock, dated as of August 2, 1996
(incorporated by Reference to Exhibit 3.8 to the Registrant's
Registration Statement No. 333-21591, dated February 11, 1997).

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 E Cumulative
Convertible Preferred Stock, dated as of January 14, 1997
(incorporated by Reference to Exhibit 3.9 to the Registrant's
Registration Statement No. 333-21591, dated February 11, 1997).

3.9 Articles of Amendment of the Articles of Incorporation deleting
Certificate of Designations of Series A Cumulative
Participating Preferred Stock dated February 28, 1997, filed
herewith.

10.1 Advisory Agreement between American Realty Trust, Inc. and
Basic Capital Management, Inc., formerly National Realty
Advisors, Inc., dated as of October 4, 1989 (Incorporated by
reference to Exhibit No. 10.15 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1989).

10.2 Amendment No. 1 to the Advisory Agreement between American
Realty Trust, Inc. and Basic Capital Management, Inc., formerly
National Realty Advisors, Inc., dated as of December 5, 1989
(Incorporated by reference to Exhibit No. 10.17 to the
Registrant's Registration Statement No. 33-19920 on Form S-11).

10.3 Amendment No. 2 to the Advisory Agreement between American
Realty Trust, Inc. and Basic Capital Management, Inc., formerly
National Realty Advisors, Inc., dated August 1, 1990
(Incorporated by reference to Exhibit No. 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1990).

10.4 Amendment No. 3 to the Advisory Agreement between American
Realty Trust, Inc. and Basic Capital Management, Inc., formerly
National Realty Advisors, Inc., dated October 1, 1991, filed
herewith.

111

112

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)

Exhibit
Number Description
- ------ -----------

10.5 Loan Servicing Agreement between American Realty Trust, Inc.
and Basic Capital Management, Inc., formerly National Realty
Advisors, Inc., dated as of October 4, 1989 (incorporated by
reference to Exhibit No. 10.16 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1989).

21.0 Subsidiaries of the Registrant, filed herewith.

27.0 Financial Data Schedule, filed herewith.

(b) Reports on Form 8-K:

A Current Report on Form 8-K, dated December 18, 1996, was filed with respect
to Item 2. "Acquisition and Disposition of Asset," and Item 7. "Financial
Statements and Exhibits," which reports the acquisition of the Best Western
Oceanside Hotel.

112

113

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

AMERICAN REALTY TRUST, INC.

Dated: March 31, 1997 By: /s/ Karl L. Blaha
------------------------- -----------------------------
Karl L. Blaha
Director and President

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

By: /s/ Karl L. Blaha By: /s/ Dale A. Crenwelge
----------------------------- -----------------------------
Karl L. Blaha Dale A. Crenwelge
Director and President Director

By: /s/ Roy E. Bode By: /s/ Al Gonzalez
----------------------------- ----------------------------
Roy E. Bode Al Gonzalez
Director Director

By: /s/ Oscar W. Cashwell
-----------------------------
Oscar W. Cashwell
Director

By: /s/ Thomas A. Holland
-----------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)

Dated: March 31, 1997
--------------------------

113

114

ANNUAL REPORT ON FORM 10-K

EXHIBIT INDEX

FOR THE YEAR ENDED DECEMBER 31, 1996

Exhibit Page
Number Description Number
- ------ ----------- ------

3.9 Articles of Amendment of the Articles of
Incorporation of American Realty Trust, Inc.
deleting Certificate of Designations of Series
A Cumulative Participating Preferred Stock dated
February 28, 1997.

10.4 Amendment No. 3 to the Advisory Agreement between
American Realty Trust, Inc. and Basic Capital
Management, Inc., formerly National Realty
Advisors, Inc., dated October 1, 1991.

21.0 Subsidiaries of Registrant.

27.0 Financial Data Schedule.

114