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, 1997

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 6, 1998, the Registrant had 10,711,921 shares of Common Stock
outstanding. Of the total shares outstanding 3,933,513 were held by other than
those who may be deemed to be affiliates, for an aggregate value of $57,528,000
based on the closing price on the New York Stock Exchange on March 6, 1998. 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

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INDEX TO
ANNUAL REPORT ON FORM 10-K

Page
PART I ----

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

Item 2 Properties .................................................. 8

Item 3 Legal Proceedings ........................................... 40

Item 4 Submission of Matters to a Vote of Security
Holders.................................................... 40

PART II

Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters................................ 40

Item 6 Selected Financial Data ..................................... 44

Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 45

Item 8 Consolidated Financial Statements and
Supplementary Data.......................................... 56

Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 108

PART III

Item 10 Directors, Executive Officers and Advisor of the
Registrant................................................. 108

Item 11 Executive Compensation ...................................... 117

Item 12 Security Ownership of Certain Beneficial Owners
and Management.............................................. 119

Item 13 Certain Relationships and Related Transactions .............. 120

PART IV

Item 14 Exhibits, Financial Statements, Schedules
and Reports on Form 8-K.................................... 125

Signature Page........................................................... 129

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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 through a wholly owned subsidiary, Pizza World Supreme, Inc.
("PWSI"), also operates and franchises pizza parlors featuring pizza delivery,
carry-out and dine-in under the trademark "Me-N-Ed's" in California and Texas.
The first Me-N-Ed's pizza parlor opened in 1962. At December 31, 1997, there
were 54 Me-N-Ed's pizza parlors in operation, consisting of 48 owned and 6
franchised pizza parlors, 6 of the owned pizza parlors were in Texas and the
remainder in California.

In April 1996, a newly formed subsidiary of the Company purchased, for $10.7
million in cash, 80% of the common stock of PWSI, which in turn had acquired 26
operating pizza parlors in various communities in California's San Joaquin
Valley. Concurrent with the purchase, the Company granted to an individual an
option to purchase 36.25% of the Company's subsidiary at any time for the
Company's net investment in such subsidiary. Additionally, the Company held
negotiations with underwriters to take such subsidiary public. The Company
believed that such option would be exercised and it further believed, that the
subsidiary would become publicly held approximately one year from its date of
acquisition. Accordingly, the Company believed its control of such subsidiary
was temporary and therefore accounted for such subsidiary under the equity
method through April 1997. In May 1997, the Company acquired the remaining 20%
of PWSI for $5.0 million and discontinued equity accounting.

The Company's businesses are not seasonal. With regard to real estate
investments, the Company is 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

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ITEM 1. BUSINESS (Continued)

Business Plan and Investment Policy (Continued)

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 investments, to include but not
limited to, real estate investments, investments in mortgage loans,
partnerships and joint venture development projects, 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 level of risk
associated with specific investments or types of investments. The Company's
management intends to attempt 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.

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ITEM 1. BUSINESS (Continued)

Management of the Company (Continued)

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 6, 1998, BCM owned 5,261,824 shares of the Company's Common
Stock, approximately 49.1% 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. Karl L. Blaha, 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 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) First Equity Properties, Inc.
("First Equity"), which is 50% owned by BCM, (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, office buildings and the Denver Merchandise Mart to Carmel Realty,
Inc. ("Carmel Realty") which is a company owned by First Equity. 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 itself, but PWSI has 839 employees. Employees of
the Advisor render services to the Company.

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ITEM 1. BUSINESS (Continued)

Competition

Real Estate. 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 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 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. Blaha, 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

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ITEM 1. BUSINESS (Continued)

Competition (Continued)

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.

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 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 are 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.

Pizza Parlors. The pizza parlor business is also highly competitive and is
affected by changes in consumer tastes and eating habits, as well as national,
regional, and local economic conditions, and demographic trends. The
performance of an individual pizza parlor can be affected by changes in traffic
patterns, demographics, and the type, number and location of competing
restaurants.

The quick-service restaurant industry is extremely competitive with respect to
price, service, location, and food quality. PWSI and its franchisees compete
with a variety of other restaurants in the quick- service restaurant industry,
including those that offer dine-in, carryout, and delivery services. These
competitors include national and regional chains, franchisees of other
restaurant chains, and local

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ITEM 1. BUSINESS (Continued)

Competition (Continued)

owner-operated restaurants. Some of these competitors have been in existence
longer and have an established market presence in certain geographic regions,
and some have substantially greater financial, marketing, and other resources
than PWSI and its franchisees. PWSI competes for qualified franchisees with
many other restaurant concepts, including national and regional restaurant
chains.

PWSI's success is largely dependent upon the efforts of its management and
other key personnel. The loss of the service of one or more members of
management could have an adverse effect on PWSI's operations. Significant
transitions in management involve important risks, including potential loss of
key personnel, difficulties in implementing changes to operational strategies,
and maintaining relationships with franchisees.

At December 31, 1997, PWSI owned and operated 48 and franchised 6 pizza
parlors. Consequently, the results achieved by PWSI's relatively small pizza
parlor base may not be indicative of the results of a larger number of pizza
parlors in a more geographically dispersed area. Because of PWSI's relatively
small pizza parlor base, an unsuccessful new pizza parlor could have a more
significant effect on PWSI's results of operations than would be the case in a
company owning more pizza parlors.

PWSI's existing pizza parlors, both owned and franchised, are located either in
California (48) or in Texas (6). Accordingly, PWSI's results of operations may
be affected by economic or other conditions in these regions. Also, given
PWSI's present geographic concentration, publicity relating to PWSI's pizza
parlors could have a more pronounced effect on PWSI's overall sales than might
be the case if PWSI's pizza parlors were more broadly dispersed.

All of the PWSI owned pizza parlors are operated on premises leased from third
parties. Most of the pizza parlor leases provide for a minimum annual rent and
additional rental payments if sales volumes exceed specified amounts. There can
be no assurance that PWSI will be able to renew leases upon expiration or that
the lease terms upon renewal will be as favorable as the current lease terms.

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, 1997 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.

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ITEM 2. PROPERTIES (Continued)

At December 31, 1997, no single asset of the Company accounted for 10% or more
of its total assets. At December 31, 1997, 69.7% of the Company's assets
consisted of real estate, 5.9% consisted of notes and interest receivable, 10.6%
consisted of investments in the equity securities of CMET, IORI, TCI and NRLP
and 5.0% consisted of pizza parlor equipment and related goodwill. The remaining
8.8% 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.

At December 31, 1997, the Company's real estate was located in the Midwest,
Southwest, Mountain, Pacific 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.]

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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 two hotels in this region.

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

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

Pacific region comprised of the states of California, Oregon and
Washington. The Company has four hotels in this region.

Excluded from the above are 42 parcels of developed, partially developed and
undeveloped land and a single family residence in Dallas, Texas as described
below.

Real Estate

At December 31, 1997, 80% 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

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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, such as One Hickory Center described
below, the Company will be subject to business risks, such as cost overruns and
construction delays, associated with such higher risk projects.

At December 31, 1997, the Company had under construction One Hickory Center, a
102,615 square foot office building in Farmers Branch, Texas. The Company
expects to expend approximately $4.5 million in 1998 to complete construction
and an additional $750,000 for tenant improvements.

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 42 parcels of
developed, partially developed and undeveloped land, and a single family
residence, described below) at December 31, 1997.

Commercial
Region Properties Hotels
-------- ---------- ------

Midwest............... 8.99% 13.90%
Mountain.............. 82.40 11.42
Pacific............... -- 45.89
Southwest............. 8.61 --
Southeast............. -- 28.79
------ ------
100.00% 100.00%

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 42 parcels of developed, partially developed and
undeveloped land consisting of: 1 developed residential lot in a residential
subdivision in Fort Worth, Texas; 2 parcels of partially developed land in Las
Colinas, Texas, totaling 59.2 acres; 3.5 acres of undeveloped land in downtown
Atlanta, Georgia; 410.7 acres of partially developed land in Denver, Colorado;
2 parcels of partially developed land in Dallas County, Texas, totaling 290.4
acres; 78.4 acres of partially developed land in Lewisville, Texas; 2 parcels
of partially developed land in Irving, Texas, totaling 335.2 acres; 420.0 acres
of undeveloped land in Duchense, Utah; 82.4 acres of undeveloped land in
Oceanside, California; 3 parcels of undeveloped land in Tarrant County, Texas,
totaling 1,373.6 acres; 130.6 acres of

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ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

undeveloped land in Harris County, Texas; 9 parcels of undeveloped land in
Collin County, Texas, totaling 638.2 acres; 6 parcels of undeveloped land in
Framers Branch, Texas, totaling 88.6 acres; 2 parcels of undeveloped land in
Plano, Texas, totaling 352.2 acres; 1,448 acres of undeveloped land in Austin,
Texas; 315.2 acres of undeveloped land in Palm Desert, California; 20.6 acres
of undeveloped land in Santa Clarita, California; and 7 additional parcels of
land totaling approximately 114.5 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.

A summary of the activity in the Company's owned real estate portfolio during
1997 is as follows:

Owned properties in real estate portfolio at January 1,
1997......................................................... 26*
Properties purchased............................................ 32
Property obtained through foreclosure........................... 1
Properties sold................................................. 3
--
Owned properties in real estate portfolio at
December 31, 1997............................................ 56*
==

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

* Includes a residential subdivision with 22 developed residential lots at
January 1, 1997, and 1 developed residential lot at December 31, 1997.

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 thereof at
December 31, 1997, 1996 and 1995 for commercial properties and average
occupancy during 1997, 1996 and 1995 for hotels:

Rent Per Square Foot
Average Room Rate Occupancy %
Square Footage/ ------------------------ ----------------------
Property Location Rooms 1997 1996 1995 1997 1996 1995
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ ------

Office Building
- ----------------
Rosedale Towers Minneapolis, MN 84,798 Sq.Ft. $15.03 $14.88 $13.16 93 91 90

Shopping Center
- ----------------
Collection Denver, CO 267,812 Sq.Ft. 9.46 * * 82 * *
Oaktree Village Lubbock, TX 45,623 Sq.Ft. 8.17 7.98 7.34 90 89 91
Preston Square Dallas, TX 35,508 Sq.Ft. 15.26 * * 92 * *

Merchandise Mart
- ----------------
Denver Mart Denver, CO 509,008 Sq.Ft. 14.75 15.33 14.53 93 95 96

Hotels
- ----------------
Best Western Virginia Beach, VA 110 Rooms 90.44 41.11 * 60 42 *
Oceanside
Inn at the Mart Denver, CO 161 Rooms 53.15 46.66 44.69 53 36 40
Kansas City
Holiday Inn Kansas City, MO 196 Rooms 70.73 66.46 61.66 77 79 75

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ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

Rent Per Square Foot
Average Room Rate Occupancy %
Square Footage/ -------------------------- -----------------------
Property Location Rooms 1997 1996 1995 1997 1996 1995
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ ------

Hotels - Continued
- ------
Piccadilly Airport Fresno, CA 185 Rooms 62.98 * * 50 * *
Piccadilly Chateau Fresno, CA 78 Rooms 50.86 * * 49 * *
Piccadilly Shaw Fresno, CA 194 Rooms 64.07 * * 62 * *
Piccadilly
University Fresno, CA 190 Rooms $62.22 * * 49 * *
Williamsburg
Hospitality House Williamsburg, VA 296 Rooms 81.87 * * 60 * *

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

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

* Property was acquired in 1997 or 1996.

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

In September 1997, the Company purchased the Collection, a 267,812 square foot
retail and commercial center in Denver, Colorado, for $19.5 million. The
Company paid $791,000 in cash and assumed existing mortgages totaling $14.7
million, and issued 400,000 shares of the Company's Series F Cumulative
Convertible Preferred Stock. See ITEM 5. "MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS." A first mortgage in the amount of $14.2
million bears interest at 8.64% per annum, requires monthly principal and
interest payments of $116,000 and matures in May 2017. A second lien mortgage
in the amount of $580,000 bears interest at 7% per annum until April 2001, 7.5%
per annum from May 2001 to April 2006, and 8% per annum from May 2006 to May
2010, requires monthly principal and interest payments of $3,000 and matures in
May 2010. The Company paid a real estate brokerage commission of $646,000 to
Carmel Realty based on the $19.5 million purchase price of the property.

In October 1997, the Company contributed the Denver Merchandise Mart in Denver,
Colorado, to a limited partnership in exchange for $6.0 million in cash, a 1%
managing general partner interest in the partnership, all of the Class B
limited partner units in the partnership and the partnership's assumption of
the $23.0 million in mortgage debt secured by such property. The existing
general and limited partners converted their general and limited partner
interests into Class A limited partner units in the partnership. The Class A
units have an agreed value of $1.00 per unit and are entitled to a fixed
preferred return of 10% per annum, paid quarterly. The Class A units may be
converted into a total of 529,000 shares of the Company's Series F Cumulative
Convertible Preferred Stock at any time after the first but not later than the
sixth anniversary of the closing, on the basis of one share of Series F
Preferred Stock for each ten Class A units. See ITEM 5. "MARKET FOR
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."

13
14
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

Also in October 1997, the Company purchased the Piccadilly Inns, four hotels in
Fresno, California, with a total of 697 rooms, for $33.0 million. The Company
issued 1.6 million shares of its Series F Cumulative Convertible Preferred
Stock for $16.0 million of the purchase price and obtained new mortgage
financing of $19.8 million. See ITEM 5. "MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS." The Company received net financing proceeds
of $2.2 million after the payment of various closing costs associated with the
financing. The mortgage bears interest at 8.4% per annum, requires monthly
principal and interest payments of $158,000 and matures in November 2012. The
Company paid a real estate brokerage commission of $1.1 million to Carmel
Realty based on the $33.0 million purchase price of the property.

Further in October 1997, the Company refinanced the Oaktree Village Shopping
Center in Lubbock, Texas, for $1.5 million. The Company received no net
financing proceeds after the payoff of $1.4 million in existing mortgage debt
and the payment of various closing costs associated with the financing. The
mortgage bears interest of 8.48% per annum, requires monthly payments of
principal and interest of $18,000 and matures in November 2007. The Company paid
a mortgage brokerage and equity refinancing fee of $15,000 to BCM based on the
new $1.5 million mortgage.

In December 1997, the Company exchanged a 43.0 acre tract of Valley Ranch land
for Preston Square, a 35,508 square foot shopping center in Dallas, Texas. In
accordance with the provisions of the term loan secured by the Valley Ranch
land, the Company paid $2.8 million to the lender in exchange for the lender's
release of its collateral interest in such land . Simultaneously, the Company
obtained new mortgage financing of $2.5 million secured by the shopping center.
The mortgage bears interest at 8.2% per annum, requires monthly payments of
interest only and matures in December 1999. The Company recognized no gain or
loss on the exchange. The Company paid a real estate brokerage commission of
$76,000 to Carmel Realty based on the $2.5 million purchase price of the
property.

Also in December 1997, the Company refinanced the Inn at the Mart in Denver,
Colorado, for $4.0 million. The Company received net financing proceeds of $1.4
million, after the payoff of $2.0 million in existing mortgage debt and the
payment of various closing costs associated with the financing. The mortgage
bears interest at 7.85% per annum, requires monthly payments of principal and
interest of $30,000 and matures in January 2013. The Company paid a mortgage
brokerage and equity refinancing fee of $40,000 to BCM based on the new $4.2
million mortgage.

14
15
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

the buyer having received a 12% return on its investment. Accordingly, the
Company recorded a deferred gain of $5.6 million which was offset against the
Company's investment in the partnership. In February 1998, the Company
reacquired three of the properties for $7.7 million. The Company paid $4.0
million in cash and assumed the existing mortgages of $3.7 million.
Simultaneously the Company refinanced the three properties for a total of $7.8
million, the Company receiving net financing proceeds of $3.9 million after the
payoff of $3.7 million in existing mortgage debt and the payment of various
costs associated with the financing. The new mortgages bear interest at 9.5% per
annum, require monthly principal and interest payments of a total of $66,000 and
mature in February 2008. In addition, the Company received a refund of $230,000
from Carmel Realty, representing the commission the Company had paid in 1994 on
the sale of the properties.

Properties Held for Sale. Set forth below are the Company's properties held for
sale, consisting of undeveloped, partially developed and developed land:

Property Location Acres/Lots
- -------------------- ------------------- --------------

Atlanta Atlanta, GA 3.5 Acres
Bad Lands Duchense, Utah 420.0 Acres
BP Las Colinas Las Colinas, TX 10.6 Acres
Chase Oaks Plano, TX 60.5 Acres
Dalho Farmers Branch, TX 3.4 Acres
Dowdy Collin County, TX 165.0 Acres
Hollywood Casino Farmers Branch, TX 51.7 Acres
Jeffries Ranch Oceanside, CA 82.4 Acres
Kamperman Collin County, TX 29.9 Acres
Katy Road Harris County, TX 130.6 Acres
Keller Tarrant County, TX 811.8 Acres
Lacy Longhorn Farmers Branch, TX 17.1 Acres
Las Colinas I Las Colinas, TX 48.6 Acres
LBJ Dallas County, TX 10.4 Acres
Lewisville Lewisville, TX 78.5 Acres
McKinney Corners I Collin County, TX 30.4 Acres
McKinney Corners II Collin County, TX 173.9 Acres
McKinney Corners III Collin County, TX 15.5 Acres
McKinney Corners IV Collin County, TX 31.3 Acres
McKinney Corners V Collin County, TX 9.7 Acres
Palm Desert Palm Desert, CA 315.2 Acres
Pantex Collin County, TX 182.5 Acres
Parkfield Denver, CO 410.7 Acres
Pioneer Crossings Austin, TX 1,448.0 Acres
Rasor Plano, TX 291.7 Acres
Rivertrails I Ft. Worth, TX 1.0 Lot
Santa Clarita Santa Clarita, CA 20.6 Acres
Scout Tarrant County, TX 546.0 Acres
Stagliano Farmers Branch, TX 3.2 Acres
Thompson Farmers Branch, TX 4.0 Acres
Tomlin Farmers Branch, TX 9.2 Acres

15
16
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

Property Location Acres/Lots
- ----------------- -------------- -------------

Valley Ranch Irving, TX 335.2 Acres
Valley Ranch III Irving, TX 12.5 Acres
Valwood Dallas, TX 280.0 Acres
Vineyards Grapevine, TX 15.8 Acres
Other (7 properties) Various 114.5 Acres

In January 1997, the Company sold a 3.0 acre tract of the Las Colinas I land
parcel in Las Colinas, Texas, for $1.2 million in cash. The Company recognized
a gain of $676,000 on the sale.

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

In February 1996, the Company entered into a contract to sell a 72.5 acre tract
of the 92.6 acre parcel of BP Las Colinas land in Las Colinas, Texas, for $12.9
million. The contract called for the sale to close in two phases. In July 1996,
the Company completed the first sale. In February 1997, the Company completed
the second sale of 40.2 acres for $8.0 million, of which $7.2 million was paid
in cash. Of the net cash proceeds of $6.9 million, $1.5 million was used to
payoff the debt secured by the BP Las Colinas land parcel, pay a $500,000
maturity fee to the lender, make a $1.5 million principal paydown on the loan
with the same lender, secured by the Parkfield land in Denver, Colorado and
$1.0 million was applied as a principal paydown on the term loan secured by the
Las Colinas I land. 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
bore interest at 12% per annum, with all accrued but unpaid interest and
principal due at maturity in August 1997. The Company recognized a gain of $3.4
million on such sale, deferring an additional $800,000 of gain until the
unsecured loan was paid in full. The loan was collected in full in August 1997
and the additional $800,000 gain was recognized. The Company paid a real estate
brokerage commission of $239,000 to Carmel Realty based on the $8.0 million
sales price of the property.

In March 1997, the Company purchased Katy Road land, a 130.6 acre parcel of
undeveloped land in Harris County, Texas, for $5.6 million. The Company paid
$1.6 million in cash with the seller providing purchase money financing for the
remaining $4.0 million of the purchase price. The financing bears interest at
9% per annum, requires quarterly payments of interest only and matures in March
2000. The Company paid a real estate brokerage commission of $209,000 to Carmel
Realty based on the $5.6 million purchase price of the property.

In April 1997, the Company purchased McKinney Corners I land, a 30.4 acre
parcel of undeveloped land in Collin County, Texas, for $3.5 million. The
Company paid $1.0 million in cash and obtained new

16
17
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

mortgage financing of $2.5 million. The mortgage bears interest at 14% per
annum, requires monthly payments of interest only and matures in April 1998.
The Company paid a real estate brokerage commission of $208,000 to Carmel
Realty based on the $3.5 million purchase price of the property.

Also in April 1997, the Company purchased McKinney Corners II land, a 173.9
acre parcel of undeveloped land in Collin County, Texas, for $5.9 million. The
Company paid $900,000 in cash and obtained new mortgage financing of $5.0
million as an advance under the term loan from the Las Colinas I lender. The
McKinney Corners II land was added as additional collateral on the term loan.
The Company paid a real estate brokerage commission of $343,000 to Carmel Realty
based on the $5.9 million purchase price of the property.

Further in April 1997, the Company sold a 3.1 acre tract of the Las Colinas I
land for $1.3 million in cash. The Company used $1.0 million of the net cash
proceeds to make a collateral escrow deposit in accordance with the provisions
of the Valley Ranch land term loan. The Company recognized a gain of $668,000
on the sale. The Company paid a real estate brokerage commission of $38,000 to
Carmel Realty based on the $1.3 million sales price of the property.

In May 1997, the Company purchased McKinney Corners III land, a 15.5 acre
parcel of undeveloped land in Collin County, Texas, for $896,000 in cash. The
Company paid a real estate brokerage commission of $54,000 to Carmel Realty
based on the $896,000 purchase price of the property.

Also in May 1997, the Company purchased Lacy Longhorn land, a 17.1 acre parcel
of undeveloped land in Farmers Branch, Texas, for $1.8 million. The Company
paid $200,000 in cash with the seller providing purchase money financing of the
remaining $1.6 million of the purchase price. The financing bore interest at
10% per annum, required monthly principal and interest payments of $400,000 and
matured in October 1997. The loan was paid off at maturity. The Company paid a
real estate brokerage commission of $105,000 to Carmel Realty based on the $1.8
million purchase price of the property.

Further in May 1997, the Company purchased Chase Oaks land, a 60.5 acre parcel
of undeveloped land in Plano, Texas, for $4.2 million. The Company paid $200,000
in cash with the seller providing purchase money financing of the remaining $4.0
million of the purchase price. The financing bears interest at 18% per annum,
requires monthly payments of interest only and matures in May 2000. The Company
paid a real estate brokerage commission of $250,000 to Carmel Realty based on
the $4.2 million purchase price of the property.

In May 1997, the Company purchased Pioneer Crossing land, a 1,448 acre parcel
of undeveloped land in Austin, Texas, for $21.5 million. The Company paid $5.4
million in cash with the seller providing purchase money financing of the
remaining $16.1 million of the purchase price. The financing bears interest at
9.5% per annum, requires monthly

17
18
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

payments of interest only and matures in May 2001. The Company paid a real
estate brokerage commission of $675,000 to Carmel Realty based on the $21.5
million purchase price of the property.

Also in May 1997, the Company financed a previously unencumbered 10.6 acre
tract of the BP Las Colinas land for $3.1 million. The mortgage bears interest
at 9.5% per annum, requires monthly payments of interest only and matures in
December 1999.

Further in May 1997, the Company obtained a second lien mortgage of $3.0
million secured by the Pin Oak land, from the limited partner in a partnership
that owns approximately 15.6% of the outstanding shares of the Company's Common
Stock. The mortgage bears interest at 12.5% per annum compounded monthly, and
matures in February 1999. In January 1998, the Palm Desert land was substituted
for the Pin Oak land as collateral for the mortgage.

In June 1997, the Company purchased Kamperman land, a 129.6 acre parcel of
undeveloped land in Collin County, Texas, for $5.0 million in cash. The Company
simultaneously sold a 99.7 acre tract for $4.5 million in cash. The Company
recognized a gain of $215,000 on the sale. The Company paid a real estate
brokerage commission of $152,000 to Carmel Realty based on the $5.0 million
purchase price of the property and $135,000 real estate brokerage commission to
Carmel Realty based on the $4.5 million sales price of the 99.7 tract.

Also in June 1997, the Company purchased Keller land, a 811.8 acre parcel of
undeveloped land in Tarrant County, Texas, for $6.3 million. The Company paid
$2.3 million in cash and obtained new mortgage financing of $4.0 million. The
mortgage bears interest at 12.95% per annum, requires monthly payments of
interest only and matures in June 1998. The Company paid a real estate
brokerage commission of $280,000 to Carmel Realty based on the $6.3 million
purchase price of the property.

Further in June 1997, the Company purchased McKinney Corners IV land, a 31.3
acre parcel of undeveloped land in Collin County, Texas, for $2.4 million. The
Company paid $400,000 in cash and obtained new mortgage financing of $2.0
million, as an advance under the term loan from the Las Colinas I lender. The
McKinney Corners IV land was added as additional collateral on the term loan.
The Company paid a real estate brokerage commission of $151,000 to Carmel Realty
based on the $2.4 million purchase price of the property.

In June 1997, the Company purchased Pantex land, a 182.5 acre parcel of
undeveloped land in Collin County, Texas, for $5.4 million. The Company paid
$900,000 in cash with the seller providing purchase money financing of the
remaining $4.5 million of the purchase price. The financing bears interest at
10.5% per annum, requires semiannual payments of interest only and matures in
December 2000. The Company paid a real estate brokerage commission of $321,000
to Carmel Realty based on the $5.4 million purchase price of the property.

18
19
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

Also in June 1997, the Company obtained a second lien mortgage of $3.0 million
secured by the Lewisville land, from the limited partner in a partnership that
owns approximately 15.6% of the outstanding shares of the Company's Common
Stock. The mortgage bears interest at 12.5% per annum, compounded monthly and
matures in February 1999.

Further in June 1997, the Company refinanced the Valwood land for $15.8 million.
The mortgage bears interest at the prime rate plus 4.5%, currently 13% per
annum, requires monthly payments of interest only and matures in June 1998. The
Company received net financing proceeds of $4.9 million, after the payoff of
$6.2 million in existing mortgage debt secured by the property, an additional
$3.0 million being applied to payoff the Jefferies land loan and $1.4 million
being applied to paydown the Las Colinas I land term loan.

In July 1997, the Company sold a 3.9 acre tract of the Las Colinas I land in
Las Colinas, Texas, for $1.6 million in cash. In accordance with the provisions
of the term loan secured by such parcel, the Company applied the net cash
proceeds of $1.4 million, to paydown the term loan in exchange for the lender's
release of its collateral interest in such land. The Company recognized a gain
of $771,000 on the sale. The Company paid a real estate brokerage commission of
$48,000 to Carmel Realty based on the $1.6 million sales price of the property.

Also in July 1997, the Company purchased Dowdy and McKinney Corners V land, a
total of 174.7 acres of undeveloped land in Collin County, Texas, for $2.9
million. The Company obtained new mortgage financing of $3.3 million as an
advance under the term loan from the Las Colinas I lender. The Dowdy, McKinney
Corners V and McKinney Corners III land were added as additional collateral on
the term loan. The Company paid a real estate brokerage commission of $173,000
to Carmel Realty based on the $2.9 million purchase price of the properties.

Further in July 1997, the Company purchased Perkins land, a 645.4 acre parcel of
undeveloped land in Collin County, Texas, for $5.8 million. The Company paid
$3.3 million in cash and assumed the existing mortgage of $2.5 million. The
mortgage bears interest at 8.5% per annum, requires quarterly payments of
interest only and matures in March 2002. The Company paid a real estate
brokerage commission of $224,000 to Carmel Realty based on the $5.8 million
purchase price of the property.

In July 1997, the Company purchased LBJ land, a 10.4 acre parcel of undeveloped
land in Dallas County, Texas, for $2.3 million. The Company paid $300,000 in
cash with the seller providing purchase money financing of the remaining $2.0
million of the purchase price. The financing bears interest at 18% per annum,
requires quarterly payments of interest only and matures in March 1998. The
Company paid a real estate brokerage commission of $141,000 to Carmel Realty
based on the $2.3 million purchase price.

19
20

ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

Also in July 1997, the Company obtained a third lien mortgage of $2.0 million
secured by the Pin Oak land, from the limited partner in a partnership that
owns approximately 15.6% of the outstanding shares of the Company's Common
Stock. The mortgage bore interest at 12.5% per annum, compounded monthly and
matured in February 1998. the mortgage was paid in full in January 1998.

In September 1997, the Company sold the Mopac Building, a 400,000 square foot
office building, in St. Louis, Missouri, for $1.0 million in cash. The Company
received net cash of $1.0 million after the payment of various closing costs
associated with the sale. In accordance with the provisions of the Las Colinas
I term loan, the Company applied $350,000 of the net cash received to paydown
the term loan in exchange for the lender's release of its collateral interest
in the property. The Company recognized a gain of $481,000 on the sale.

Also in September 1997, the Company sold a 2.6 acre tract of the Las Colinas I
land in Las Colinas, Texas, for $1.2 million in cash. In accordance with the
provisions of the term loan secured by such parcel, the Company applied the net
cash proceeds of $1.0 million, to paydown the term loan in exchange for the
lender's release of its collateral interest in such land. The Company paid a
real estate brokerage commission of $35,000 to Carmel Realty based on the $1.2
million sales price of the property. The Company recognized a gain of $578,000
on the sale.

Further in September 1997, the Company sold three tracts of Valley Ranch land
totaling 24.0 acres, for $1.6 million in cash. The net cash proceeds of $1.2
million were deposited in a certificate of deposit for the benefit of the
lender, in accordance with the term loan secured by such land. The certificate
of deposit was released to the lender in December 1997, in conjunction with the
payoff of the loan. The Company paid a real estate brokerage commission of
$46,000 to Carmel Realty based on the $1.6 million sales price of the property.
The Company recognized a gain of $567,000 on the sale.

In September 1997, the Company refinanced the Las Colinas I land Double O tract
for $7.3 million. The Company received net financing proceeds of $2.1 million,
after the payoff of existing mortgage debt of $5.0 million and the payment of
various closing costs associated with the financing. The new mortgage bears
interest at the prime rate plus 4.5%, currently 13% per annum, requires monthly
payments of interest only and matures in October 1998. The Company paid a
mortgage brokerage and equity refinancing fee of $73,000 to BCM based on the new
$7.3 million mortgage.

20
21
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

their general and limited partner interests into Class A limited partner units
in the partnership. The Class A units have an agreed value of $1.00 per unit
and are entitled to a fixed preferred return of 10% per annum, paid quarterly.
The Class A units may be converted into a total of 360,000 shares of the
Company's Series F Cumulative Convertible Preferred Stock at any time after the
first but no later than the sixth anniversary of the closing, on the basis of
one share of Series F Preferred Stock for each ten Class A units. See ITEM 5.
"MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."

Also in October 1997, the Company purchased Palm Desert land, a 315.2 acre
parcel of undeveloped land in Palm Desert, California, for $11.2 million. The
Company paid $3.8 million in cash and assumed the existing mortgage of $7.4
million. The mortgage bears interest at 9% per annum, requires monthly
principal and interest payments of $76,000 and matures in February 2002. The
Company paid a real estate brokerage commission of $396,000 to Carmel Realty
based on the $11.2 million purchase price of the property.

Further in October 1997, the Company purchased Thompson land, a 4.0 acre parcel
of undeveloped land in Dallas County, Texas, for $869,000 in cash. The Company
paid a real estate brokerage commission of $52,000 to Carmel Realty based on
the $869,000 purchase price of the property.

In October 1997, the Company purchased Santa Clarita land, a 20.6 acre parcel of
undeveloped land, in Santa Clarita, California, for $1.3 million. The Company
obtained new mortgage financing of $1.3 million as an advance under the term
loan from the Las Colinas I lender. The Santa Clarita land was added as
additional collateral on the term loan. The Company paid a real estate brokerage
commission of $78,000 to Carmel Realty based on the $1.3 million purchase price
of the property.

Also in October 1997, the Company purchased Tomlin land, a 9.2 acre parcel of
undeveloped land in Dallas County, Texas, for $1.7 million in cash. The Company
paid a real estate brokerage commission of $100,000 to Carmel Realty based on
the $1.7 million purchase price of the property.

Further in October 1997, the Company purchased Rasor land, a 378.2 acre parcel
of undeveloped land in Plano, Texas, for $14.4 million. The Company paid $5.1
million in cash, obtained new mortgage financing of $3.5 million as an advance
from the Las Colinas I lender, and exchanged its Perkins land, a 645.4 acre
parcel of undeveloped land in Collin County, Texas, for the remainder of the
purchase price. The Company simultaneously sold an 86.5 acre tract of Rasor
land, for $3.8 million in cash, the Company received net cash of $3.5 million
after the payment of various closing costs associated with the sale. The Rasor
land was added as additional collateral on the term loan. The Company paid a
real estate brokerage commission of $268,000 to Carmel Realty based on the $14.4
million purchase price of the property and a real estate brokerage commission of
$115,000 to Carmel Realty based on the $3.8 million sales price of the 86.5 acre
tract. The Company recognized a gain of $212,000 on the sale of the 86.5 acre
tract.

21
22

ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

In October 1997, a newly formed partnership, of which the Company is the
general partner and Class B limited partner, purchased the Vineyards land, a
15.8 acre parcel of undeveloped land in Grapevine, Texas, for $4.5 million. The
partnership paid $800,000 in cash, assumed the existing mortgage of $2.5
million and issued to the seller 1.1 million Class A limited partner units in
the partnership as additional consideration. The Class A units have an agreed
value of $1.00 per unit and are entitled to a fixed preferred return of 10% per
annum, paid quarterly. The Class A units may be exchanged for either shares of
the Company's Series G Cumulative Convertible Preferred Stock on or after the
second anniversary of the closing at the rate of one share of Series G
Preferred Stock for each 100 Class A unit exchanged, or on or after the third
anniversary of the closing date, for shares of the Company's Common Stock. The
Class A units are exchangeable for shares of the Company's Common Stock at a
rate of $1.00 per Class A unit plus any outstanding preferred return divided by
.9 times the simple average of the daily closing price of the Company's Common
Stock for the 20 days preceding the date of conversion. The mortgage bears
interest at 12.95% per annum requires quarterly payments of interest only and
matures in June 1998. See ITEM 5. "MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS."

Also in October 1997, the Company purchased Dalho land, a 3.4 acre parcel of
undeveloped land in Farmers Branch, Texas, for $300,000 in cash. The Company
paid a real estate brokerage commission of $18,000 to Carmel Realty based on
the $300,000 purchase price of the property.

Further in October 1997, the Company sold a 11.6 acre tract of Valley Ranch
land for $1.2 million in cash. The net cash proceeds of $990,000, after the
payment of various closing costs associated with the sale, were deposited in a
certificate of deposit for the benefit of the lender, in accordance with the
term loan secured by such land. The certificate of deposit was released to
lender in December 1997, in conjunction with the payoff of the loan. The
Company paid a real estate brokerage commission of $35,000 to Carmel Realty
based on the $1.2 million sales price of the property. The Company recognized a
gain of $629,000 on the sale.

In October 1997, the Company refinanced the Denver Merchandise Mart for $25.0
million. The Company received net financing proceeds of $10.2 million, after
the payoff of $14.8 million in existing mortgage debt and the payment of
various closing costs associated with the financing. The mortgage bears
interest at 8.3% per annum, requires monthly principal and interest payments of
$198,000 and matures in October 2012. The Company paid a mortgage and equity
refinancing fee of $230,000 to BCM based on the new $25.0 million mortgage.

22
23
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

certificate of deposit was released to lender in December 1997, in conjunction
with the payoff of the loan. The Company paid a real estate brokerage
commission of $17,300 to Carmel Realty based on the $577,000 sales price of the
property. The Company recognized a gain of $216,000 on the sale.

Also in November 1997, the Company purchased Hollywood Casino land, a 51.7 acre
parcel of undeveloped land, in Farmers Branch, Texas, for $11.1 million. The
Company paid $3.6 million in cash and obtained new mortgage financing of $7.5
million. The mortgage bears interest at 9.25% per annum, requires monthly
payments of interest only and matures in December 1999. The Company paid a real
estate brokerage commission of $394,000 to Carmel Realty based on the $11.1
million purchase price of the property.

Further in November 1997, the Company obtained mortgage financing of $5.4
million secured by 33.9 acres of previously unencumbered Valwood land, Lacy
Longhorn land, Thompson land, and Tomlin land. The Company received net
financing proceeds of $4.8 million after the payment of various closing costs
associated with the financing. The mortgage bears interest at 13.5% per annum,
requires monthly payments of principal and interest and matures in November
2007. The Company paid a mortgage brokerage and equity refinancing fee of
$54,000 to BCM based on the $5.4 million mortgage.

In December 1997, the Company sold a 5.1 acre tract of Valley Ranch land, for
$430,000 in cash. The net cash proceeds of $353,000, after the payment of
various closing costs associated with the sale, were deposited in a certificate
of deposit for the benefit of the lender, in accordance with the term loan
secured by such land. The certificate of deposit was released to lender in
December 1997, in conjunction with the payoff of the loan. The Company paid a
real estate brokerage commission of $13,000 to Carmel Realty based on the
$430,000 sales price of the property. The Company recognized a gain of $203,000
on the sale.

Also in December 1997, the Company purchased Valley Ranch III land, a 12.5 acre
parcel of undeveloped land in Irving, Texas, for $2.1 million. The Company paid
$527,000 in cash with the seller providing purchase money financing of the
remaining $1.6 million of the purchase price. The financing bears interest at
10.0% per annum, requires the payment of principal and interest at maturity and
matures in December 1998. The Company paid a real estate brokerage commission
of $126,000 to Carmel Realty based on the $2.1 million purchase price of the
property.

Further in December 1997, the Company purchased Stagliano land, a 3.2 acre
parcel of undeveloped land in Farmers Branch, Texas, for $500,000 in cash. The
Company paid a real estate brokerage commission of $30,000 to Carmel Realty
based on the $500,000 purchase price of the property.

23
24
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

exchange for the lender's release of its collateral interest in such land. The
Company paid a real estate brokerage commission of $36,000 to Carmel Realty
based on the $1.2 million sales price of the property. The Company recognized a
gain of $372,000 on the sale.

Also in December 1997, the Company sold two parcels of Valley Ranch land,
totaling 25.1 acres, for $3.3 million. The Company received net cash proceeds
of $2.1 million and provided an additional $891,000 in purchase money
financing. The purchase money financing bore interest at 10.0% per annum and
matured in January 1998. The Company received a $624,000 paydown on the
purchase money financing in January with the remainder being deferred until a
zoning issue is resolved. In accordance with the provisions of the term loan
secured by such parcel, the Company applied the net cash proceeds of $2.1
million to payoff the term loan secured by such parcel, the lender releasing
its collateral interest in the remaining Valley Ranch land. The Company paid a
real estate brokerage commission of $98,000 to Carmel Realty based on the $3.3
million sales price of the property. The Company recognized a gain of $1.8
million on the sale, and deferred an additional $267,000 until the zoning issue
is resolved.

Further in December 1997, the Company sold Park Plaza, a 105,507 square foot
shopping center in Manitowoc, Wisconsin, for $4.9 million in cash. The Company
received net cash of $1.6 million, after the payoff of $3.1 million in existing
mortgage debt and the payment of various closing costs associated with the
sale. The Company paid a real estate brokerage commission of $147,000 to Carmel
Realty based on the $4.9 million sales price of the property. The Company
recognized a gain of $105,000 on the sale.

In December 1997, the Company sold Pin Oak land, a 567.6 acre parcel of
undeveloped land in Houston, Texas, for $11.4 million. The Company received net
cash proceeds of $3.5 million, and provided an additional $6.9 million in short
term purchase money financing that was paid in full in January 1998. On the
payoff of the purchase money financing the Company received net cash of $1.5
million after the payoff of $5.2 million in underlying mortgage debt and the
payment of various closing costs associated with the sale. The Company paid a
real estate brokerage commission of $342,000 to Carmel Realty based on the
$11.4 million sales price of the property. The Company recognized a gain of
$3.7 million on the sale.

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,
1996, 188 of the residential lots had been sold. During 1997, 9 additional lots
were sold for an aggregate gain of $17,000. At December 31, 1997, one lot
remained to be sold.

In November 1991, the Company transferred the Porticos Apartments to IORI, an
equity investee, in satisfaction of the Company's then $3.6 million obligation
to IORI. The Company recorded a deferred gain of $3.0 million on the transfer.
In June 1997, IORI sold the property, and accordingly the Company recognized
such previously deferred gain.

24
25
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

In January 1998, the Company purchased El Dorado Parkway land, a 8.5 acre
parcel of undeveloped land in McKinney, Texas, for $952,000. The Company paid
$307,000 in cash and assumed the existing mortgage of $164,000, with the seller
providing purchase money financing of the remaining $481,000 of the purchase
price. The mortgage bears interest at 10% per annum, requires semiannual
payments of principal and interest of $18,000 and matures in May 2005. The
financing bears interest at 8% per annum, requires semiannual principal and
interest payments of $67,000 and matures in January 2002. The Company paid a
real estate brokerage commission of $57,000 to Carmel Realty based on the
$952,000 purchase price of the property.

Also in January 1998, the Company purchased Valley Ranch IV land, a 12.3 acre
parcel of undeveloped land in Irving, Texas, for $2.0 million. The Company paid
$500,000 in cash with the seller providing purchase money financing of the
remaining $1.5 million of the purchase price. The financing bears interest at
10% per annum, requires quarterly payments of interest only and matures in
December 2000. The Company paid a real estate brokerage commission of $123,000
to Carmel Realty based on the $2.0 million purchase price of the property.

Further in January 1998, the Company purchased JHL Connell land, a 7.7 acre
parcel of undeveloped land in Carrollton, Texas, for $1.3 million in cash. The
Company paid a real estate brokerage commission of $39,000 to Carmel Realty
based on the $1.3 million purchase price of the property.

In February 1998, the Company purchased Scoggins land, a 314.5 acre parcel of
undeveloped land in Tarrant County, Texas, for $3.0 million. The Company paid
$1.5 million in cash and obtained new mortgage financing of $1.5 million. The
mortgage bears interest at 14% per annum, requires quarterly payments of
interest only, requires a principal paydown of $300,000 in May 1998, and
matures in February 1999. The Company paid a real estate brokerage commission
of $91,000 to Carmel Realty based on the $3.0 million purchase price of the
property.

Also in February 1998, the Company purchased Bonneau land, a 8.4 acre parcel of
undeveloped land in Dallas County, Texas, for $1.0 million. The Company obtained
new mortgage financing of $1.0 million. The mortgage bears interest at 18.5% per
annum with the principal and interest due at maturity in February 1999. The
Company's JHL Connell land is pledged as additional collateral for this loan.
The Company paid a real estate brokerage commission of $30,000 to Carmel Realty
based on the $1.0 million purchase price.

Further in February 1998, the Company financed the previously unencumbered
Kamperman land for $1.6 million. The Company received net financing proceeds of
$1.5 million after the payment of various closing costs associated with the
financing. The mortgage bears interest at 9.0%, requires monthly payments of
interest only and matures in February 2000. The Company paid a mortgage
brokerage and equity refinancing fee of $16,000 to BCM based on the $1.6
million mortgage.

25
26
ITEM 2. PROPERTIES (Continued)

Real Estate (Continued)

In February 1998, the Company refinanced the Vineyards land for $3.4 million.
The Company received net refinancing proceeds of $2.9 million, after the payoff
of existing mortgage debt of $540,000. The note bears interest at 9.0% per
annum, requires monthly payments of interest only and matures in February 2000.
The Company paid a mortgage brokerage and equity refinancing fee of $34,000 to
BCM based on the new $3.4 million mortgage.

Also in February 1998, the Company financed the unencumbered Valley Ranch land
for $4.3 million. The Company received net financing proceeds of $4.1 million
after the payment of various closing costs associated with the financing. The
note bears interest at 9.0% per annum, requires monthly payments of interest
mortgage and matures in February 2000. The Company paid a mortgage brokerage and
equity refinancing fee of $43,000 to BCM based on the $4.3 million mortgage.

In March 1998, the Company financed the previously unencumbered Stagliano and
Dalho land for $800,000 with the lender on the Bonneau land, described above.
The mortgage bears interest at 18.5% per annum with principal and interest due
at maturity in February 1999. The Company's JHL Connell land is also pledged as
additional collateral for this loan. The Company paid a mortgage brokerage and
equity refinancing fee of $8,000 to BCM based on the $800,000 mortgage.

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 may acquire 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, 1997 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, 1997, the obligors on $1.3 million or 4% of the Company's
mortgage notes receivable portfolio were affiliates of the Company. Also at
that date, $23.2 million or 71% of the Company's mortgage notes receivable
portfolio were in default.

26
27
ITEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

The following table sets forth the percentages (based on the outstanding
mortgage note balance at December 31, 1997), by both property type and
geographic region, of the properties that serve as collateral for the Company's
mortgage notes receivable at December 31, 1997. 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 ................. -- % 71.3% 71.3%
Southeast ................ .2 .3 .5
Southwest ................ 4.3 23.9 28.2
--- ---- ------
4.5% 95.5% 100.0%

A summary of the activity in the Company's mortgage notes receivable portfolio
during 1997 is as follows:

Loans in mortgage notes receivable portfolio at
January 1, 1997...................................... 13*
Loans funded ........................................... 4
Loans paid in full...................................... 3
Loans sold.............................................. 2
Loan foreclosed......................................... 1
----
Loans in mortgage notes receivable portfolio
at December 31, 1997................................. 11*
====

- ----------------
* Includes a mortgage note receivable collateralized by three condominium
mortgage loans in 1996 and two condominium mortgage loans in 1997.

During 1997, the Company collected $2.6 million in interest and $4.5 million in
principal on its mortgage notes receivable and sold two mortgage notes
receivable for $17.0 million. The Company plans, for the foreseeable future, to
hold, to the extent its liquidity permits, rather than sell in the secondary
market, the remainder of 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.

27
28
ITEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

The following discussion briefly describes the events that affected previously
funded first mortgage loans during 1997.

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 recognized a gain of $171,000 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 otherwise make a first mortgage loan.

The following discussion briefly describes the wraparound mortgage loans funded
during 1997 and the events that affected previously funded wraparound mortgage
loans during 1997.

In August 1990, the Company obtained the Continental Hotel and Casino in Las
Vegas, Nevada, through foreclosure subject to first and second lien mortgages
totaling $10.0 million. In June 1992, the Company sold the hotel and casino for,
among other consideration, a $22.0 million wraparound mortgage note receivable.
In March 1997, the wraparound note was modified and extended in exchange for,
among other things, the borrower's commitment 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
also pledged 1,500,000 shares of common stock in Crowne Ventures, Inc., as
additional collateral. The borrower has not made the required note payments
since April 1997, nor the required improvements. In December 1997, the borrower
filed for bankruptcy protection. In February 1998, a hearing was held to allow
the Company to foreclose on the hotel and casino. At the hearing, the court
allowed the borrower 90 days to submit a reorganization plan and beginning March
2, 1998 required the borrower to make monthly payments of $175,000 to the
Company. The Company received the first such payment on March 2, 1998. If the

28
29
ITEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

Company is allowed to foreclose on the property it does not expect to incur a
loss as the fair value of the property exceeds the carrying value of the
Company's note receivable.

In September 1997, the Company sold its $16.3 million wraparound mortgage note
receivable secured by the Las Vegas Plaza Shopping Center in Las Vegas, Nevada,
for $15.0 million. The Company received net cash of $5.5 million after the
payoff of $9.2 million in underlying debt and the payment of various closing
costs associated with the sale. The Company incurred no loss on the sale in
excess of the reserve previously established.

In December 1997, the Company sold the Pin Oak land, in conjunction with the
sale, as more fully described under "Real Estate," above. The Company provided
$6.9 million in short term purchase money financing. The note bore interest at
2% of the unpaid purchase price and matured in January 1998. The note was paid
in full at maturity.

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
during 1997 and the events that affected previously funded junior mortgage
notes during 1997.

At December 31, 1996, the Company held a junior mortgage note receivable
secured by the Williamsburg Hospitality House in Williamsburg, Virginia, that
is subject to a first mortgage of $12.0 million. The Company's junior mortgage
had matured April 1, 1996. In September 1997, the Company foreclosed on its
$8.9 million junior mortgage. The Company obtained the property through
foreclosure subject to the first mortgage of $12.0 million. The Company
incurred no loss on foreclosure as the fair value of the property exceeded the
carrying value of the Company's mortgage note receivable and assumed mortgage
debt. The property is included in real estate held for investment in the
accompanying Consolidated Balance Sheet.

In May 1997, the $3.7 million note receivable secured by an apartment complex
in Merrillville, Indiana, owned by a subsidiary of Davister Corp., a general
partner in a partnership that owns approximately 15.6% of the Company's
outstanding shares of Common Stock, was paid in full. See ITEM 13. "CERTAIN
RELATIONSHIPS AND TRANSACTIONS."

In December 1997, the Company sold 25.1 acres of Valley Ranch land, as more
fully described under "Real Estate," above. In conjunction with the sale, the
Company provided $891,000 of purchase money financing. The purchase money
financing bore interest at 10.0% per annum and

29
30
ITEM 2. PROPERTIES (Continued)

Mortgage Loans (Continued)

matured in January 1998. The Company received a $624,000 paydown on the
purchase money financing in January with the remainder being deferred until a
zoning issue is resolved.

Investments in Real Estate Investment Trusts and Real Estate
Partnerships

Real estate entities. The Company's investment in real estate entities includes
(i) equity securities of three publicly traded Real Estate Investment Trusts
(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
the Company's 96% limited partner interest in SAMLP 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. Randall M. Paulson, Executive Vice
President of the Company, serves as the sole director and 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 December 31, 1997 totaled
$21.6 million, and its cost with respect to units of limited partner interest
in NRLP totaled $23.3 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 $38.3 million at December 31, 1997 and the
aggregate market value of such equity securities was $134.6 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, 1997
financial statements of each such entity was $69.8 million and $198.9 million,
respectively. See ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

The Company's Board of Directors has authorized the expenditure by the Company
of up to an aggregate of $35.0 million to acquire, in open market purchases,
units of NRLP and shares of the REITs, excluding private purchase transactions
which were separately authorized. As of December 31, 1997, the Company had
expended $4.0 million to acquire 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, 1997, 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.

30
31
ITEM 2. PROPERTIES (Continued)

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

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, 1997, 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, 1997 December 31, 1997 December 31, 1997 December 31, 1997
- -------- ----------------- ----------------- ----------------- -----------------

NRLP ..... 54.4% $11,479 $ * $ 83,018
CMET ..... 40.6 14,939 35,745 25,733
IORI ..... 29.7 3,511 7,439 5,176
TCI ...... 30.6 8,378 26,652 20,664
------- --------
$38,307 $134,591
======= ========

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

* At December 31, 1997, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity, however, was $198.9
million. Revaluation equity is defined as the difference between the
estimated current 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 real estate as reported in NRLP's Annual Report on Form 10-K for
the year ended December 31, 1997.

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

31
32
ITEM 2. PROPERTIES (Continued)

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

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. NRLP is the sole limited partner of NOLP and owns 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. Gene E. Phillips and SAMI are the general partners of SAMLP. At
December 31, 1997, the Company owned approximately 54% of the outstanding
limited partner units of NRLP.

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

32
33
ITEM 2. PROPERTIES (Continued)

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

the Partnership may incur either in the aggregate or with respect to any
particular property or other investment. At December 31, 1997, the aggregate
loan-to-value ratio of the Partnership's real estate portfolio was 43.4%
computed on the basis of the ratio of total property-related debt to aggregate
appraised values.

At December 31, 1997, NRLP owned 79 properties located in 22 states. These
properties consisted of 66 apartment complexes comprising 16,538 units, five
office buildings with an aggregate 367,271 square feet and eight shopping
centers with an aggregate of 1.1 million square feet.

For the year ended December 31, 1997, the Partnership reported net income of
$8.7 million compared to a net loss of $375,000 for the year ended December 31,
1996. The Partnership had income from operations, prior to gains on sale of
real estate of $362,000 for the year ended December 31, 1997 compared to a loss
of $436,000 for the year ended December 31, 1996. The improvement in the
Partnership's 1997 income from operations is due to an average 3.0% increase in
average rental rates at the Partnership's apartment complexes and an average
1.0% increase in rental rates at the Partnership's commercial properties
coupled with an average 1.0% increase in occupancy at the Partnership's
apartment complexes and an average 3.0% increase at the Partnership's
commercial properties.

The Partnership's cash flow from property operations (rents collected less
payments for property operations) improved from $43.7 million in 1996 to $49.4
million in 1997. At December 31, 1997, the Partnership had total assets of
$279.6 million, which consisted of $211.4 million of real estate held for
investment, $25.0 million of notes and interest receivable, $26.0 million of
investments in equity securities and other assets and $17.2 million in cash and
cash equivalents.

The Partnership has paid quarterly distributions to unitholders since the
fourth quarter of 1993. In 1997, the Company received a total of $1.4 million
in distributions from the Partnership and accrued an additional $5.5 million
that was received in January 1998.

The Partnership, SAMLP and Mr. Phillips were among the defendants in a class
action lawsuit arising out of the formation of the Partnership. An agreement
settling such lawsuit (the "Settlement Agreement") 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

33
34
ITEM 2. PROPERTIES (Continued)

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

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, the
individual general partners, 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. SAMI, the managing general partner of SAMLP, has
calculated the fair value of such Redeemable General Partner Interest to be
$49.6 million at December 31, 1997, before reduction for the principal balance
($4.2 million at December 31, 1997) and accrued interest ($7.2 million at
December 31, 1997) on the note receivable from SAMLP for its original capital
contribution to the partnership.

In January 1995, NRLP, SAMLP, William H. Elliott and the NRLP oversight
committee executed an Implementation Agreement which provided for the
nomination of an entity controlled by Mr. Elliott as successor general partner
and for the resolution of all related matters under the Settlement Agreement.
In February 1996, the parties to the Implementation Agreement executed an
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 plaintiff class members. In April 1997, the Supervising Judge entered an
order amending the September 1996 order, approving the formal notice and
setting a hearing on the Amended and Restated Implementation Agreement for June
1997. A notice was sent to all plaintiff class members and NRLP unitholders in
April 1997 and the hearing was held in June 1997. In September 1997, the
Supervising Judge rendered a Statement of Decision in which he declined to
approve the Amended and Restated Implementation Agreement. As a result of the
Statement of Decision, the original Settlement Agreement remains in full force
and effect and all of the provisions of the Amended and Restated Implementation
Agreement have been voided.

On December 15, 1997, NRLP, SAMLP, the NRLP oversight committee, Joseph B.
Moorman, Invenex and the Counsel for the plaintiff class members

34
35
ITEM 2. PROPERTIES (Continued)

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

executed an Agreement for Establishment of Class Distribution Fund and Election
of Successor General Partner (the "Resolution Agreement") which provides for
the nomination of an entity affiliated with SAMLP to be the successor general
partner of the Partnership, for the establishment of a fund for the benefit of
the plaintiff class members consisting of cash and properties owned by the
Partnership and for the resolution of all related matters under the Settlement
Agreement.

The Resolution Agreement was submitted to the Supervising Judge and on February
11, 1998, the Supervising Judge entered an order granting preliminary approval
of the Resolution Agreement and scheduled a hearing to be held on April 24,
1998, for consideration of preliminary approval of a business plan for the
operation of the entity which will receive the cash and properties and to
consider a form of notice to be distributed to the plaintiff class members
describing the Resolution Agreement and the business plan.

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.

Upon approval by the NRLP 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 1998.

SAMLP has agreed to waive its rights under the Settlement Agreement to receive
any payment from the Partnership of the fees it is entitled to receive upon the
election of a successor general partner. As of December 31, 1997, these fees
were calculated to be $49.6 million.

Upon final approval by the Supervising Judge, the Partnership will transfer
$1.9 million in cash and five shopping centers to the new entity which will be
owned by the plaintiff class members and managed for their benefit by a court
approved board. This fund is being established in order to provide additional
benefits to the plaintiff class members.

Upon the election and taking office of the successor general partner and the
transfer of the cash and properties to the fund for the benefit of the
plaintiff class members, the original Settlement Agreement and the NRLP
oversight committee shall be terminated.

In September 1997, one of the original class action defendants, Robert A.
McNeil, filed motions to (i) be installed as receiver for the Partnership and
(ii) disband the NRLP oversight committee. A hearing on the motion was set for
February 5, 1998. However, the Supervising Judge continued the hearing to April
24, 1998.

35
36
ITEM 2. PROPERTIES (Continued)

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

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. At December 31, 1997, CMET
owned 57 income producing properties located in 14 states consisting of 34
apartment complexes comprising of 6,173 units, ten office buildings with an
aggregate of 1.2 million square feet, 11 industrial warehouses with an
aggregate of 1.6 million square feet and two shopping centers with an aggregate
of 247,196 square feet. 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, 1997, CMET reported a net income of $4.2
million as compared with a net income of $8.7 million for the year ended
December 31, 1996. CMET's 1997 net income includes gains on the sale of real
estate of $8.2 million, where as its 1996 net income included gains on the sale
of real estate and marketable equity securities of $10.1 million and an
extraordinary gain of $812,000. CMET's cash flow from property operations
improved from $19.3 million in 1996 to $23.7 million in 1997. At December 31,
1997, CMET had total assets of $299.4 million, which consisted of $250.1
million of real estate held for investment, $11.6 million of real estate held
for sale, $3.6 million of notes and interest receivable, $31.0 million of
investments in partnerships and other assets and $3.1 million in cash and cash
equivalents.

CMET has paid quarterly distributions since the first quarter of 1993. The
Company received a total of $885,000 in distributions from CMET in 1997.

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. At December 31, 1997, IORI owned 14 income producing
properties located in five states. These properties consisted of four apartment
complexes comprising 654 units and ten office buildings with an aggregate of
611,009 square feet. IORI holds one mortgage note receivable which is secured
by a shopping center in the Midwest region.

36
37
ITEM 2. PROPERTIES (Continued)

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

For the year ended December 31, 1997, IORI reported net income of $3.3 million
as compared with a net loss of $568,000 for the year ended December 31, 1996.
IORI's net income in 1997, is attributable to $4.0 million of gains on sale of
real estate. IORI's cash flow from property operations increased to $6.5
million in 1997 from $3.5 million in 1996. At December 31, 1997, IORI had total
assets of $90.3 million, which consisted of $81.9 million in real estate held
for investment, $2.0 million in notes and interest receivable, $5.3 million in
investments in partnerships and other assets and $1.1 million in cash and cash
equivalents.

IORI has paid quarterly dividends since the first quarter of 1993. The Company
received a total of $184,000 in dividends from IORI in 1997.

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. AT December 31, 1997, TCI owned 56 income
producing properties located in 14 states. These properties consisted of 28
apartment complexes comprising 5,174 units, 14 office buildings with an
aggregate of 1.3 million square feet, 7 industrial warehouses with an aggregate
of 1.7 million square feet 6 shopping centers with an aggregate of 857,750
square feet and one hotel with 60 rooms. 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.

For the year ended December 31, 1997, TCI reported net income of $12.6 million
as compared with a net loss of $7.8 million for the year ended December 31,
1996. TCI's net income for 1997 includes gains on the sale of real estate of
$21.4 million whereas its net loss for 1996 included gains on the sale of real
estate of $1.6 million and extraordinary gains of $256,000. TCI's cash flow
from property operations increased to $16.2 million in 1997 as compared to
$12.7 million in 1996. At December 31, 1997, TCI had total assets of $319.5
million, which consisted of $270.2 million in real estate held for investment,
$5.0 million in real estate held for sale, $15.6 million in investments in real
estate entities, $4.0 million in notes and interest receivable and other assets
and $24.7 million in cash and cash equivalents. At December 31, 1997, TCI owned
341,500 shares of IORI's common stock, approximately 22.5% of IORI's shares
then outstanding.

TCI has paid quarterly dividends since the fourth quarter of 1995. The Company
received $333,000 in dividends from TCI in 1997 and accrued an additional $1.2
million that was received in January 1998.

37
38
ITEM 2. PROPERTIES (Continued)

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

SAMLP. As discussed in more detail under "Real Estate" above, the Company owns
a 96% limited partner interest in 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 a limited partner in a partnership
that owns approximately 15.6% of the Company's outstanding shares of Common
Stock, to acquire 287 developed residential lots adjacent to the Company's
other residential lots in Fort Worth, Texas. The partnership agreement
designates the Company as managing general partner. The partnership agreement
also provides each of the partners with a guaranteed 10% return on their
respective investments. Through December 31, 1996, 197 residential lots had
been sold. In 1997, an additional 17 lots were sold and at December 31, 1997,
73 lots remained to be sold. During 1997, each partner received $21,000 in
return of capital distributions and $12,000 in profit distributions.

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. ("Campbell,
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 payments of interest
only and matures April 2000. In January 1997, the Company exercised its option
to purchase an additional 28% general partner interest in Campbell, Ltd. The
purchase price was $300,000 in cash and a $750,000 note, which bears interest
at 8% per annum, requires monthly payments of interest only and matures in
April 2000. In July 1997, the Company purchased an additional 9% general
partner interest in Campbell, Ltd. for $868,000 in cash.

Highway 380/Preston Partners, Ltd. In June 1996, a newly formed limited
partnership, of which the Company is the general partner, purchased 580 acres
of undeveloped land in Collin County, Texas. In April 1997, the partnership
sold a 35.0 acre tract for $1.3 million in cash. The net

38
39
ITEM 2. PROPERTIES (Continued)

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

sales proceeds of $1.2 million were distributed to the limited partner in
accordance with the partnership agreement. The partnership recognized a gain of
$884,000 on the sale. In July 1997, the partnership sold a 24.6 acre tract for
$800,000 in cash. In accordance with the terms of the term loan secured by such
property, $197,000 of the net sales proceeds were used to paydown such term
loan. The remaining $545,000 was distributed to the limited partner in
accordance with the partnership agreement. The partnership recognized a gain of
$497,000 on the sale. In September 1997, the partnership sold a 77.2 acre tract
for $1.5 million in cash. In accordance with the terms of the term loan secured
by such property, the net sales proceeds were used to paydown such term loan.
The partnership recognized a gain of $704,000 on the sale. In October 1997, the
partnership sold a 96.5 acre tract for $1.7 million in cash. In accordance with
the terms of the term loan secured by such property, $548,000 of the net sales
proceeds were used to payoff such term loan with the remaining $1.1 million
being distributed to the limited partner in accordance with the partnership
agreement. The partnership recognized a gain of $691,000 on the sale. In
December 1997, the partnership sold a 94.4 acre tract for $2.5 million in cash.
Of the net sales proceeds, $1.8 million was distributed to the limited partner
and $572,000 was distributed to the Company as general partner in accordance
with the partnership agreement. The partnership recognized a gain of $1.4
million on the sale. In January 1998, the partnership sold a 155.4 acre tract
for $2.9 million. The partnership received $721,000 in cash and provided
purchase money financing of an additional $2.2 million. Of the net sales
proceeds $300,000 was distributed to the limited partner and $300,000 was
distributed to the Company as general partner in accordance with the
partnership agreement. The purchase money financing bears interest at 12% per
annum, requires monthly payments of interest only and matures in July 1998. The
partnership recognized a gain of $1.2 million on the sale.

Elm Fork Ranch, L.P. In September 1997, a newly formed limited partnership, of
which the Company is a 1% general partner and 21.5% limited partner, purchased
a 422.4 acre parcel of undeveloped land in Denton County, Texas, for $16.0
million in cash. The Company contributed $3.6 million in cash to the
partnership with the remaining $12.4 million being contributed by the other
limited partners. The partnership agreement designates the Company as the
managing general partner. In September 1997, the partnership obtained financing
of $6.5 million secured by the 422.4 acres of land. The mortgage bears interest
at 10% per annum, requires quarterly payments of interest only and matures in
September 2001. The net financing proceeds were distributed to the partners,
the Company receiving $2.9 million of its initial investment. The partnership
agreement also provides that the limited partners receive a 12% preferred
cumulative return on their investment before any sharing of partnership profits
occurs. One of the limited partners in the partnership is also a limited
partner in a partnership that, owns approximately 15.6% of the Company's
outstanding shares of Common Stock.

39
40

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

The Company held its annual meeting of stockholders on January 19, 1998, at
which meeting the Company's stockholders were asked to consider and vote upon
(i) the election of one Class III Director of the Company, (ii) an amendment to
the Company's Articles of Incorporation to increase the authorized shares of
Common Stock to 100,000,000, (iii) an amendment to the Company's By-Laws to
remove the provision for the division of the Company's Board of Directors into
three classes, and (iv) the Company's 1997 Stock Option Plan. At such meeting
the Company's stockholders elected the following individual as a Class III
Director of the Company:

Shares Voting
-----------------------
Withheld
Director For Authority
------------- ---------- ---------

Karl L. Blaha 10,393,167 30,072

Also at such meeting the Company's stockholders approved an amendment to the
Company's Articles of Incorporation increasing the authorized shares of the
Company's Common Stock to 100,000,000 with 10,145,137 votes for the proposal,
267,177 votes against the proposal and 10,923 votes abstaining; approved an
amendment to the Company's By-Laws to remove the provision for the Division of
the Company's Board of Directors into three classes with 8,550,887 votes for
the proposal, 55,747 votes against and 15,260 votes abstaining and approved the
Company's 1997 Stock Option Plan with 10,289,439 votes for the proposal, 93,820
votes against and 39,978 votes abstaining.

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

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, 1998....................... $15 $14
(through March 6, 1998)
March 31, 1997....................... 22 1/4 9 3/4
June 30, 1997........................ 16 5/8 11 1/2
September 30, 1997................... 13 1/4 12 1/8
December 31, 1997.................... 15 1/2 12 5/8

40
41
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (Continued)

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

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 *

- --------------
* Adjusted for the 2 for 1 forward Common Stock split effected February
17, 1997.

As of March 6, 1998, the closing market price of the Company's Common Stock on
the New York Stock Exchange was $14.63 per share.

As of March 6, 1998, the Company's Common Stock was held by 2,314 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 resumed the payment of regular quarterly
dividends on its 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 1997 and 1996 as follows:

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

February 26, 1997 March 14, 1997 March 31, 1997 $ .05
June 5, 1997 June 13, 1997 June 30, 1997 .05
September 3, 1997 September 15, 1997 September 30, 1997 .05
December 1, 1997 December 15, 1997 December 31, 1997 .05

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*

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

* Adjusted for the 2 for 1 forward Common Stock split effected February 17,
1997.

The Company reported to the Internal Revenue Service that 100% of the dividends
paid in 1997 represented ordinary income and 100% of the dividends paid in 1996
represented a return of capital.

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

41
42
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (Continued)

liquidation preference of $100.00 per share. The Series B Preferred Stock
consists of a maximum of 4,000 shares, all of which were outstanding at December
31, 1997. 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 Company's Board of Directors. The
Series B Preferred Stock is convertible into Common Stock of the Company between
May 8, 1998 and June 8, 1998, at 90% of the average closing price of the
Company's Common Stock on the prior 30 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 16,681
shares, all of which were outstanding at December 31, 1997. 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 Company's Board of Directors. The Series C Preferred Stock is
convertible into Common Stock of the Company between November 25, 1998 and
February 23, 1999 at 90% of the average closing price of the Company's Common
Stock on the prior 30 trading days.

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,
none of which were outstanding at December 31, 1997. Dividends are payable at
the 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 Series D Preferred Stock is
reserved for the conversion of the Class A limited partner units of Ocean Beach
Partners, L.P. Such Class A units may be exchanged for Series D Preferred Stock
at the rate of 20 Class A units for each share of Series D Preferred Stock. No
more than one-third of the Class A units held may be exchanged prior to May 31,
2001. Between June 1, 2001 and May 31, 2006 all unexchanged Class A units are
exchangeable.

Also in December 1996 the Company filed 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, none of which were outstanding at December 31, 1997.
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 Company's Board of Directors, for periods
prior to November 4, 1999 and $11.00 per year, $2.75 per quarter thereafter.
The Series E Preferred Stock is reserved for the conversion of the Class A
limited partner units of Valley Ranch, L.P. The Class A units may be

42
43
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (Continued)

exchanged for Series E Preferred Stock at the rate of 100 Class A units for
each share of Series E Preferred Stock. Beginning November 4, 1998, the Series
E Preferred Stock may be converted into 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 Series E Preferred Stock may be converted, and
the remainder can be converted on or after November 4, 2001.

In August 1997, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series F Cumulative Convertible
Preferred Stock, par value $2.00 per share, with a liquidation preference of
$10.00 per share. The Series F Preferred Stock consists of a maximum of
7,500,000 shares of which 2,000,000 shares were outstanding at December 31,
1997. Dividends are payable at the rate of $1.00 per share or $.25 per quarter
to stockholders of record on the 15th day of each March, June, September and
December when and as declared by the Company's Board of Directors, accruing
cumulatively from August 16, 1998 and commencing on October 15, 1998. The
Series F Preferred Stock may be converted, after August 15, 2003, into Common
Stock of the Company at 90% of the market value of the Company's Common Stock.

In September 1997, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series G 10% Cumulative Convertible
Preferred Stock; par value $2.00 per share, with a liquidation preference of
$100.00 per share. The Series G Preferred Stock consists of a maximum of 11,000
shares, none of which were outstanding at December 31, 1997. 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 Company's Board of Directors. The Series G Preferred Stock is
reserved for the conversion of the Class A limited partner units of Grapevine
American, L.P. The Class A units may be exchanged for Series G Preferred Stock
at the rate of 100 Class A units for each share of Series G Preferred Stock
after October 6, 1999 and into Common Stock of the Company at 90% of the market
value of the Company's Common Stock for the twenty trading days prior to
conversion after October 6, 2000.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

43
44
ITEM 6. SELECTED FINANCIAL DATA

For the Years Ended December 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
EARNINGS DATA (dollars in thousands, except per share)

Revenue .......................... $ 49,971 $ 26,979 $ 22,952 $ 23,070 $ 13,427
Expense .......................... 83,355 38,577 28,314 26,490 18,128
----------- ----------- ----------- ----------- -----------
(Loss) from operations ........... (33,384) (11,598) (5,362) (3,420) (4,701)
Equity in income (losses)
of investees .................. 10,660 2,004 (851) 292 (4,014)
Gain on sale of real estate ...... 20,296 3,659 2,594 379 481
----------- ----------- ----------- ----------- -----------
(Loss) before extraordinary
gain .......................... (2,428) (5,935) (3,619) (2,749) (8,234)
Extraordinary gain ............... -- 381 783 323 3,807
----------- ----------- ----------- ----------- -----------
Net (loss) ....................... (2,428) (5,554) (2,836) (2,426) (4,427)

Preferred dividend
requirement ................... (206) (113) -- -- --
Redeemable Common Stock,
accretion of discount ......... -- -- -- -- (129)
----------- ----------- ----------- ----------- -----------
(Loss) applicable to
Common shares ................. $ (2,634) $ (5,667) $ (2,836) $ (2,426) $ (4,556)
=========== =========== ========== =========== ===========
PER SHARE DATA
(Loss) before extra-
ordinary gain ................. $ (.22) $ (.46) $ (.31) $ (.23) $ (.68)
Extraordinary gain ............... -- .03 .07 .03 .31
----------- ----------- ----------- ----------- -----------
Net (loss) ....................... (.22) (.43) (.24) (.20) (.37)
Redeemable Common Stock,
accretion of discount ......... -- -- -- -- (.01)
----------- ----------- ----------- ----------- -----------
(Loss) applicable to
Common shares ................. $ (.22) $ (.43) $ (.24) $ (.20) $ (.38)
=========== =========== ========== =========== ===========
Dividends per Common share ....... $ .20 $ .15 $ -- $ -- $ --

Weighted average shares
outstanding ................... 11,710,013 12,765,082 11,716,656 12,208,876 12,101,100

December 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA (dollars in thousands, except per share)

Notes and interest
receivable, net ............... $ 25,526 $ 48,485 $ 49,741 $ 45,664 $ 51,769
Real estate, net ................. 302,453 119,035 59,424 47,526 52,437
Total assets ..................... 433,799 235,037 162,033 137,362 139,861
Notes and interest
payable ....................... 261,986 127,863 61,163 45,695 53,693
Margin borrowings ................ 53,376 40,044 34,017 26,391 16,147
Stockholders' equity ............. 63,453 47,786 53,058 55,894 56,120

Book value per share ............. $ 3.53 $ 3.74 $ 4.53 $ 4.77 $ 5.56

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

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.

44
45
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, 1997 aggregated $5.3
million, compared with $1.3 million at December 31, 1996. Although the Company
anticipates that during 1998 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 $89.0 million are scheduled to mature during 1998. The
Company has the option of extending the maturity dates to April and June 1999
of $18.3 million of that amount. The lender on an additional $19.5 million has
agreed to extend the maturity date to February 2000. In January and February
1998, the Company has also paid off $8.7 million of such maturing debt.

The Company expects an increase in cash flow from property operations in 1998.
Such increase is expected to be derived from operations of the Collection Office
and Retail Center, the Preston Square Shopping Center, the Williamsburg
Hospitality House and the four Piccadilly hotels, all of which were acquired
during 1997. The Company is also expecting continued lot sales at its Texas
residential subdivision and substantial sales of land to generate additional
cash flow.

In 1997, the Company sold a total of 1,610.3 acres of land in Las Colinas,
Houston, Irving and Collin County, Texas and Denver, Colorado in 20 separate
transactions for a total of $52.2 million. The Company applied $23.5 million of
the net sales proceeds to paydown the loans secured by such land. In addition,
the Company sold an office building in St. Louis, Missouri, and a shopping
center in Manitowoc, Wisconsin, for a total of $6.7 million in cash. The Company
received net cash of $2.2 million, after the payoff of $3.5 million in existing
mortgage debt secured by such properties.

In 1997, the Company purchased a total of 5,221.4 acres of land in Palm Desert,
and Santa Clarita, California and Austin, Collin County, Dallas County, Farmers
Branch, Harris County, Irving, Plano and Tarrant County, Texas, for a total of
$121.6 million. The Company paid $44.4 million in cash and obtained new or
seller financing of $77.2 million.

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

Liquidity and Capital Resources (Continued)

The Company expects that funds from existing cash resources, collections on or
sales of 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
additional borrowings from the Company's advisor, will be sufficient to meet
the cash requirements associated with the Company's current and anticipated
level of operations, maturing debt obligations and existing commitments. To the
extent that the Company's liquidity permits or financing sources are available,
the Company will 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 $72.6 million,
$27.5 million, and $14.3 million of its land holdings during each of the next
three years, respectively, to satisfy the debt on such land 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 $31.2 million are due in
1998 of which $23.2 million is due on nonperforming notes receivable. In
February 1997, the Company sold a nonperforming note receivable with a
principal balance at December 31, 1996 of $1.6 million for $1.8 million in
cash. In September 1997, the Company sold its $16.3 million wraparound mortgage
note receivable secured by the Las Vegas Plaza Shopping Center in Las Vegas,
Nevada, for $15.0 million. The Company received net cash of $5.5 million after
the payoff of $9.2 million in underlying debt. The Company incurred no loss on
the sale in excess of the reserve previously established. The balance of the
Company's mortgage notes receivable are due over the next one to fifteen 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.

46
47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

improvements. In December 1997, the borrower filed for bankruptcy protection. In
February 1998, a hearing was held to allow the Company to foreclose on the hotel
and casino. At the hearing, the court ruled that the borrower had 90 days to
submit a reorganization plan and beginning March 2, 1998, required the borrower
to make monthly payments of $175,000 to the Company. The Company received the
first such payment on March 2, 1998. If the Company allowed to foreclose on the
property it does not expect to incur a loss as the fair value of the property
exceeds the carrying value of the Company's note receivable. The Company's
wraparound mortgage note receivable had a principal balance of $13.3 million at
December 31, 1997.

At December 31, 1996, the Company held a mortgage note receivable secured by an
apartment complex in Merrillville, Indiana, with a principal balance of $3.5
million. The note matured in December 1996. The Company and borrower had agreed
to a modification and extension of the note. In May 1997, the note plus accrued
but unpaid interest was paid in full.

In September 1997, the Company foreclosed on its junior mortgage note
receivable secured by the Williamsburg Hospitality House in Williamsburg,
Virginia. The Company obtained the property at foreclosure subject to the first
mortgage of $12.0 million. The Company incurred no loss on foreclosure as the
fair value of the property exceeded the carrying value of the Company's
mortgage note receivable and assumed mortgage debt. The property is included in
real estate held for investment in the accompanying Consolidated Balance Sheet.

The Company anticipates a continued improvement in the operations of the
properties securing its mortgage notes receivable. 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 of 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 totaled $53.4 million (approximately 39.7% of market value) at
December 31, 1997, compared to $40.0 million at December 31, 1996.

In May 1997, the Company financed a previously unencumbered 10.6 acre tract of
BP Las Colinas land for $3.1 million. Also in May 1997, the Company obtained a
second lien mortgage of $3.0 million secured by the Pin Oak land.

In June 1997, the Company obtained a second lien mortgage of $3.0 million
secured by the Lewisville land. Also in June 1997, the Company refinanced the
Valwood land for $15.8 million. The Company received net

47
48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

cash of $4.9 million, after the payoff of $6.2 million in existing mortgage
debt secured by the property, an additional $3.0 million being applied to
payoff the Jefferies land loan and $1.4 million being applied to paydown the
Las Colinas I land term loan.

In July 1997, the Company obtained a third lien mortgage of $2.0 million
secured by the Pin Oak land.

In September 1997, the Company refinanced the Las Colinas I land Double O tract
for $7.3 million. The Company received net cash of $2.1 million, after the
payoff of $5.0 million in existing mortgage debt.

In October 1997, the Company refinanced the Oaktree Village Shopping Center for
$1.5 million. The Company received no net cash after the payoff of $1.4 million
in existing mortgage debt and the payment of various closing costs associated
with the financing. Also in October 1997, the Company refinanced the Denver
Merchandise Mart for $25.0 million. The Company received net cash of $10.2
million, after the payoff of $14.8 million in existing mortgage debt and the
payment of various closing costs associated with the financing.

In November 1997, the Company obtained mortgage financing of $5.4 million
secured by 33.9 acres of previously unencumbered Valwood land, Lacy Longhorn
land, Thompson land, and Tomlin land. The Company received net financing
proceeds of $4.8 million after the payment of various closing costs associated
with the financing.

In December 1997, the Company refinanced the Inn at the Mart in Denver,
Colorado, for $4.0 million. The Company received net cash of $1.4 million, after
the payoff of $2.0 million in existing mortgage debt and the payment of various
closing costs associated with the financing.

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,
1997, 3,349,535 NRLP units with a market value of $80.0 million were pledged as
security for such loan. In July 1997, the lender advanced an additional $3.7
million, increasing the loan balance to $24.0 million.

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 the Company's advisor,
with a market value of $4.0 million. The Company received $2.0 million in net
cash

48
49
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

after the payment of closing costs associated with the loan. The loan was paid
in full in December 1997, from the proceeds of a $4.0 million loan from another
financial institution also secured by a pledge of equity securities of the REITs
owned by the Company and Common Stock of the Company owned by the Company's
advisor, with a market value of $10.4 million. The Company received $2.0 million
in net cash after the payoff of the $2.0 million loan. In January 1998, the
lender made a second loan to the Company of $2.0 million. This second loan is
secured by a pledge of Common Stock of the Company owned by the Company's
advisor with a market value of $4.7 million. The Company received $2.0 million
in net cash.

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 one year period 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 1997, the Company received total
distributions from the REITs of $1.4 million and $1.4 million from NRLP and an
additional $6.7 million, which was accrued at December 31, 1997, was received in
January 1998. The Company anticipates receiving distributions totaling $2.3
million from the REITs and $11.1 million from NRLP in 1998, including amounts
accrued at December 31, 1997.

In June 1996, the Company resumed dividend payments on the Company's Common
Stock. The Company paid dividends totaling $2.0 million or $.20 per share in
1997.

The Company's management reviews the carrying values of the Company's
properties and mortgage notes 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

49
50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

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.

Results of Operations

1997 COMPARED TO 1996. The Company reported a net loss of $2.4 million in 1997
as compared to a net loss of $5.6 million in 1996. The primary factors
contributing to the Company's net loss are discussed in the following
paragraphs.

Sales and cost of sales were $17.9 million and $14.5 million,
respectively, in 1997. The Company had no sales or cost of sales prior
to May 1997. These items of revenue and cost relate to Pizza World
Supreme, Inc. ("PWSI"), consolidated in May 1997. See NOTE 7. "ACQUISITION
OF PIZZA WORLD SUPREME, INC."

Net rental income (rents less property operating expenses) increased from $4.8
million in 1996 to $4.9 million in 1997. 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 1998 from a full years operation of the Collection
Office and Retail Center, Preston Square Shopping Center, Williamsburg
Hospitality House and the four Piccadilly hotels all of which were acquired in
1997.

Interest income decreased from $4.7 million in 1996 to $2.8 million in 1997.
This decrease is primarily attributable to the sale of two notes receivable and
the payoff of a third note receivable in 1997. Interest income in 1998 is
expected to approximate that in 1997.

Other income decreased from $1.6 million in 1996 to $134,000 in 1997. This
decrease is due in part to recognizing a unrealized gain on marketable equity
securities of $486,000 in 1996 compared to an unrealized loss of $850,000 in
1997. This decrease is also attributable in part to a decrease in dividend
income and net gains on sales of marketable equity securities of $67,000 and
$56,000, respectively.

Interest expense increased from $16.5 million in 1996 to $30.2 million in 1997.
Of this increase, $10.8 million is due to the debt secured by the Best Western
Oceanside Hotel acquired in 1996 and the Williamsburg Hospitality House,
Piccadilly Hotels, Pin Oak land, Scout land, Katy land, McKinney land, Lacy
Longhorn land, Santa Clarita land, Chase Oaks land, Pioneer Crossing land,
Pantex land, Keller land, Perkins land, Rasor land, Dowdy land, Palm Desert land
and LBJ land acquired in 1997, $2.0 million is due to additional borrowings and
a full years interest on the loan

50
51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

secured by NRLP units and $1.1 million is due to refinancing the debt secured
by the Kansas City Holiday Inn and Denver Merchandise Mart. Interest expense
for 1998 is expected to increase from the continued acquisition of properties
on a leveraged basis.

Advisory and mortgage servicing fees increased from $1.5 million in 1996 to
$2.7 million in 1997. The increase is attributable to the increase in the
Company's gross assets, the basis for such fee. Such fee will continue to
increase as the Company's gross assets increase.

General and administrative expenses, increased from $2.7 million in 1996 to
$7.0 million in 1997. The increase is attributable to a $1.1 million increase
in legal fees and travel expenses in 1997 relating to potential acquisitions,
financings and refinancings, a $1.1 million increase in advisor cost
reimbursements and $2.1 million attributable to the general and administrative
expenses of PWSI. See NOTE 7. "ACQUISITION OF PIZZA WORLD SUPREME, INC."

Depreciation and amortization increased from $2.0 million in 1996 to $3.3
million in 1997 due to the acquisition of six properties and PWSI in 1997.
Depreciation and amortization are expected to increase again in 1998 from a
full years depreciation of the properties acquired in 1997.

Minority interest in 1997 is the preferred return paid on limited partner units
of Ocean Beach Partners, L.P., Valley Ranch, L.P., Grapevine American, L.P.,
Edina Park Plaza Associates, L.P. and Hawthorne Lakes Associates, L.P.

Equity in income of investees improved from $2.0 million in 1996 to $10.7
million in 1997. The increase in equity income is primarily attributable to an
increase of $32.1 million in gains on sale of real estate in IORI, NRLP and
TCI offset by a decrease of $1.9 million in CMET. The Company's equity share of
such gains was $13.5 million. The increase is also attributable to an
improvement in income from property operations for the REITs and NRLP, from
increased rental rates and operating expense control.

Gains on the sale of real estate increased from $3.7 million in 1996 to $20.3
million in 1997. In 1996, the Company recognized a $2.0 million gain on the
sale of a 32.3 acre tract of BP Las Colinas land in Las Colinas, Texas, and a
$1.1 million gain on the sale of a 4.6 acre tract of Las Colinas I land also in
Las Colinas, Texas. In 1997, the Company recognized gains of $5.9 million on
the sale of a 49.7 acre tract of BP Las Colinas land in Las Colinas, Texas;
$3.5 million on the sale of tracts totaling 116.8 acres of Valley Ranch land in
Irving, Texas; $2.7 million on the sale of a 12.5 acre tract of Las Colinas I
land in Las Colinas, Texas; $3.6 million on the sale of Pin Oak land in
Houston, Texas; $216,000 on the sale of a 99.7 acre tract of Kamperman land in
Collin County, Texas; $371,000 on the sale of a 32.0 acre tract of Parkfield
land in Denver, Colorado; $211,000 on

51
52
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

the sale of a 86.5 acre tract of Rasor land in Plano, Texas; $106,000 on the
sale of Park Plaza Shopping Center in Manitowoc, Wisconsin; $480,000 on the
sale of the Mopac Building in St. Louis, Missouri; and $172,000 on the sale of
a mortgage note receivable. The Company also recognized a previously deferred
gain of $3.0 million on the sale of Porticos Apartments. See NOTE 4. "REAL
ESTATE."

The Company reported $381,000 in extraordinary gains in 1996 compared to no
extraordinary gains in 1997. 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.

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.

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.

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.

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.

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.

General and administrative expense of $2.7 million in 1996 approximated the
$2.6 million incurred in 1995.

52
53
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

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 apartment complex in the fourth quarter of 1995, a $4.6
million gain representing the Company's equity share of the REITs' 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.

Contingencies

The Company owns a 96% limited partner interest in Syntek Asset Management,
L.P. ("SAMLP"). 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 the Company until November 16, 1992, is also a
general partner of SAMLP. At December 31, 1997, the Company owned approximately
54% of the outstanding limited partner units of NRLP.

NRLP, SAMLP and Mr. Phillips were among the defendants in a class action
lawsuit arising from the formation of NRLP. An agreement settling such lawsuit
(the "Settlement Agreement") 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 and the establishment of
specified annually increasing targets for five years relating to the price of
NRLP's units of limited partner interest.

53
54

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

Contingencies (Continued)

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, L.P. ("SAMI"), the
managing general partner of SAMLP, has calculated the fair value of such
Redeemable General Partner Interest to be $49.6 million at December 31, 1997,
before reduction for the principal balance ($4.2 million at December 31, 1997)
and accrued interest ($7.2 million at December 31, 1997) on the note receivable
from SAMLP for its original capital contribution to the partnership.

On December 15, 1997, NRLP, SAMLP, the NRLP oversight committee, Joseph B.
Moorman, Invenex and the Counsel for the plaintiff class members executed an
Agreement for Establishment of a Class Distribution of Fund and Election of
Successor General Partner (the "Resolution Agreement") which provides for the
nomination of an entity affiliated with SAMLP to be the successor general
partner of NRLP and NOLP, for the establishment of a fund for the benefit of
the plaintiff class members consisting of cash and properties owned by NOLP and
for the resolution of all related matters under the Settlement Agreement.

The Resolution Agreement was submitted to the Judge appointed to supervise the
class action settlement (the "Supervising Judge") and on February 11, 1998, the
Supervising Judge entered an order granting preliminary approval of the
Resolution Agreement and scheduled a hearing to be held on April 24, 1998, for
consideration of preliminary approval of a business plan for the operation of
the entity which will receive the cash and properties and to consider a form of
notice to be distributed to the plaintiff class members describing the
Resolution Agreement and the business plan.

Upon the election and taking office of the successor general partner and the
transfer of the cash and properties to the fund establish for the benefit of
the plaintiff class members, the Settlement Agreement and the NRLP oversight
committee shall be terminated.

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.

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55
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Environmental Matters (Continued)

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

Inflation

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

Year 2000

The Company's advisor has advised the Company that its current computer
software has been certified by the Information Technology Association of
America ("ITAA") as year 2000 compliant. The Company's advisor has also advised
the Company that it has recently received and plans to install in 1998 the ITAA
certified year 2000 compliant operating system for its computer hardware.

55
56

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Certified Public Accountants .............. 57

Consolidated Balance Sheets -
December 31, 1997 and 1996 ............................. 58

Consolidated Statements of Operations -
Years Ended December 31, 1997, 1996 and 1995 .......... 60

Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1997, 1996 and 1995 ........... 62

Consolidated Statements of Cash Flows -
Years Ended December 31, 1997, 1996 and 1995 ........... 64

Notes to Consolidated Financial Statements ...................... 67

Schedule III - Real Estate and Accumulated Depreciation ......... 101

Schedule IV - Mortgage Loans on Real Estate .................... 105

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.

56
57

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, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, 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 25, 1998

57
58
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS

December 31,
-----------------------
1997 1996
-------- -------
(dollars in thousands)
Assets

Notes and interest receivable
Performing (including $1,307 in 1997 and
$13,563 in 1996 from affiliate) .............. $ 9,300 $ 50,784
Nonperforming, nonaccruing ..................... 18,624 1,627
--------- ---------
27,924 52,411
Less - allowance for estimated losses ............ (2,398) (3,926)
--------- ---------
25,526 48,485
Real estate held for sale, net of accumulated
depreciation ($5,098 in 1996) .................. 178,938 77,688

Real estate held for investment net of accumu-
lated depreciation ($5,380 in 1997 and $4,234
in 1996) ....................................... 123,515 41,347

Pizza parlor equipment, net of accumulated
depreciation ($905 in 1997) .................... 6,693 --

Marketable equity securities, at market value .... 6,205 2,186
Cash and cash equivalents ........................ 5,347 1,254
Investments in equity investees .................. 45,851 55,880
Intangibles, net of accumulated amortization
($704 in 1997) ................................. 15,230 --
Other assets ..................................... 26,494 8,197
--------- ---------
$ 433,799 $ 235,037
========= ==========

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

58
59
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS - Continued

December 31,
-------------------------
1997 1996
---------- ---------
(dollars in thousands,
except per share)
Liabilities and Stockholders' Equity

Liabilities
Notes and interest payable (including $11,400 in
1997 and $8,973 in 1996 to affiliates) .............. $ 261,986 $ 127,863
Margin borrowings ..................................... 53,376 40,044
Accounts payable and other liabilities (including
$22.9 million in 1997 and $318,000 in 1996 to
affiliate) .......................................... 34,442 8,433
--------- ---------
349,804 176,340
Minority interest ..................................... 20,542 10,911

Commitments and contingencies

Stockholders' equity
Preferred Stock, $2.00 par value, authorized
20,000,000 shares, issued and outstanding
Series B, 4,000 shares in 1997 and 1996
(liquidation preference $400) ................. 8 8
Series C, 16,681 shares in 1997 and 15,877
shares in 1996 (liquidation preference
$1,668) ....................................... 33 32
Series F, 2,000,000 shares in 1997
(liquidation preference $20,000) .............. 4,000
Common Stock, $.01 par value, authorized
100,000,000 shares; issued 13,479,348 shares
in 1997 and 1996 .................................... 135 135
Paid-in capital ....................................... 84,943 68,595
Accumulated (deficit) ................................. (25,638) (20,978)
Treasury stock at cost, 2,767,427 shares in 1997
and 56,704 shares in 1996 ........................... (28) (6)
--------- ---------
63,453 47,786
--------- ---------
$ 433,799 $ 235,037
========= =========

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

59
60
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,
-------------------------------------------
1997 1996 1995
---------- ---------- -----------
(dollars in thousands, except per share)

Income
Sales ........................................ $ 17,926 $ -- $ --
Rents ........................................ 29,075 20,658 17,869
Interest (including $230 in 1997, $539 in
1996 and $506 in 1995 from affiliates) .... 2,835 4,724 4,929
Other ........................................ 135 1,597 154
---------- ---------- -----------
49,971 26,979 22,952

Expenses
Cost of sales ................................ 14,492 -- --
Property operations (including $865 in
1997, $892 in 1996 and $1,200 in 1995
to affiliates) ............................ 24,195 15,874 13,260
Interest (including $433 in 1997, $418
in 1996 and $437 in 1995 to affiliates) ... 30,231 16,450 8,941
Advisory and servicing fees to affiliate ..... 2,657 1,539 1,195
General and administrative (including
$1,809 in 1997, $691 in 1996 and $516
in 1995 to affiliate) ..................... 6,997 2,712 2,554
Depreciation and amortization ................ 3,338 2,002 1,691
Minority interest ............................ 1,445 -- 671
---------- ---------- ----------
83,355 38,577 28,312
---------- ---------- ----------
(Loss) from operations ......................... (33,384) (11,598) (5,360)
Equity in income (loss) of investees ........... 10,660 2,004 (851)
Gain on sale of real estate .................... 20,296 3,659 2,594
---------- ---------- ----------
(Loss) before income taxes ..................... (2,428) (5,935) (3,617)
Income tax expense ............................. -- -- 2
---------- ---------- ----------
(Loss) before extraordinary gain ............... (2,428) (5,935) (3,619)
Extraordinary gain ............................. -- 381 783
---------- ---------- ----------
Net (loss) ..................................... (2,428) (5,554) (2,836)

Preferred dividend requirement ................. (206) (113) --
---------- ---------- ----------
Net (loss) applicable to Common shares ......... $ (2,634) $ (5,667) $ (2,836)
========== ========== ==========

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

60
61
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

Years Ended December 31,
1997 1996 1995
------------ ------------ -------------

Earnings per share
(Loss) before extraordinary gain ............ $ (.22) $ (.46) $ (.31)
Extraordinary gain .......................... -- .03 .07
----------- ----------- ----------
Net (loss) applicable to Common
shares .................................... $ (.22) $ (.43) $ (.24)
=========== =========== ===========
Weighted average Common shares used in
computing earnings per share .............. 11,710,013 12,765,082 11,716,656
=========== =========== ===========

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

61
62
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, 1995 .............. $ -- $ -- $ 117 $ -- $ 66,661 $(10,884) $ 55,894

Net (loss) ...................... -- -- -- -- -- (2,836) (2,836)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1995 ...... -- -- 117 -- 66,661 (13,720) 53,058

Common Stock issued ............. -- -- 18 -- (18) -- --

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 ($.01
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 $ 135 $ (6) $ 68,595 $(20,978) $ 47,786

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

62
63

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

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

Balance,
January 1, 1997 ........ $ 8 $ 32 $ -- $ 135 $ (6) $ 68,595 $(20,978) $ 47,786

Series F Preferred
Stock issued ........... -- -- 4,000 -- -- 16,000 -- 20,000

Common Stock cash
dividend ($.20 per
share) ................. -- -- -- -- -- -- (2,026) (2,026)

Series B Preferred
Stock cash dividend
($10.00 per share) ..... -- -- -- -- -- -- (40) (40)

Series C Preferred
Stock, stock and
cash dividend
($10.00 per share) ..... -- 1 -- -- -- 81 (166) (84)

Sale of Common Stock ...... -- -- -- -- -- 245 -- 245

Treasury stock, at
cost ................... -- -- -- -- (22) 22 -- --

Net (loss) ................ -- -- -- -- -- -- (2,428) (2,428)
------ ------ -------- -------- -------- -------- -------- --------
Balance, December 31,
1997 ................... $ 8 $ 33 $ 4,000 $ 135 $ (28) $ 84,943 $(25,638) $ 63,453
====== ====== ======== ======== ======== ======== ======== ========

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

63
64
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Years Ended December 31,
-----------------------------------
1997 1996 1995
--------- ----------- ----------
(dollars in thousands)

Cash Flows From Operating Activities
Pizza parlor sales collected ....................... $ 17,790 $ -- $ --
Rents collected .................................... 28,199 19,013 18,473
Interest collected ($262 in 1997, $385
in 1996 and $399 in 1995 from
affiliates) ..................................... 2,592 4,304 4,845
Distributions from equity investees'
operating activities ............................ 5,689 9,054 1,464
Interest paid ($19 in 1995 to affiliate) ........... (19,092) (9,601) (8,296)
Payments for property operations
(including $865 in 1997, $892 in 1996
and $1,200 in 1995 to affiliate) ................ (22,821) (15,034) (13,442)
Payments for pizza parlor operations ............... (12,580) -- --
Advisory fee paid to affiliate ..................... (2,657) (1,539) (1,195)
Distributions to minority interest holders ......... (1,445) -- --
Purchase of marketable equity securities ........... (15,147) (22,613) (19,394)
Proceeds from sale of marketable
equity securities ............................... 10,588 23,557 18,374
General and administrative expenses paid
(including $1,809 in 1997, $691 in 1996
and $516 in 1995 to affiliate) .................. (6,982) (3,095) (2,448)
Litigation settlement .............................. -- -- (100)
Other .............................................. (781) (1,661) 1,016
--------- ---------- --------
Net cash provided by (used in) operating
activities ................................... (16,647) 2,385 (703)

Cash Flows From Investing Activities
Collections on notes receivable (including
$3,503 in 1997, $1,166 in 1996 and $394
in 1995 from affiliates) ........................ 4,489 1,495 1,604
Proceeds from sale of notes receivable ............. 16,985 -- --
Notes receivable funded ............................ (8,716) (250) (3,295)
Proceeds from sale of real estate .................. 38,169 7,718 11,992
Contributions from minority interest
holders ......................................... 9,799 -- --
Acquisitions of real estate ........................ (123,074) (41,636) (21,394)
Real estate improvements ........................... (10,993) (2,862) (1,802)
Pizza parlor equipment purchased ................... (2,695) -- --
Deposits ........................................... (6,221) 577 (516)
Investment in equity investees ..................... (1,331) (15,471) (7,169)
--------- ---------- --------
Net cash (used in) investing activities ......... (83,588) (50,429) (20,580)
========= ========== ========

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

64
65
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

For The Years Ended December 31,
----------------------------------------
1997 1996 1995
--------- -------- --------
(dollars in thousands)

Cash Flows From Financing Activities
Proceeds from notes payable ........................ $161,103 $ 86,490 $ 36,211
Margin borrowings, net ............................. 8,914 2,981 7,626
Proceeds from issuance of Preferred Stock .......... -- 400 --
Payments on notes payable (including
$990 in 1995 to affiliate) ...................... (81,639) (30,003) (22,268)
Deferred borrowing costs ........................... (5,174) (5,028) (2,475)
Net advances (payments) to/from affiliates ......... 23,274 (4,979) 3,050
Dividends .......................................... (2,150) (1,617) --
--------- -------- --------
Net cash provided by financing
activities ................................... 104,328 48,244 22,144
--------- -------- --------
Net increase in cash and cash equivalents ............. 4,093 200 861
Cash and cash equivalents, beginning of year .......... 1,254 1,054 193
--------- -------- --------
Cash and cash equivalents, end of year ................ $ 5,347 $ 1,254 $ 1,054
========= ======== ========
Reconciliation of net (loss) to net cash
provided by (used in) operating activities
Net (loss) ............................................ $ (2,428) $ (5,554) $ (2,836)
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating
activities
Extraordinary gain .............................. -- (381) (783)
Gain on sale of real estate ..................... (20,296) (3,659) (2,594)
Depreciation and amortization ................... 3,338 2,002 1,691
Amortization of deferred borrowing costs ........ 4,042 2,692 326
Equity in (income) losses of investees .......... (10,660) (2,004) 851
Distributions from equity investees'
operating activities ......................... 5,689 9,054 1,464
(Increase) decrease in marketable equity
securities ................................... (4,559) 944 (1,020)
(Increase) decrease in accrued interest
receivable ................................... 66 (117) 79
(Increase) decrease in other assets ............. 2,403 (2,817) 1,629
Increase (decrease) in accrued interest
payable ...................................... 1,019 1,417 (5)
Increase in accounts payable and other
liabilities .................................. 4,978 733 495
Other ........................................... (239) 75 --
--------- -------- --------
Net cash provided by (used in)
operating activities ....................... $ (16,647) $ 2,385 $ (703)
========= ======== ========

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

65
66
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

For The Years Ended December 31,
----------------------------------------
1997 1996 1995
--------- -------- --------
(dollars in thousands)

Schedule of noncash investing and
financing activities

Notes payable from acquisition of
real estate ........................................ $ 44,151 $ 9,099 $ 21,394

Stock dividends on Series C Preferred Stock ........... 82 31 --

Series F Preferred Stock issued for real
estate ............................................. 20,000 -- --

Current value of property obtained through
foreclosure of note receivable ..................... 20,226 -- --

Note receivable put to basis .......................... 2,737 -- --
Note payable assumed on property obtained
through foreclosure ................................ 11,867 -- --

Carrying value of real estate exchanged ............... 7,882 -- --

Notes payable from acquisition of minority
interest in subsidiary ............................. 5,000 -- --
Acquisition of Pizza World Supreme, Inc. ..............
Carrying value of intangible ....................... 15,641 -- --
Carrying value of pizza parlor equipment ........... 3,998 -- --
Carrying value of note receivable retired .......... 13,387 -- --
Carrying value of accounts payable and
other liabilities ............................... 1,314 -- --

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

Settlement with insurance company
Carrying value of real estate received ............. -- -- 1,619
Carrying value of note receivable
participation received .......................... -- -- 1,500
Carrying value of notes receivable
returned ........................................ -- -- (32)
Carrying value of real estate returned ............. -- -- (2,183)

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

66
67
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 1995 and 1996 have been reclassified to conform to the 1997
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 during the period April 1996 to April 1997
for Pizza World Supreme, Inc. ("PWSI"). The Company uses the equity method to
account for its investment in NRLP as control is considered to be temporary. The
Company used the equity method to account for its investment in PWSI from April
1996 to April 1997 as control was considered to be temporary. See NOTE 2.
"SYNTEK ASSET MANAGEMENT, L.P." and NOTE 7. "ACQUISITION OF PIZZA WORLD SUPREME,
INC." 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.

67
68
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for estimated losses. Valuation allowances are provided for estimated
losses on notes receivable considered to be impaired. Impairment 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 fair value of the collateral securing such note.

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

68
69
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, the financing or other 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 presented in accordance with the provision
of the Statement of Accounting Standards No. 128, "Earnings Per Share". Loss per
share is computed based upon the weighted average number of shares of 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.

The Company owns a 96% limited partner interest in Syntek Asset Management, L.P.
("SAMLP"). SAMLP is the general partner of National Realty, L.P. ("NRLP") and
National Operating, L.P. ("NOLP"), the operating partnership of NRLP. Gene E.
Phillips, a Director and Chairman of the Board of the Company until November 16,
1992, is also a general partner of SAMLP. As of September 30, 1997, the Company
owned approximately 54% of the outstanding limited partner units of NRLP.

69
70
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

for, among other things, the appointment of an NRLP oversight committee and the
establishment of specified annually increasing targets for five years relating
to the price of NRLP's units of limited partner interest.

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 $49.6 million at December 31, 1997,
before reduction for the principal balance ($4.2 million at December 31, 1997)
and accrued interest ($7.2 million at December 31, 1997) on the note receivable
from SAMLP for its original capital contribution to the partnership.

On December 15, 1997, NRLP, SAMLP, the NRLP oversight committee, Joseph B.
Moorman, Invenex and the Counsel for the plaintiff class members executed an
Agreement for Establishment of a Class Distribution Fund and Election of
Successor General Partner (the "Resolution Agreement") which provides for the
nomination of an entity affiliated with SAMLP to be the successor general
partner of NRLP and NOLP, for the establishment of a fund for the benefit of the
plaintiff class members consisting of cash and properties owned by NOLP and for
the resolution of all related matters under the Settlement Agreement.

Upon the election and taking office of the successor general partner and the
transfer of the cash and properties to the fund established for the benefit of
the plaintiff class members, the Settlement Agreement and the NRLP oversight
committee shall be terminated.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

70
71
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. NOTES AND INTEREST RECEIVABLE

1997 1996
--------------------- --------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------- -------- --------- --------

Notes Receivable
Performing (including $1,307
in 1997 and $13,563 in 1996
from affiliates) .............. $ 9,217 $ 9,340 $52,939 $ 55,161
Nonperforming, nonaccruing ....... 26,344 23,212 1,884 1,584
-------- -------- ------- --------
$ 35,561 32,552 $54,823 56,745
======== =======
Interest receivable .............. 380 445
Unamortized premiums/
(discounts) ................... (124) (162)
Deferred gains .................... (4,884) (4,617)
-------- --------
$ 27,924 $ 52,411
======== ========

The Company recognizes interest income on nonperforming notes receivable on a
cash basis. For the years 1997, 1996 and 1995 unrecognized interest income on
such nonperforming notes receivable totaled $2.2 million, $1.6 million and $1.2
million, respectively.

Notes receivable at December 31, 1997, mature from 1998 to 2014 with interest
rates ranging from 6.0% to 12.9% and a weighted average rate of 12.78%. A small
percentage of these notes receivable carry a variable interest rate. Notes
receivable include notes generated from property sales which have interest rates
adjusted at the time of sale to yield rates ranging from 6% to 14%. Notes
receivable are generally nonrecourse and are generally collateralized by real
estate. Scheduled principal maturities of $31.2 million are due in 1998 of which
$23.2 million is due on nonperforming notes receivable.

Nonrecourse participations totaling $2.2 million and $1.6 million at December
31, 1997 and 1996, respectively, have been deducted from notes receivable.

In August 1990, the Company obtained the Continental Hotel and Casino in Las
Vegas, Nevada, through foreclosure subject to first and second lien mortgages
totaling $10.0 million. In June 1992, the Company sold the hotel and casino
accepting, among other consideration, a $22.0 million wraparound mortgage note
receivable. 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. In March 1997, the wraparound note was modified and extended. In
exchange for the extension, the borrower was 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
also pledged 1,500,000 shares of common stock in Crowne Ventures, Inc., as
additional collateral. The Company's wraparound mortgage note receivable had a
principal balance of $13.3 million at

71
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)

December 31, 1997. The Company recognizes interest income on this wraparound
mortgage note only to the extent interest is collected. The borrower has not
made the required note payments since April 1997, nor the required improvements.
In December 1997, the borrower filed for bankruptcy protection. In February
1998, a hearing was held to allow the Company to foreclose on the hotel and
casino. At the hearing, the court allowed the borrower 90 days to submit a
reorganization plan and beginning March 2, 1998, required the borrower to make
monthly payments of $175,000 to the Company. The Company received the first such
payment on March 2, 1998. If the Company is allowed to foreclose on the property
it does not expect to incur a loss as the fair value of the property exceeds the
carrying value of the Company's note receivable.

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. In February 1997, the Company sold its mortgage note
receivable for $1.8 million in cash. The Company recognized a gain of $171,000
on the sale.

In September 1997, the Company sold its $16.3 million wraparound mortgage note
receivable secured by the Las Vegas Plaza Shopping Center in Las Vegas, Nevada,
for $15.0 million. The Company received net cash of $5.5 million after the
payoff of $9.2 million in underlying debt. The Company incurred no loss on the
sale in excess of the reserve previously established.

Related Party. In September 1997, the Company foreclosed on its $8.9 million
junior mortgage note receivable secured by the Williamsburg Hospitality House in
Williamsburg, Virginia. The Company obtained the property through foreclosure
subject to the first mortgage of $12.0 million. The Company incurred no loss on
foreclosure as the fair value of the property exceeded the carrying value of the
Company's mortgage note receivable and assumed mortgage debt. The property is
included in real estate held for investment in the accompanying Consolidated
Balance Sheet.

At December 31, 1996, the Company held a mortgage note receivable secured by an
apartment complex in Merrillville, Indiana, with a principal balance of $3.7
million. The property is owned by a subsidiary of Davister Corp. ("Davister"), a
general partner in a partnership that owns approximately 15.6% of the Company's
outstanding shares of Common Stock. In May 1997, the note plus accrued but
unpaid interest was paid in full.

72
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. REAL ESTATE

In January 1997, the Company sold a 3.0 acre tract of Las Colinas I land in Las
Colinas, Texas, for $1.2 million in cash. The Company recognized a gain of
$676,000 on the sale.

In February 1996, the Company entered into a contract to sell a 72.5 acre tract
of the 92.6 acre parcel of BP Las Colinas land in Las Colinas, Texas, for $12.9
million. The contract called for the sale to close in two phases. In July 1996,
the Company completed the first sale. In February 1997, the Company completed
the second sale of 40.2 acres for $8.0 million, of which $7.2 million was paid
in cash. Of the net cash proceeds of $6.9 million, $1.5 million was used to
payoff the debt secured by the BP Las Colinas land parcel, pay a $500,000
maturity fee to the lender, make a $1.5 million principal paydown on the loan
with the same lender, secured by the Parkfield land in Denver, Colorado and $1.0
million was applied as a principal paydown on the term loan secured by the Las
Colinas I land. 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
bore interest at 12% per annum, with all accrued but unpaid interest and
principal due at maturity in August 1997. The Company recognized a gain of $3.4
million on such sale, deferring an additional $800,000 of gain until the
unsecured loan was paid in full. The loan was collected in full in August 1997
and the additional $800,000 gain was recognized.

In March 1997, the Company purchased Katy Road land, a 130.6 acre parcel of
undeveloped land in Harris County, Texas, for $5.6 million. The Company paid
$1.6 million in cash with the seller providing purchase money financing for the
remaining $4.0 million of the purchase price. The financing bears interest at 9%
per annum, requires quarterly payments of interest only and matures in March
2000.

In April 1997, the Company purchased McKinney Corners I land, a 30.4 acre parcel
of undeveloped land in Collin County, Texas, for $3.5 million. The Company paid
$1.0 million in cash and obtained new mortgage financing of $2.5 million. The
mortgage bears interest at 14% per annum, requires monthly payments of interest
only and matures in April 1998.

Also in April 1997, the Company purchased McKinney Corners II land, a 173.9 acre
parcel of undeveloped land in Collin County, Texas, for $5.9 million. The
Company paid $900,000 in cash and obtained new mortgage financing of $5.0
million as an advance under the term loan from the Las Colinas I lender. The
McKinney Corners II land was added as additional collateral on the term loan.

73
74
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. REAL ESTATE (Continued)

Further in April 1997, the Company sold a 3.1 acre tract of Las Colinas I land
for $1.3 million in cash. The Company used $1.0 million of the net cash proceeds
to make a collateral escrow deposit in accordance with the provisions of the
Valley Ranch land term loan. The Company recognized a gain of $668,000 on the
sale.

In May 1997, the Company purchased McKinney Corners III land, a 15.5 acre parcel
of undeveloped land in Collin County, Texas, for $896,000 in cash.

Also in May 1997, the Company purchased Lacy Longhorn land, a 17.1 acre parcel
of undeveloped land in Farmers Branch, Texas, for $1.8 million. The Company paid
$200,000 in cash with the seller providing purchase money financing of the
remaining $1.6 million of the purchase price. The financing bore interest at 10%
per annum, required monthly principal and interest payments of $400,000 and
matured in October 1997. The loan was paid off at maturity.

In May 1997, the Company purchased Pioneer Crossing land, a 1,448 acre parcel of
undeveloped land in Austin, Texas, for $21.5 million. The Company paid $5.4
million in cash with the seller providing purchase money financing of the
remaining $16.1 million of the purchase price. The financing bears interest at
9.5% per annum, requires monthly payments of interest only and matures in May
2001.

74
75
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. REAL ESTATE (Continued)

In July 1997, the Company sold a 3.9 acre tract of Las Colinas I land in Las
Colinas, Texas, for $1.6 million in cash. In accordance with the provisions of
the term loan secured by such parcel, the Company applied the net cash proceeds
of $1.4 million to paydown the term loan in exchange for the lender's release
of its collateral interest in such land. The Company recognized a gain of
$771,000 on such sale.

In July 1997, the Company purchased LBJ land, a 10.4 acre parcel of undeveloped
land in Dallas County, Texas, for $2.3 million. The Company paid $300,000 in
cash and with the seller providing purchase money financing of the remaining
$2.0 million of the purchase price. The financing bears interest at 18% per
annum, requires quarterly payments of interest only and matures in March 1998.

In September 1997, the Company sold the Mopac Building, a 400,000 square foot
office building, in St. Louis, Missouri, for $1.0 million in cash. The Company
received net cash of $1.0 million after the payment of various closing costs
associated with the sale. In accordance with the provisions of the Las Colinas I
term loan, the Company applied $350,000 of the net cash received to paydown the
term loan in exchange for the lender's release of its collateral interest in the
property. The Company recognized a gain of $481,000 on the sale.

Also in September 1997, the Company sold a 2.6 acre tract of Las Colinas I land
in Las Colinas, Texas, for $1.2 million in cash. In accordance with the
provisions of the term loan secured by such parcel, the Company applied the net
cash proceeds of $1.0 million to paydown the term loan in exchange for the
lender's release of its collateral interest in such land. The Company recognized
a gain of $578,000 on the sale.

75
76
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. REAL ESTATE (Continued)

Further in September 1997, the Company sold three tracts of Valley Ranch land
totaling 24.0 acres, for $1.6 million in cash. The net cash proceeds of $1.2
million were deposited into a certificate of deposit for the benefit of the
lender, in accordance with the term loan secured by such land. The certificate
of deposit was released to the lender in December 1997, in conjunction with the
payoff of the loan. The Company recognized a gain of $567,000 on the sale.

In September 1997, the Company purchased the Collection, a 267,812 square foot
retail and commercial center in Denver, Colorado, for $19.5 million. The Company
paid $791,000 in cash and assumed existing mortgages totaling $14.7 million, and
issued 400,000 shares of the Company's Series F Cumulative Convertible Preferred
Stock. See NOTE 13. "PREFERRED STOCK." A first mortgage in the amount of $14.2
million bears interest at 8.64% per annum, requires monthly principal and
interest payments of $116,000 and matures in May 2017. A second lien mortgage in
the amount of $580,000 bears interest at 7% per annum until April 2001, 7.5% per
annum from May 2001 to April 2006, and 8% per annum from May 2006 to May 2010,
requires monthly principal and interest payments of $3,000 and matures in May
2010.

In October 1997, the Company contributed its Pioneer Crossing land in Austin,
Texas to a limited partnership in exchange for $3.4 million in cash, a 1%
managing general partner interest in the partnership, all of the Class B limited
partner units in the partnership and the partnership's assumption of the $16.1
million mortgage debt secured by such property. The existing general and limited
partners converted their general and limited partner interests into Class A
limited partner units in the partnership. The Class A limited partner units have
an agreed value of $1.00 per unit and are entitled to a fixed preferred return
of 10% per annum, paid quarterly. The Class A units may be converted into a
total of 360,000 shares of the Company's Series F Cumulative Convertible
Preferred Stock at any time after the first but no later than the sixth
anniversary of the closing, on the basis of one share of Series F Preferred
Stock for each ten Class A units. See NOTE 13. "PREFERRED STOCK."

Also in October 1997, the Company contributed the Denver Merchandise Mart in
Denver, Colorado, to a limited partnership in exchange for $6.0 million in cash,
a 1% managing general partner interest in the partnership, all of the Class B
limited partner units in the partnership and the partnership's assumption of the
$23.0 million in mortgage debt secured by such property. The existing general
and limited partners converted their general and limited partner interests into
Class A limited partner units in the partnership. The Class A units have an
agreed value of $1.00 per unit and are entitled to a fixed preferred return of
10% per annum, paid quarterly. The Class A units may be converted into a total
of 529,000 shares of the Company's Series F Cumulative Convertible Preferred
Stock at any time after the first but

76
77
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. REAL ESTATE (Continued)

not later than the sixth anniversary of the closing, on the basis of one
share of Series F Preferred Stock for each ten Class A units. See NOTE
13. "PREFERRED STOCK."

Further in October 1997, the Company purchased Palm Desert land, a 315.2 acre
parcel of undeveloped land in Palm Desert, California, for $11.2 million. The
Company paid $3.8 million in cash and assumed the existing mortgage of $7.4
million. The mortgage bears interest at 9% per annum, requires monthly principal
and interest payments of $76,000 and matures in February 2002.

In October 1997, the Company purchased Thompson land, a 4.0 acre parcel of
undeveloped land in Dallas County, Texas, for $869,000 in cash.

Also in October 1997, the Company purchased Santa Clarita land, a 20.6 acre
parcel of undeveloped land, in Santa Clarita, California, for $1.3 million. The
Company obtained new mortgage financing of $1.3 million as an advance
under the term loan from the Las Colinas I lender. The Santa Clarita land was
added as additional collateral for the term loan.

Further in October 1997, the Company purchased Tomlin land, a 9.2 acre parcel of
undeveloped land in Dallas County, Texas, for $1.7 million in cash.

In October 1997, the Company purchased Rasor land, a 378.2 acre parcel of
undeveloped land in Plano, Texas, for $14.4 million. The Company paid $5.1
million in cash, obtained new mortgage financing of $3.5 million as an
advance under the term loan from the Las Colinas I lender and exchanged the
Perkins land, a 645.4 acre parcel of undeveloped land in Collin County, Texas,
for the remainder of the purchase price. The Company simultaneously sold an 86.5
acre tract of the Rasor land for $3.8 million in cash, the Company receiving net
cash proceeds of $3.5 million after the payment of various closing costs
associated with the sale. The Company recognized a gain of $217,000 on the sale
of the 86.5 acre tract. The Rasor land was added as additional collateral for
the term loan.

Also in October 1997, the Company purchased the Piccadilly Inns, four hotels in
Fresno, California, with a total of 697 rooms, for $33.0 million. The Company
issued 1.6 million shares of its Series F Cumulative Convertible Preferred Stock
for $16.0 million of the purchase price and obtained new mortgage financing of
$19.8 million. See NOTE 13. "PREFERRED STOCK." The Company received net
financing proceeds of $2.2 million after the payment of various closing costs
associated with the financing. The mortgage bears interest at 8.40% per annum,
requires monthly principal and interest payments of $158,000 and matures in
November 2012.

Further in October 1997, a newly formed partnership, of which the Company is the
general partner and Class B limited partner, purchased

77
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. REAL ESTATE (Continued)

the Vineyards land, a 15.8 acre parcel of undeveloped land in Tarrant County,
Texas, for $4.5 million. The partnership paid $800,000 in cash, assumed the
existing mortgage of $2.5 million and issued the seller 1.1 million Class A
limited partner units in the partnership as additional consideration. The Class
A units have an agreed value of $1.00 per unit and are entitled to a fixed
preferred return of 10% per annum, paid quarterly. The Class A units may be
exchanged for either shares of the Company's Series G Preferred Stock on or
after the second anniversary of the closing at the rate of one share of Series G
Preferred Stock for each 100 Class A units exchanged, or on or after the third
anniversary of the closing, the Class A units are also exchangeable for shares
of the Company's Common Stock. The Class A units are exchangeable for shares of
the Company's Common Stock at the rate of $1.00 per unit plus any outstanding
preferred return divided by .9 times the simple average of the daily closing
price of the Company's Common Stock for the 20 days preceding the date of
conversion. The assumed mortgage bears interest at 12.95% per annum requires
quarterly payments of interest only and matures in June 1998. See NOTE 13.
"PREFERRED STOCK."

In October 1997, the Company purchased Dalho land, a 3.4 acre parcel of
undeveloped land in Farmers Branch, Texas, for $300,000 in cash.

Also in October 1997, the Company sold a 11.6 acre tract of Valley Ranch land
for $1.2 million in cash. The net cash proceeds of $990,000, after the payment
of various closing costs associated with the sale, were deposited in a
certificate of deposit for the benefit of the lender, in accordance with the
term loan secured by such land. The certificate of deposit was released to the
lender in December 1997, in conjunction with the payoff of the loan. The Company
recognized a gain of $629,000 on the sale.

In November 1997, the Company sold two tracts of Valley Ranch land, totaling 8
acres, for $577,000 in cash. The net cash proceeds of $451,000, after the
payment of various closing costs associated with the sale, were deposited in a
certificate of deposit for the benefit of the lender, in accordance with the
term loan secured by such land. The certificate of deposit was released to the
lender in December 1997 in conjunction with the payoff of the loan. The Company
recognized a gain of $216,000 on the sale.

Also in November 1997, the Company purchased Hollywood Casino land, a 51.7 acre
parcel of undeveloped land in Farmers Branch, Texas, for $11.1 million. The
Company paid $3.6 million in cash and obtained new mortgage financing of $7.5
million. The mortgage bears interest at 9.25% per annum, requires monthly
payments of interest only and matures in December 1999.

In December 1997, the Company sold a 5.1 acre tract of the Valley Ranch land,
for $430,000 in cash. The net cash proceeds of $353,000, after the payment of
various closing costs associated with the sale, were

78
79
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. REAL ESTATE (Continued)

deposited in a certificate of deposit for the benefit of the lender, in
accordance with the term loan secured by such land. The certificate of deposit
was released to the lender in December 1997, in conjunction with the payoff of
the loan. The Company recognized a gain of $203,000 on the sale.

Further in December 1997, the Company purchased Stagliano land, a 3.2 acre
parcel of undeveloped land in Farmers Branch, Texas, for $500,000 in cash.

In December 1997, the Company sold a 32.0 acre tract of Parkfield land in
Denver, Colorado, for $1.2 million in cash. In accordance with the provisions of
the term loan secured by such parcel, the Company applied the net cash proceeds
of $1.1 million, to paydown the term loan in exchange for the lender's release
of its collateral interest in such land. The Company recognized a gain of
$372,000 on the sale.

Also in December 1997, the Company exchanged a 43.0 acre tract of Valley Ranch
land for Preston Square, a 35,508 square foot shopping center in Dallas, Texas.
In accordance with the provisions of the term loan securing the Valley Ranch
land, the Company paid $2.8 million to the lender in exchange for the lender's
release of its collateral interest in such land. Simultaneously, the Company
obtained new mortgage financing of $2.5 million secured by the shopping center.
The mortgage bears interest at 8.2% per annum, requires monthly payments of
interest only and matures in December 1999. The Company recognized no gain or
loss on the exchange.

Further in December 1997, the Company sold two parcels of Valley Ranch land,
totaling 25.1 acres, for $3.3 million. The Company received net cash proceeds of
$2.1 million and provided an additional $891,000 in purchase money financing.
The purchase money financing bore interest at 10.0% per annum and matured in
January 1998. The Company received a $624,000 paydown on the purchase money
financing in January with the remainder being deferred until a zoning issue is
resolved. In accordance with the provisions of the term loan secured by such
parcel, the Company applied the net cash proceeds of $2.1 million to payoff the
term loan secured by such parcel, the lender releasing its collateral interest
in the remaining Valley Ranch land. The Company recognized a gain of $1.8
million and deferred an additional $267,000 until the zoning issue is resolved.

79
80

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

NOTE 4. REAL ESTATE (Continued)

In December 1997, the Company sold Park Plaza, a 105,507 square foot shopping
center in Manitowoc, Wisconsin, for $4.9 million in cash. The Company received
net cash of $1.6 million, after the payoff of $3.1 million in existing mortgage
debt and the payment of various closing costs associated with the sale. The
Company recognized a gain of $105,000 on the sale.

Also in December 1997, the Company sold Pin Oak land, a 567.6 acre parcel of
undeveloped land in Houston, Texas, for $11.4 million. The Company received net
cash proceeds of $3.5 million and provided an additional $6.9 million of short
term purchase money financing that was paid in full in January 1998. On the
payoff of the purchase money financing the Company received net cash of $1.5
million after the payoff of $5.2 million in underlying mortgage debt, and the
payment of various closing costs associated with the sale. The Company
recognized a gain of $3.7 million on the sale.

In November 1991, the Company transferred the Porticos Apartments to Income
Opportunity Realty Investors, Inc. ("IORI"), an equity investee, in
satisfaction, at the time, of the Company's $3.6 million obligation to IORI. The
Company recorded a deferred gain of $3.0 million on the transfer. In June 1997,
IORI sold the property, and accordingly the Company recognized such previously
deferred gain. See NOTE 6. INVESTMENT IN EQUITY INVESTEES."

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 cash proceeds to paydown the term loans secured by such land.
The Company recognized gains totaling $3.7 million from such sales.

In 1996, the Company purchased a single family residence, a hotel and a total of
1,368.5 acres of land for a total of $57.5 million. In connection with these
acquisitions, the Company obtained new or seller financing totaling $41.3
million. The mortgages bear interest at rates ranging from 9% to 15% per annum,
required monthly payments of principal and interest totaling $491,479 and
matured from June 1998 to December 1999.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

80
81

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

NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES

Activity in the allowance for estimated losses was as follows:

1997 1996 1995
-------- -------- -------

Balance January 1, ........................... $3,926 $ 7,254 $ 8,201
Amounts charged off .......................... (1,528) -- (947)
Writedown of property ........................ -- (3,328) --
------ ------- -------
Balance December 31, ......................... $2,398 $ 3,926 $ 7,254
====== ======= =======

NOTE 6. INVESTMENTS IN EQUITY INVESTEES

The Company's investment in equity investees at December 31, 1997, includes (i)
equity securities of three publicly traded real estate investment trusts,
Continental Mortgage and Equity Trust ("CMET"), 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 Basic Capital Management, Inc.
("BCM"), the Company's advisor. 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 10. "MARGIN
BORROWINGS."

[THIS SPACE INTENTIONALLY LEFT BLANK.]

81
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. INVESTMENTS IN EQUITY INVESTEES (Continued)

The Company's investment in entity investees accounted for using the equity
method, at December 31, 1997 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, 1997 December 31, 1997 December 31, 1997 December 31, 1997
- -------- ----------------- ----------------- ----------------- -----------------

NRLP .................... 54.4% $ 11,479 $ * $ 83,018
CMET .................... 40.6 14,939 35,745 25,733
IORI .................... 29.7 3,511 7,439 5,176
TCI ..................... 30.6 8,378 26,652 20,664
-------- ---------
38,307 $134,591
======== =========
General partner
interest in NRLP and NOLP 6,230
Other ..................... 1,314
--------
$ 45,851
========

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

* At December 31, 1997, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity, however, was $198.9
million. Revaluation equity is defined as the difference between the
estimated current 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, 1997.

The Company's investment in entity investees 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 ......................... 54.4% $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
========
General partner
interest in NRLP and NOLP... 6,607
Other ........................ (2,234)
-------
$41,972
=======

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

* 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

82
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. INVESTMENTS IN EQUITY INVESTEES (Continued)

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.

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 1997, as its liquidity
has permitted.

In April 1996, the Company purchased a 28% general partner interest in Campbell
Center Associates, Ltd. ("Campbell, 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 payments of interest only and matures April 2000. In January
1997, the Company exercised its option to purchase an additional 28% general
partner interest in Campbell, Ltd. The purchase price was $300,000 in cash and a
$750,000 note, which bears interest at 8% per annum, requires monthly payments
of interest only and matures in April 2000. In July 1997, the Company purchased
an additional 9% general partner interest in Campbell, Ltd. for $868,000 in
cash.

In June 1996, a newly formed limited partnership, of which the Company is the
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 guarantee of the limited
partner. 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. In April 1997, the partnership sold a 35.0 acre
tract for $1.3 million in cash. The net sales proceeds of $1.2 million were
distributed to the limited partner in accordance with the partnership agreement.
The partnership recognized a gain of $884,000 on the sale. In July 1997, the
Partnership sold a 24.6 acre tract for $800,000 in cash. In accordance with the
terms of the term loan secured by such property, $197,000 of the net sales
proceeds were used to paydown such term loan. The remaining $545,000 was
distributed to the limited partner in accordance with the partnership agreement.
The partnership recognized a gain of $497,000 on the sale. In September 1997,
the partnership sold a 77.2 acre tract for $1.5 million in cash. In accordance
with the terms of the term loan secured by such property, the net sales proceeds
were used to paydown such term loan. The partnership recognized a gain of
$704,000 on the sale. In October 1997, the partnership sold a 96.5 acre tract
for $1.7 million in cash. In

83
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. INVESTMENTS IN EQUITY INVESTEES (Continued)

accordance with the terms of the term loan secured by such property, $548,000 of
the net sales proceeds were used to paydown such term loan and the remaining
$1.1 million being distributed to the limited partner in accordance with the
partnership agreement. The partnership recognized a gain of $691,000 on the
sale. In December 1997, the partnership sold a 94.4 acre tract for $2.5 million
in cash. Of the net sales proceeds, $1.8 million was distributed to the limited
partner and $572,000 was distributed to the Company as general partner in
accordance with the partnership agreement. The partnership recognized a gain of
$1.4 million on the sale. In January 1998, the partnership sold a 155.4 acre
tract for $2.9 million. The partnership received $721,000 in cash and provided
purchase money financing of an additional $2.2 million. Of the net sales
proceeds, $300,000 was distributed to the limited partner and $300,000 was
distributed to the Company as general partner in accordance with the partnership
agreement. The purchase money financing bears interest at 12% per annum,
requires monthly payments of interest only and matures in July 1998. The
partnership recognized a gain of $1.2 million on the sale.

In September 1997, a newly formed limited partnership, of which the Company is a
1% general partner and 21.5% limited partner, purchased a 422.4 acre parcel of
undeveloped land in Denton County, Texas, for $16.0 million in cash. The Company
contributed $3.6 million in cash to the partnership with the remaining $12.4
million being contributed by the other limited partners. The partnership
agreement designates the Company as the managing general partner. In September
1997, the partnership obtained financing of $6.5 million secured by the 422.4
acres of land. The mortgage bears interest at 10% per annum, requires quarterly
payments of interest only and matures in September 2001. The net financing
proceeds were distributed to the partners, the Company receiving $2.9 million of
its initial investment. The partnership agreement also provides that the limited
partners receive a 12% preferred cumulative return on their investment before
any sharing of partnership profits occurs. One of the limited partners in the
partnership is also a limited partner in a partnership that owns approximately
15.6% of the Company's outstanding shares of Common Stock. See NOTE 11. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."

In January 1992, the Company entered into a partnership agreement with an entity
affiliated with a limited partner in a partnership that owns approximately 15.6%
of the Company's outstanding shares of Common Stock, that 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,
1996, 197 of the residential lots had been sold. During 1997, an additional 17
lots were sold with 73 lots remaining to be sold at December 31, 1997. During
1997, each partner received $21,000 in return of capital distributions and
$12,000 in profit distributions.

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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%:

1997 1996
--------- --------

Property and notes
receivable, net ................... $236,367 $240,552
Other assets ........................ 43,213 59,409
Notes payable ....................... (339,102) (352,441)
Other liabilities ................... (17,311) (19,294)
-------- --------
Equity .............................. $(76,833) $(71,774)
======== ========

1997 1996 1995
--------- --------- --------

Revenues........................... $ 124,521 $124,044 $110,892
Depreciation..................... (10,418) (11,148) (10,268)
Interest......................... (34,481) (34,640) (34,956)
Operating expenses............... (79,463) (78,043) (69,572)
-------- -------- --------
Income (loss) before gains on
sale of real estate and
extraordinary gains............ 159 213 (3,904)

Gains on sale of real estate..... 8,356 61 7,701
-------- -------- --------
Net income....................... $ 8,515 $ 274 $ 3,797
======== ======== ========

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:

1997 1996 1995
--------- --------- --------

Income (loss) before gains on
sale of real estate.............. $ 817 $ 270 $(1,767)
Gains on sale of real estate........ 3,022 -- 1,884
------- ------ -------
Net income.......................... $ 3,839 $ 270 $ 117
======= ====== =======

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

1997 1996
--------- --------

Property and notes
receivable, net................ $ 631,825 $ 501,097
Other assets...................... 80,789 57,877
Notes payable..................... (483,064) (358,203)
Other liabilities................. (28,326) (19,849)
--------- ---------
Equity............................ $ 201,22 $ 180,922
========= =========

85
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. INVESTMENTS IN EQUITY INVESTEES (Continued)

1997 1996 1995
------------ ------------ --------------

Revenues ........................... $ 129,531 $ 101,246 $ 94,730
Depreciation ....................... (17,429) (14,408) (13,950)
Provision for losses ............... (1,337) 844 (541)
Interest ........................... (38,537) (30,401) (28,102)
Operating expenses ................. (85,387) (69,698) (65,471)
------------ ------------ ------------
(Loss) before gains on sale of
real estate and extra-
ordinary gains .................. (13,159) (12,417) (13,334)
Gains on sale of real estate ....... 34,297 11,701 5,822
Extraordinary gains ................ -- 1,068 1,437
------------ ------------ ------------
Net income (loss) .................. $ 21,138 $ 352 $ (6,075)
============ ============ ============

The Company's equity share of:

1997 1996 1995
--------- -------- --------

(Loss) before gains on sale of
real estate and extra-
ordinary gains................... $ (3,703) $ (2,911) $(3,356)
Gains on sale of real estate........ 4,645 2,463
Extraordinary gains................. 10,524 381 783
-------- -------- -------
Net income (loss)................... $ 6,821 $ 2,115 $ (110)
======== ======== =======

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
quarterly distributions since the first quarter of 1993, NRLP since the fourth
quarter of 1993 and TCI since the fourth quarter of 1995. In 1997, the Company
received distributions totaling $1.4 million from the REITs and $1.4 million
from the REITs from NRLP and accrued an additional $6.7 million in NRLP and TCI
distributions that were not received until January 1998. In 1996, the Company
received total distributions from the REITs of $2.1 million and $6.9 million
from NRLP. At December 31, 1995, the Company accrued $3.3 million in NRLP
distributions which were received January 2, 1996.

The Company's investments in the REITs and NRLP were initially acquired in 1989.
In 1997, the Company purchased an additional $172,000 of equity securities of
the REITs and NRLP.

NOTE 7. ACQUISITION OF PIZZA WORLD SUPREME, INC.

In April 1996, a newly formed subsidiary of the Company purchased, for $10.7
million in cash, 80% of the common stock of Pizza World Supreme, Inc. ("PWSI"),
which in turn had acquired 26 operating pizza parlors in various communities in
California's San Joaquin Valley. Concurrent with the purchase, the Company
granted to an individual an option to purchase 36.25% of the Company's
subsidiary at any time for the Company's net investment in such subsidiary.
Additionally, the Company held negotiations with underwriters to take such
subsidiary public. The Company believed that such option would be exercised and
further, that

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

NOTE 7. ACQUISITION OF PIZZA WORLD SUPREME, INC. (Continued)

the subsidiary would become publicly held approximately one year from its date
of acquisition. Accordingly, the Company believed its control of such subsidiary
was temporary and therefore accounted for such subsidiary under the equity
method through April 1997. In May 1997, the Company acquired the remaining 20%
of PWSI for $5.0 million and discontinued equity accounting. The sellers
provided purchase money financing in the form of two $2.5 million term loans.
The term loans bear interest at 8% per annum, require quarterly payments of
interest only and mature in May 2007.

NOTE 8. 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 1997, the Company purchased $15.1 million and sold $10.6
million of such securities. These equity securities are considered a trading
portfolio and are carried at market value. At December 31, 1997, the Company
recognized an unrealized decline in the market value of the equity securities in
its trading portfolio of $850,000. In 1997, the Company realized a net gain of
$154,000 from the sale of trading portfolio securities and received $107,000 in
dividends. 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 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. Unrealized and realized gains and losses in the trading portfolio
are included in other income in the accompanying Consolidated Statements of
Operations.

NOTE 9. NOTES AND INTEREST PAYABLE

Notes and interest payable consisted of the following:

1997 1996
----------------------- ----------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------- --------- -------- ---------

Notes payable
Mortgage loans ................ $ 84,050 $ 96,654 $ 40,680 $ 68,385
Borrowings from financial
institutions ............... 170,491 153,369 78,812 48,929
Notes payable to affiliates.... 7,342 4,570 1,658 4,176
-------- -------- -------- --------
$261,883 254,593 $121,150 121,490
======== ========
Interest payable (including....
$4,836 in 1997 and $4,798
in 1996 to affiliates)...... 7,393 6,373
-------- --------
$261,986 $127,863
======== ========

87
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. NOTES AND INTEREST PAYABLE (Continued)

Scheduled principal payments on notes payable are due as follows:

1998.................................... $ 89,049
1999.................................... 28,400
2000.................................... 17,771
2001 ................................... 29,564
2002.................................... 8,083
Thereafter.............................. 81,726
----------
$ 254,593
==========

Stated interest rates on notes payable ranged from 6.0% to 15% at December 31,
1997, and mature in varying installments between 1998 and 2007. At December 31,
1997, notes payable were collateralized by mortgage notes receivable with a net
carrying value of $22.7 million and by deeds of trust on real estate with a net
carrying value of $302.3 million. Excluded from interest expense in the
accompanying Consolidated Statement of Operations is capitalized interest of
$68,000 in 1997.

In May 1997, the Company financed a previously unencumbered 10.6 acre tract of
BP Las Colinas land for $3.1 million. The mortgage bears interest at 9.5% per
annum, requires monthly payments of interest only and matures in December 1999.

In May 1997, the Company obtained a second lien mortgage of $3.0 million secured
by the Pin Oak land. The mortgage bears interest at 12.5% per annum compounded
monthly, and matures in February 1999. In January 1998, the Palm Dessert land
was substituted for the Pin Oak land as collateral for the loan. See NOTE 11.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

In June 1997, the Company obtained a second lien mortgage of $3.0
million secured by the Lewisville land. The mortgage bears interest at
12.5% per annum, compounded monthly and matures in February 1999. See
NOTE 11. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

In June 1997, the Company refinanced the Valwood land for $15.8 million. The
mortgage bears interest at the prime rate plus 4.5%, currently 13% per annum,
requires monthly payments of interest only and matures in June 1998. The Company
received net cash of $4.9 million, after the payoff of $6.2 million in existing
mortgage debt secured by the property, an additional $3.0 million being applied
to payoff the Jefferies land loan and $1.4 million being applied to paydown the
Las Colinas I land term loan.

In July 1997, the Company obtained a third lien mortgage of $2.0 million
secured by the Pin Oak land. The mortgage bore interest at 12.5% per
annum, compounded monthly and matured in February 1998. The mortgage
was paid in full in January 1998. See NOTE 11. "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS."

88
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. NOTES AND INTEREST PAYABLE

In September 1997, the Company refinanced the Las Colinas I land Double O tract
for $7.3 million. The Company received net refinancing proceeds of $2.1 million,
after the payoff of $5.0 million in existing mortgage debt. The mortgage bears
interest at the prime rate plus 4.5%, currently 13% per annum, requires monthly
payments of interest only and matures in October 1998.

In October 1997, the Company refinanced the Oaktree Village Shopping Center for
$1.5 million. The Company received no net refinancing proceeds after the payoff
of $1.4 million in existing mortgage debt and the payment of various closing
costs associated with the financing. The note bears interest of 8.48% per annum,
requires monthly payments of principal and interest of $13,000 and matures in
November 2007.

Also in October 1997, the Company refinanced the Denver Merchandise Mart for
$25.0 million. The Company received net refinancing proceeds of $10.2 million,
after the payoff of $14.8 million in existing mortgage debt and the payment of
various closing costs associated with the financing. The note bears interest at
8.3% per annum, requires monthly payments of principal and interest and matures
in October 2012.

In December 1997, the Company refinanced the Inn at the Mart in Denver,
Colorado, for $4.0 million. The Company received net refinancing proceeds of
$1.4 million, after the payoff of $2.0 million in existing mortgage debt. The
mortgage bears interest at 7.85% per annum, requires monthly payments of
principal and interest of $35,000 and matures in January 2013.

In 1996, the Company purchased a single family residence, a hotel and a total of
1,368.5 acres of land for a total of $57.5 million. In connection with these
acquisitions, the Company obtained new or seller financing totaling $41.3
million. The mortgages bear interest at rates ranging from 9% to 15% per annum,
require monthly payments of principal and interest totaling $491,479 and
mature from June 1998 to December 1999.

Also in 1996, the Company refinanced the mortgage debt secured by a wraparound
mortgage note receivable, the Denver Merchandise Mart and an office building and
obtained mortgage financing for two previously unencumbered hotels, in the total
amount of $39.8 million. The Company received net cash of $23.0 million after
the payoff of $10.4 million in existing mortgage debt and the payment of various
costs associated with

89
90
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. NOTES AND INTEREST PAYABLE

the financings. The mortgages bore interest rates from 9.5% to 16.5% per annum,
required monthly payments of principal and interest totaling $404,500 and
matured October 1997 to September 2001.

Notes payable to affiliates at December 31, 1997 and 1996 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 10. 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 $53.3
million at December 31, 1997, and $40.0 million at December 31, 1996, 39.7% and
34.5%, 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
various brokerage firms into a single loan of $20.3 million. In July 1997, the
lender advanced an additional $3.7 million, increasing the loan balance to $24.0
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, 1997,
3,349,169 NRLP units with a market value of $80.8 million were pledged as
security for such loan.

NOTE 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In August 1996, the Company obtained a $2.0 million loan from a financial
institution 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
at the time of $4.0 million. The Company received $2.0 million in net cash after
the payment of closing costs associated with the loan. The loan was paid in full
by the proceeds of a new $4.0 million loan from another financial institution
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 at the time of
$10.4 million. The Company received $2.0 million in net cash after the payoff of
the $2.0 million loan.

In September 1996, the August 1996 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 $9.1 million. The Company received $2.0 million in net cash after the payment
of closing costs associated with the loan. The loan matures in July 1998.

90
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)

In January 1998, the December 1997 lender made a second $2.0 million loan. This
loan is secured by a pledge of Common Stock in the Company owned by BCM with a
market value at the time of $4.7 million. The Company received $2.0 million in
net cash.

In May, June and July 1997, the Company obtained a total of $8.0 million in
mortgage loans from entities and trusts affiliated with the limited partner in a
partnership that owns approximately 15.6% of the Company's outstanding shares of
Common Stock. See NOTE 9. "NOTES AND INTEREST PAYABLE." In January 1998, one of
the loans in the amount of $2.0 million was paid in full. In September 1997, the
limited partner also became a 22.5% limited partner in a newly formed limited
partnership of which the Company is a 1% general partner and a 21.5% limited
partner. See NOTE 6. "INVESTMENTS IN EQUITY INVESTEES" and NOTE 3. "NOTES
AND INTEREST PAYABLE" and NOTE 4. "REAL ESTATE."

NOTE 12. DIVIDENDS

In June 1996, the Company's Board of Directors resumed the payment of dividends
on the Company's Common Stock. The Company paid common dividends totaling $2.0
million or $.20 per share in 1997 and 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 1997 represented ordinary income and 100% of the
dividends paid in 1996 represented a return of capital.

NOTE 13. PREFERRED STOCK

The Company's Series B 10% Cumulative Convertible Preferred Stock consists of a
maximum of 4,000 shares with a par value of $2.00 per share and a liquidation
preference of $100.00 per share. 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 Company's Board
of Directors. The Series B Preferred Stock is convertible between May 8, 1998
and June 8, 1998, into Common Stock of the Company at 90% of the average closing
price of the Company's Common Stock on the prior 30 trading days. At December
31, 1997, 4,000 shares of Series B Preferred Stock were issued and outstanding.

The Company's Series C 10% Cumulative Convertible Preferred Stock consists of a
maximum of 16,681 shares with a par value of $2.00 per share and a liquidation
preference of $100.00 per share. 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 Company's Board
of Directors. The Series C Preferred Stock is convertible between November 25,
1998 and February 23, 1999, into Common Stock of the Company at 90% of the
average closing price of the Company's Common Stock on the prior 30 trading
days. At December 31, 1997, 16,681 shares of Series C Preferred Stock were
issued and outstanding.

91
92
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13. PREFERRED STOCK (Continued)

The Company's Series D 9.50% Cumulative Preferred Stock consists of a maximum of
91,000 shares with a par value of $2.00 per share and a liquidation preference
of $20.00 per share. Dividends are payable at the 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 Company's Board of Directors.
The Class A limited partner units of Ocean Beach Partners, L.P. may be exchanged
for Series D Preferred Stock at the rate of 20 Class A units for each share of
Series D Preferred Stock. No more than one-third of the Class A units held may
be exchanged prior to May 31, 2001. Between June 1, 2001 and May 31, 2006 all
unexchanged Class A units are exchangeable. At December 31, 1997, none of the
Series D Preferred Stock was issued.

The Company's Series E 10% Cumulative Convertible Preferred Stock consists of a
maximum of 80,000 shares with a par value of $2.00 per share and a liquidation
preference of $100.00 per share. 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 Company's Board
of Directors for periods prior to November 4, 1999 and $11.00 per year, $2.75
per quarter thereafter. The Series E Preferred Stock is reserved for the
conversion of the Class A limited partner units of Valley Ranch, L.P. Such Class
A units may be exchanged for Series E Preferred Stock at the rate of 100 Class A
units for each share of Series E Preferred Stock. Beginning November 4, 1998,
the Series E Preferred Stock may be converted into 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 original Series E Preferred Stock
may be converted, and the remainder may be converted on or after November 4,
2001. At December 31, 1997, none of the Series E Preferred Stock was issued.

The Company's Series F 10% Cumulative Convertible Preferred Stock consists of a
maximum of 7,500,000 shares with a par value of $2.00 per share and a
liquidation preference of $10.00 per share. Dividends are payable at the rate of
$1.00 per year or $.25 per quarter to stockholders of record on the 15th day of
each March, June, September and December when and as declared by the Company's
Board of Directors accruing cumulatively from August 16, 1998 and commencing on
October 15, 1998. The Series F Preferred Stock may be converted, after August
15, 2003, into Common Stock of the Company at 90% of the market value of the
Company's Common Stock for the 20 trading days prior to conversion. At December
31, 1997, 2,000,000 shares of Series F Preferred Stock were issued and
outstanding.

The Company's Series G 10% Cumulative Convertible Preferred Stock consists of a
maximum of 11,000 shares with a par value of $2.00 per share, and a liquidation
preference of $100.00 per share. Dividends are

92
93
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13. PREFERRED STOCK (Continued)

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 Company's Board of Directors. The Series G Preferred Stock is
reserved for the conversion of the Class A limited partner units of Grapevine
American, L.P. The Class A units may be exchanged for Series G Preferred Stock
at the rate of 100 Class A units for each share of Series G Preferred Stock, on
or after October 6, 1999. The Series G Preferred Stock may be converted, after
October 6, 2000, into Common Stock of the Company at 90% of the market value of
the Company's Common Stock for the twenty trading days prior to conversion. At
December 31, 1997, none of the Series G Preferred Stock was issued.

NOTE 14. 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. Karl L.
Blaha, President and Director of the Company serves as Executive Vice President
- - Commercial Asset Management of 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.

93
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14. ADVISORY AGREEMENT (Continued)

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

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

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

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

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

NOTE 15. 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) First Equity Properties, Inc. ("First Equity"), which is
50% owned by BCM, (ii) Gene E. 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, its
office building and the Denver Merchandise Mart to Carmel Realty, Inc.

94
95
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. PROPERTY MANAGEMENT (Continued)

("Carmel Realty"), which is a company owned by First Equity. Carmel Realty is
entitled to receive property and construction management fees and leasing
commissions in accordance with the terms of its property- level management
agreement with Carmel, Ltd.

NOTE 16. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.

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

1997 1996 1995
--------- -------- --------

Fees
Advisory and mortgage
servicing ....................................... $ 2,657 $ 1,539 $ 1,195
Loan arrangement ................................... 592 806 95
Brokerage commissions ................................. 7,586 1,889 905
Property and construction
management and leasing
commissions* .................................... 865 892 1,200
--------- -------- --------
$ 11,700 $ 5,126 $ 3,395
========= ======== ========

Cost reimbursements ................................ $ 1,809 $ 691 $ 516
========= ======== ========

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

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

95
96

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

NOTE 17. INDUSTRY SEGMENTS

Real Pizza
1997 Estate Parlor Total
- ------ ---------- --------- --------

Revenues .............................................. $ 29,075 $ 17,926 $ 47,001
Income (loss) before income
taxes ............................................ (4,007) 1,579 (2,428)
Identifiable assets ................................... 410,000 23,799 433,799
Depreciation and amortization ......................... 2,652 686 3,338
Capital expenditures .................................. 10,993 6,693 17,686

NOTE 18. 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, 1997, the Company had a tax net operating loss carryforwards of
$21.0 million expiring through 2011.

At December 31, 1997, the Company has a deferred tax benefit of $8.0 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:

1997 1996 1995
--------- ---------- ---------

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

NOTE 19. 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 early payoff of debt.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

96
97
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 20. 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 under
non-cancelable operating leases as of December 31, 1997:

1998........................... $ 3,747
1999........................... 3,427
2000........................... 2,773
2001........................... 2,231
2002........................... 1,875
Thereafter..................... 10,746
-------------
$ 24,799
=============

PWSI conducts the majority of its operations from leased facilities which
includes an office, warehouse, and sixty-one pizza parlor locations for which a
lease was signed and the pizza parlor was either open at December 31, 1997 or
scheduled to open thereafter. The leases expire over the next twelve years. PWSI
also leases vehicles under operating leases. the following is a schedule of
minimum future rent commitments under operating leases as of December 31, 1997:

1998.......................... $ 2,133
1999.......................... 2,176
2000.......................... 2,007
2001.......................... 1,806
2002.......................... 1,773
Thereafter.................... 9,387
-------------
$ 19,282
=============

Total facilities and automobile rent expense relating to these leases was $1.3
million in 1997.

NOTE 21. COMMITMENTS AND CONTINGENCIES

[THIS SPACE INTENTIONALLY LEFT BLANK.]

97
98
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 22. QUARTERLY RESULTS OF OPERATIONS

The following is a tabulation of the Company's quarterly results of operations
for the years 1997 and 1996 (unaudited):

Three Months Ended
1997 March 31, June 30, September 30, December 31,
- ---------- -------- -------- ------------- ------------

Revenue ................... $ 7,499 $ 9,667 $ 15,039 $ 17,766
Expense ................... 11,795 15,960 24,296 31,304
-------- -------- -------- --------

(Loss) from operations .... (4,296) (6,293) (9,257) (13,538)
Equity in income of
investees .............. 280 4,970 (145) 5,555
Gains on sale of
real estate ............ 4,287 3,863 3,205 8,941
-------- -------- -------- --------
Net income (loss) ......... 271 2,540 (6,197) 958

Preferred dividend
requirement .............. (50) (49) (49) (58)
-------- -------- -------- --------
Net income (loss) appli-
cable to common shares ... $ 221 $ 2,491 $ (6,246) $ 900
======== ======== ======== ========

Earnings per share
Net income (loss) ......... $ .02 $ .21 $ (.52) $ .07
======== ======== ======== ========

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)
======= ======= ======= ========

98
99
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 23. SUBSEQUENT EVENTS

In January 1998, the Company purchased El Dorado Parkway land, a 8.5 acre parcel
of undeveloped land in McKinney, Texas, for $952,000. The Company paid $307,000
in cash and assumed the existing mortgage of $164,000 with the seller providing
purchase money financing of the remaining $481,000 of the purchase price. The
assumed mortgage bears interest at 10% per annum, requires semiannual payments
of principal and interest of $18,000 and matures in May 2005. The financing
bears interest at 8% per annum, requires semiannual principal and interest
payments of $67,000 and matures in January 2002.

Further in January 1998, the Company purchased JHL Connell land, a 7.7 acre
parcel of undeveloped land in Carrollton, Texas, for $1.3 million in cash.

Further in February 1998, the Company financed the previously unencumbered
Kamperman land in the amount of $1.6 million. The Company received net financing
proceeds of $1.5 million after the payment of various closing costs associated
with the financing. The mortgage bears interest at 9.0%, requires monthly
payments of interest only and matures in February 2000.

In February 1998, the Company refinanced the Vineyards land in the amount of
$3.4 million. The Company received net refinancing proceeds of $2.9 million,
after the payoff of existing mortgage debt of $540,000. The note bears interest
at 9.0% per annum, requires monthly payments of interest only and matures in
February 2000.

Also in February 1998, the Company financed the unencumbered Valley Ranch land
in the amount of $4.3 million. The Company received net financing proceeds of
$4.1 million after the payment of various closing

99
100
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 23. SUBSEQUENT EVENTS (Continued)

costs associated with the financing. The mortgage bears interest at 9.0% per
annum, requires monthly payments of interest only and matures in February 2000.

In November 1994, the Company and an affiliate of BCM, sold five apartment
complexes to a newly formed limited partnership in exchange for $3.2 million in
cash, a 27% limited partner interest in the partnership and two mortgage notes
receivable, secured by one of the properties sold. The Company had the option to
reacquire the properties at any time after September 1997 for their original
sales prices, after the buyer received a 12% return on its investment.
Accordingly, the Company recorded a deferred gain of $5.6 million which was
offset against the Company's investment in the partnership. In February 1998,
the Company reacquired three of the properties for $7.7 million. The Company
paid $4.0 million in cash and assumed the existing mortgage of $3.7 million.
Simultaneously the Company refinanced the three properties for a total of $7.8
million, the Company receiving net cash of $3.9 million after the payoff of $3.7
million in existing mortgage debt and the payment of various costs associated
with the financing. The new mortgages bear interest at 9.5% per annum, require
monthly principal and interest payments of a total of $66,000 and mature in
February 2008. In addition, the Company received a refund of $230,000 from
Carmel Realty, representing the commission the Company had paid on the sale of
the properties in 1994.

In March 1998, the Company financed the previously unencumbered Stagliano and
Dalho land in the amount of $800,000 with the lender on the Bonneau land,
described above. The Company received net financing proceeds of $790,000 after
the payment of various closing costs associated with the financing. The mortgage
bears interest at 18.5% per annum with principal and interest due at maturity in
February 1999. The Company's JHL Connell land is also pledged as additional
collateral for this loan.

100
101
AMERICAN REALTY TRUST, INC. SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997

Cost Gross Amounts
Capitalized of Which Carried Life on Which
Subsequent to at End of Year Date Depreciation
Initial Cost Con- Acquisition ---------------------- Accumu- of In Latest
------------------ struc- ----------- Building & lated Con- Statement
Building & tion in Improve- Improve- (1) Depreci- struc- Date of Operation
Property/Location Encumbrances Land Improvements Progress ments Land ments Total ation tion Acquired is Computed
- ----------------- ------------ ---- ------------ -------- -------- ---- ------- ------- ------- ---- -------- ------------
PROPERTIES HELD FOR INVESTMENT (dollars in thousands)

OFFICE BUILDING
- ---------------

Rosedale Towers ...... $ 2,761 $ 665 $ 3,769 $ -- $ 1,057 $ 715 $ 4,776 $ 5,491 $ 1,150 1974 1990 10 - 40 years
Roseville, MN

SHOPPING CENTERS
- ----------------
Collection ........... 14,688 -- 20,210 -- 36 -- 20,246 20,246 169 1997 10 - 40 years
Denver, CO
Oaktree Shopping
Village ........... 1,538 192 1,431 -- 7 192 1,438 1,630 77 1981 1995 10 - 40 years
Lubbock, TX
One Hickory Center ... -- 335 -- 1,821 -- 335 1,821 2,156 -- (2) -- --
Dallas, TX
Preston Square ....... 2,538 389 1,555 -- -- 389 1,555 1,944 -- 1997 10 - 40 years
Dallas, TX

MERCHANDISE MART
- ----------------
Denver Mart .......... 25,377 4,824 5,184 -- 11,917 5,963 15,963 21,926 1,812 1965/ 1992 10 - 40 years
Denver, CO ........ 1986

HOTELS
- ------
Best Western Hotel ... 4,988 1,521 6,082 -- 662 1,521 6,744 8,265 282 1983 1996 10 - 40 years
Virginia Beach, VA
Inn at the Mart ...... 4,000 -- 302 -- 2,253 -- 2,555 2,555 175 1974 1994 10 - 40 years
Denver, CO
KC Holiday Inn ....... 8,995 1,110 4,535 -- 2,321 1,110 6,856 7,966 1,422 1974 1993 10 - 40 years
Kansas City, MO
Piccadilly Airport ... 5,335 -- 7,834 -- -- -- 7,834 7,834 33 1970 1997 10 - 40 years
Fresno, CA
Piccadilly Chateau ... 2,245 -- 3,906 -- -- -- 3,906 3,906 16 1989 1997 10 - 40 years
Fresno, CA
Piccadilly Shaws ..... 6,195 2,392 9,567 -- -- 2,392 9,567 11,959 40 1973 1997 10 - 40 years
Fresno, CA
Piccadilly University 6,025 -- 12,011 -- -- -- 12,011 12,011 50 1984 1997 10 - 40 years
Fresno, CA
Williamsburg
Hospitality House . 11,815 4,049 16,195 -- 496 4,049 16,690 20,739 145 1973 1997 10 - 40 years
Williamsburg, VA

SINGLE FAMILY RESIDENCE
- -----------------------
Tavel Circle.......... 154 53 214 -- -- 53 214 267 9
Dallas, TX ------- ------- ------- ------ ------- ------- -------- -------- ------
96,654 15,530 92,795 1,821 18,749 16,719 112,176 128,895 5,380

PROPERTIES HELD FOR SALE
LAND
- ----
Atlanta, Atlanta, GA.. 2,250(2) 11,052 -- (3,329)(3) 7,723 -- 7,723 -- N/A 1990 --
Bad Lands, Duchense, UT -- 25 -- -- 25 -- 25 -- 1992 --
BP Las Colinas,....... 2,627 7,318 -- (6,380)(4) 938 -- 938 -- N/A 1995 --
Las Colinas, TX
Chase Oaks, Plano, TX. 4,000 4,511 -- -- -- 4,511 - 4,511 -- N/A 1997 --

101
102

AMERICAN REALTY TRUST, INC. SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31, 1997

Dalho ................ $ -- $ 331 $ -- $ -- $ -- $ 331 $ -- $ 331 $ -- N/A 1997 --
Dowdy, Collin
County, TX ........ 1,509 1,949 -- -- -- 1,949 -- 1,949 -- N/A 1997 --
Hollywood Casino ..... 7,474 11,581 -- -- 11,581 -- 11,581 -- N/A 1997 --
Jeffries Ranch, ...... 1,084 1,178 -- -- 1,178 -- 1,178 -- N/A 1996 --
Oceanside, CA
Kamperman, Collin
County, TX ........ -- 5,361 -- -- (4,125)(4) 1,237 -- 1,237 -- N/A 1997 --
Katy Road, Harris
County, TX ........ 4,042 5,920 -- -- -- 5,920 -- 5,920 N/A 1997 --
Keller, Tarrant
County, TX ........ 4,000 6,897 -- -- -- 6,897 -- 6,897 -- N/A 1997 --
Lacy Longhorn, Farmers
Branch, TX ........ 1,350 1,908 -- -- -- 1,908 -- 1,908 N/A 1997 --
Las Colinas I, ....... 9,126 14,076 -- -- (3,644)(4) 10,432 -- 10,432 -- N/A 1995 --
Las Colinas, TX
Lewisville, .......... 5,664 4,195 -- -- -- 4,195 -- 4,195 -- N/A 1996 --
Lewisville, TX
McKinney Corners I,
Collin County, TX . 2,500 3,686 -- -- -- 3,686 -- 3,686 -- N/A 1997 --
McKinney Corners II,
Collin County, TX . 3,583 5,911 -- -- -- 5,911 -- 5,911 -- N/A 1997 --
McKinney Corners III,
Collin County, TX . 532 954 -- -- -- 954 -- 954 -- N/A 1997 --
McKinney Corners IV,
Collin County, TX . 1,455 2,679 -- -- -- 2,679 -- 2,679 -- N/A 1997 --
McKinney Corners V,
Collin County, TX . 434 1,117 -- -- -- 1,117 -- 1,117 -- N/A 1997 --
Pantex, Collin
County, TX ........ 4,548 5,759 -- -- -- 5,759 -- 5,759 -- N/A 1997 --
Parkfield, Denver, CO 4,970 9,112 -- -- (184)(4) 8,928 -- 8,928 -- N/A 1996 --
Palm Desert .......... 7,311 12,592 -- -- -- 12,592 -- 12,592 -- N/A 1997 --
Perkins, Collin
County, TX ........ -- 6,304 -- -- (6,304)(4) -- -- -- -- N/A 1997 --
Pin Oak, Houston, TX . 10,497 6,781 -- -- (6,781) -- -- -- N/A 1996 --
Pioneer Crossing ..... 16,125 23,254 -- -- -- 23,254 -- 23,254 N/A 1997 --
Austin, TX
Rasor ................ 5,334 15,316 -- -- (3,357)(4) 11,959 -- 11,959 -- N/A 1997 --
Rivertrails I, ....... -- 1,139 -- -- (1,126) 13 -- 13 -- N/A 1991 --
Ft. Worth, TX
Santa Clarita ........ 1,425 1,488 -- -- -- 1,488 -- 1,488 -- N/A 1997 --
Scout, Tarrant ....... 1,425 2,388 -- -- -- 2,388 -- 2,388 N/A 1997 --
County, TX
Stagliano ............ -- 566 -- -- -- 566 -- 566 -- N/A 1997 --
Thompson ............. 1,350 948 -- -- -- 948 -- 948 -- N/A 1997 --
Tomlin ............... 1,350 1,878 -- -- -- 1,878 -- 1,878 -- N/A 1997 --
Treefarm - LBJ, Dallas
County, TX ........ 1,956 2,568 -- -- -- 2,568 -- 2,568 -- N/A 1997 --

102
103

Cost Gross Amounts
Capitalized of Which Carried Life on Which
Subsequent to at End of Year Date Depreciation
Initial Cost Con- Acquisition ---------------------- Accumu- of In Latest
------------------ struc- ----------- Building & lated Con- Statement
Building & tion in Improve- Improve- (1) Depreci- struc- Date of Operation
Property/Location Encumbrances Land Improvements Progress ments Land ments Total ation tion Acquired is Computed
- ----------------- ------------ ---- ------------ -------- -------- ---- ------- ------- ------- ---- -------- ------------
(dollars in thousands)
PROPERTIES HELD FOR SALE - CONTINUED

LAND - Continued
- ----

Valley Ranch ....... $ 62 $ 16,592 $ -- $ -- $ (4,287)(4) $ 12,305 $ -- $ 12,305 $ -- N/A 1996 --
Irving, TX
Valley Ranch III ... 1,580 2,248 -- -- -- 2,248 -- 2,248 -- N/A 1997 --
Valwood, Dallas, TX 17,150 13,969 -- -- (239) 13,634 96 13,730 -- N/A 1996 --
Vineyards .......... 1,970 4,982 -- -- -- 4,982 -- 4,982 -- N/A 1997 --
Grapevine, TX
Other (7 properties) -- 160 -- -- 160 -- 160 -- N/A Various --
-------- -------- ------- ------ -------- -------- -------- -------- ------
128,683 218,694 -- -- (39,756) 178,842 96 178,938 --
-------- -------- ------- ------ -------- -------- -------- -------- ------
$225,337 $234,224 $92,795 $1,821 $(21,007) $195,561 $112,272 $307,833 $5,380
======== ======== ======= ====== ======== ======== ======== ======== ======

- ------------------
(1) The aggregate cost for federal income tax purposes is $288 million.
(2) Construction in progress on a 102,615 square foot office building in Dallas,
Texas.
(3) Writedown of property to estimated net realizable value.
(4) Cost basis of assigned to portion of property sold.

103

104
SCHEDULE III
(Continued)

AMERICAN REALTY TRUST, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION

1997 1996 1995
-------- -------- --------
(dollars in thousands)

Reconciliation of Real Estate

Balance at January 1, ............ $128,366 $ 70,495 $ 58,517

Additions
Acquisitions and improvements .... 201,955 61,649 23,196
Foreclosures ..................... 20,226 -- --
Property received in settlement
with insurance company ......... -- -- 1,622

Deductions
Sales of real estate ............. (42,714) (3,778) (9,813)
Property transferred in settlement
with insurance company ......... -- -- (3,027)
-------- -------- --------

Balance at December 31, .......... $307,833 $128,366 $ 70,495
======== ======== ========

Reconciliation of Accumulated Depreciation

Balance at January 1, ............ $ 9,331 $ 7,744 $ 6,819

Additions
Depreciation ..................... 2,244 1,587 1,250

Deductions
Sales of real estate ............. (6,195) -- (325)
-------- -------- --------

Balance at December 31, .......... $ 5,380 $ 9,331 $ 7,744
======== ======== ========

104

105
SCHEDULE IV

AMERICAN REALTY TRUST, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997

Periodic
Interest Maturity Payment Prior
Description Rate (1) Date (1) Terms Liens
- -------------------- -------- -------- -------------------------- -----------
(dollars in thousands)

FIRST MORTGAGE LOANS
Hall Land........................ 10.00% 12/97 Principal and interest due $ -
Secured by 4.2 acres of at maturity.
residential land in Maricopa
County, Arizona.

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

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

WRAPAROUND MORTGAGE LOANS

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

The Mills Corporation........... 2% of unpaid 01/98 Principal due at maturity. 10,497
Secured by 567.6 acres of purchase price
land in Katy, Texas.

JUNIOR MORTGAGE LOANS

NO. SO. II...................... 12.00% 02/98 Interest due monthly, with 1,317
Secured by shopping center in principal reductions of
Columbia, South Carolina. $25,000 due quarterly.
Principal balance due at
maturity.

Hall Land.................... 10.00% 12/97 Principal and interest due 112
Secured by 4.2 acres of at maturity.
residential land in Maricopa
County, Arizona.

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

Cat Valley Ranch, Ltd........ 10.00% 01/98 Principal and interest due -
Secured by 24 acres of land at maturity.
in Irving, Texas.

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

FIRST MORTGAGE LOANS
Hall Land........................ $ 250 $ 416 $ 112
Secured by 4.2 acres of
residential land in Maricopa
County, Arizona.

Nak Chung Building............... 100 20 -
Secured by restaurant in
Los Angeles, California.

Webster & Banc Boston............ 158 75 -
Secured by condominiums in Fort
Lauderdale, Florida.

WRAPAROUND MORTGAGE LOANS

Continental Hotel................ 27,600 22,713 -
Secured by a hotel and casino
in Las Vegas, Nevada.

The Mills Corporation........... 6,876 6,876 -
Secured by 567.6 acres of
land in Katy, Texas.

JUNIOR MORTGAGE LOANS

NO. SO. II...................... 852 79 -
Secured by shopping center in
Columbia, South Carolina.

Hall Land.................... 71 82 79
Secured by 4.2 acres of
residential land in Maricopa
County, Arizona.

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

Cat Valley Ranch, Ltd........ 891 891 -
Secured by 24 acres of land
in Irving, Texas.

105
106
SCHEDULE IV
(Continued)

AMERICAN REALTY TRUST, INC.
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997

Periodic
Interest Maturity Payment Prior
Description Rate (1) Date (1) Terms Liens
- -------------------- -------- -------- -------------------------- -----------
(dollars in thousands)

OTHER
Mediterranean Villas(3)...... 09/04 Interest only monthly. $ -
Secured by second and third 09/04 Principal at maturity. -
liens on an apartment complex
in San Antonio, Texas.

Tanglewood Partnership....... Variable 09/03 Interest only monthly. -
Secured by a partnership
interest.

-------

$15,468
=======

Interest receivable

Deferred gains

Discounts

Allowance for estimated losses

OTHER

Mediterranean Villas(3)...... $ 1,000 $ 1,000 $ -
Secured by second and third 300 300 -
liens on an apartment complex
in San Antonio, Texas.

Tanglewood Partnership....... 3,400 - -
Secured by a partnership
interest.

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

$ 41,598 32,552 $ 191
======== ==========

Interest receivable 380

Deferred gains (4,884)

Discounts (124)

Allowance for estimated losses (2,398)
----------

$ 25,526
==========

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

(1) Interest rates and maturity dates shown are as stipulated
in the loan documents at December 31, 1997. 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 $32.9
million.

(3) Mortgage note is receivable from a partnership in which the
Company is a 27% limited partner.

106
107

SCHEDULE IV
(Continued)

AMERICAN REALTY TRUST, INC.
MORTGAGE LOANS ON REAL ESTATE

1997 1996 1995
-------- -------- --------
(dollars in thousands)

Balance at January 1, ............. $ 56,745 $ 58,119 $ 54,050

Additions
New mortgage loans .............. 8,567 100 --
Compounding of interest ......... 8 -- --
Funding on existing loans ......... 150 150 3,295

Deductions
Collections of principal ........ (4,489) (1,495) 1,590
Proceed on sale of notes receivable (16,985) -- --
Write-off of principal ............ (2,723) (129) (816)
Foreclosures .................... (8,721) -- --
-------- -------- --------

Balance at December 31, ........... $ 32,552 $ 56,745 $ 58,119
======== ======== ========

107
108

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 Directors are elected at the annual
meeting of stockholders or are appointed by the Company's incumbent Board of
Directors and serve until the next annual meeting of stockholders 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.]

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109
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)

Directors (Continued)

KARL L. BLAHA: Age 50, Director (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 - Commercial Asset Management (since July 1997)
and 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 (October 1992 to July
1997) of Carmel Realty, Inc. ("Carmel Realty"), a company owned by First
Equity Properties, Inc. ("First Equity"), which is 50% owned by BCM;
Director and President (since 1996) of First Equity; 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 50, Director (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 Executive Board Member (since October 1996) of Yellow
Rose Foundation for Multiple Sclerosis Research.

OSCAR W. CASHWELL: Age 70, Director (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.

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

Directors (Continued)

AL GONZALEZ: Age 61, Director (Independent) (since 1989).

President (since March 1991) of AGE Refining, Inc.; President (January
1988 to March 1991) of Moody-Day Inc.; 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.; and member
(1987 to 1989) of the Dallas City Council.

CLIFF HARRIS: Age 49, Director (Independent) (since 1997).

President (since 1995) of Energy Transfer Group, L.L.C.; Project
Development Vice President (1990 to 1995) of Marsh & McLennan; Vice
Chairman (1990 to 1997) of the Dallas Rehabilitation Institute; Director
(since 1992) of Court Appointed Special Advocates; and Director (since
1989) of the NFL Alumni Association.

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. On April 21, 1997, Avacelle again filed
a voluntary petition under Chapter 11 of the United States Bankruptcy Code.

Board Meetings and Committees

The Company's Board of Directors held seventeen meetings during 1997. 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) and Bode. The Audit
Committee met three times during 1997.

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

Executive Officers

The following persons in addition to Karl L. Blaha, currently serve as
executive officers of the Company: Bruce A. Endendyk, Executive Vice
President; Thomas A. Holland, Executive Vice President and Chief

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

Executive Officers (Continued)

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 49, 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 55, 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.]

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

Executive Officers (Continued)

RANDALL M. PAULSON: Age 51, 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: 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.

ROBERT A. WALDMAN: Age 45, 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.

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

Officers (Continued)

DREW D. POTERA: Age 38, 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 1997. All of these filing requirements were satisfied by
the Company's Directors and executive officers and ten percent holders. In
making these 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

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

The Advisor (Continued)

a trustee of the trust for the benefit of the children of Mr. Phillips which
owns BCM. Mr. Blaha, President and a Director of the Company, serves as
Executive Vice President - Commercial Asset Management of 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 6, 1998, BCM
owned 5,261,824 shares of the Company's Common Stock, approximately 49.1% 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 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.

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115
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)

The Advisor (Continued)

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' 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

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

The Advisor (Continued)

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

KARL L. BLAHA: Executive Vice President - Commercial
Asset Management

BRUCE A. ENDENDYK: Executive Vice President

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

A. CAL ROSSI, JR.: Executive Vice President

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

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) First
Equity, which is 50% owned by

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

Property Management (Continued)

BCM, (ii) Gene E. 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, its office building and the Denver
Merchandise Mart to Carmel Realty, which is company owned by First Equity.
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.

The only direct remuneration paid by the Company is to those Directors who are
not officers or employees of BCM or its affiliated companies. Until April 1,
1998, the Company compensated 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 1997, $48,673 was paid to Independent
Directors in total Directors' fees for all meetings as follows: Roy E. Bode,
$14,900; Dale A. Crenwelge, $15,340; Al Gonzalez, $13,100; and Cliff Harris,
$5,333.

Effective April 1, 1998, the Company compensates Independent Directors at the
rate of $20,000 per year, plus $300 per Audit Committee meeting attended. In
addition, the Chairman of the Audit Committee receives an annual fee of $500.

In 1997, the Company's Board of Directors, including all of the Independent
Directors, approved the Company's 1997 Stock Option Plan (the "Plan"). The
Plan was approved by the Company's Stockholders at the Company's annual meeting
of stockholders held on January 19, 1998. There are no stock options
outstanding under the Plan.

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118
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, 1992 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.

====================================================================================================================
1992 1993 1994 1995 1996 1997
- --------------------------------------------------------------------------------------------------------------------

THE COMPANY 100.00 194.02 208.00 236.00 427.92 479.98
- --------------------------------------------------------------------------------------------------------------------
DJ EQUITY INDEX 100.00 109.95 110.76 152.49 187.63 251.34
- --------------------------------------------------------------------------------------------------------------------
DJ REAL ESTATE
INDEX 100.00 117.07 111.35 137.60 184.73 220.96
====================================================================================================================

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119
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 6, 1998.

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

Basic Capital Management, Inc. 5,261,824 (2) 49.1%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231

Davister Corp./Nanook Partners, L.P. 1,669,436 (3) 15.6%
10670 N. Central Expressway
Suite 640
Dallas, TX 75231

Continental Mortgage and Equity Trust 818,088 (4) 7.6%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231

Ryan T. Phillips 5,360,156 (2)(5) 50.0%
10670 N. Central Expressway
Suite 600
Dallas, Texas 75231

_________________________

(1) Percentages are based upon 10,711,921 shares outstanding as of March 6,
1998.

(2) Includes 5,261,824 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. Ryan T. 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.

(4) Each of the Trustees of CMET, Richard W. Douglas, Larry E. Harley, R.
Douglas Leonhard, Murray Shaw, Ted P. Stokely, 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.

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120
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (Continued)

(5) 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 6, 1998.

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

All Directors and 6,778,408 (2)(3)(4) 73.3%
Executive Officers as a (5)
group (8 persons)

___________________________

(1) Percentage is based upon 10,711,921 shares outstanding as of March 6, 1998.

(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 5,261,824 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. Ryan T. Phillips disclaims 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.

(5) Includes 500,000 shares owned by ND Investments, Inc., a wholly-owned
subsidiary 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

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121
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Policies with Respect to Certain Activities (Continued)

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.

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. Blaha, 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.

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122
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)

Certain Business Relationships (Continued)

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 T. 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.
In February 1998, an entity affiliated with Ryan T. Phillips, advanced BCM an
additional $1.7 million also on an unsecured demand note. This note bears
interest at 7.5% per annum with interest only payable month.

BCM has advanced an entity affiliated with Ryan Phillips $1.1 million on an
unsecured demand note. The note bore interest at 10% per annum with interest
only payable monthly. The note was paid in full in February 1998.

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) First Equity, which is 50% owned by BCM, (ii)
Gene E. 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, its office building and Denver Merchandise
Mart to Carmel Realty, which is a company owned by First Equity.

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

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 Merrillville, Indiana, with a principal balance of $3.5
million. The property is owned by a subsidiary of

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)

Related Party Transactions (Continued)

Davister Corp., a general partner in a partnership that owns approximately
15.6% of the Company's outstanding shares of Common Stock. The note matured in
December 1996. The Company and borrower agreed to extend the note's maturity
date to December 2000. As additional collateral for this loan, the Company
received a second lien mortgage on another property owned by the borrower as
well as the borrower's guarantee of the loan. In May 1997, the note plus
accrued but unpaid interest was paid in full.

BCM has entered into put agreements with certain holders of the Class A limited
partner units of Ocean Beach Partners, L.P. Such Class A units 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 Company's Common Stock is 80% of the average
daily closing price of the Company's Common Stock on the 20 previous trading
days.

BCM has also entered into put agreements with the certain holders of the
Company's Series F Cumulative Convertible Preferred Stock. The put price for
the Series F Preferred Stock is $10.00 per share plus any accrued and unpaid
dividends for up to a maximum of 50,000 shares of Series F Preferred Stock.

In August 1996, the Company obtained a $2.0 million loan from a financial
institution secured by a pledge of equity securities of CMET, IORI and TCI owned
by the Company and Common Stock of the Company owned by BCM with a market value
at the time of $4.0 million. The Company received $2.0 million in net cash
after the payment of closing costs associated with the loan. The loan was paid
in full by the proceeds of a new $4.0 million loan from another financial
institution secured by a pledge of equity securities of CMET IORI and TCI owned
by the Company and Common Stock of the Company owned by BCM with a market value
at the time of $10.4 million. The Company received $2.0 million in net cash
after the payoff of the $2.0 million loan.

In September 1996, the August 1996 lender made a second $2.0 million loan. The
second loan is also secured by a pledge of equity securities of the CMET, IORI
and TCI owned by the Company and Common Stock of the Company owned by BCM with
a market value of $9.1 million. The Company received $2.0 million in net cash
after the payment of closing costs associated with the loan. The loan matures
in July 1998.

In January 1998, the December 1997 lender made a second $2.0 million loan.
This loan is also secured by a pledge Common Stock of the Company owned by BCM
with a market value at the time of $4.7 million. The Company received $2.0
million in net cash.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)

Related Party Transactions (Continued)

In 1997, the Company paid BCM and its affiliates $2.6 million in advisory and
mortgage servicing fees; $7.6 million in real estate brokerage commissions;
$592,000 in loan arrangement fees and $865,000 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, in 1997 BCM received cost reimbursements from the Company
of $1.8 million.

In October 1997, the Company entered into leases with BCM and Carmel Realty for
space at the Company's One Hickory Center Office Building, which is currently
under construction. The BCM lease, effective upon the completion of the
building, is for 50,574 square feet (approximately 50% of the building), has a
term of ten years and provides for annual base rent of $974,000 per year for
the first year or $19.25 per square foot increasing to $1.3 million in the
tenth year or $24.90 per square foot. The Carmel Realty lease, also effective
upon completion of the building, is for 25,278 square feet (approximately 25%
of the building) has a term of 15 years, and provides for annual base rent of
$487,050 per year for the first year or $19.25 per square foot increasing to
$964,000 in the fifteenth year or $38.15 per square foot.

Effective January 1, 1998, Carmel Realty entered into a master lease for 23,813
square feet of space at the Company's Denver Merchandise Mart. The lease has a
term of three years and provides for annual rent of $358,000 or $15.00 per
square foot.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

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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, 1997 and 1996

Consolidated Statements of Operations -
Years Ended December 31, 1997, 1996 and 1995

Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1997, 1996 and 1995

Consolidated Statements of Cash Flows -
Years Ended December 31, 1997, 1996 and 1995

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, 1997).

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, 1997).

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, 1997).

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, 1997).

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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).

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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 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 Special Stock of Series F 10% Cumulative Preferred
Stock, increasing the number of authorized shares, dated April 21, 1997 (incorporated by reference to Exhibit
No. 3.0 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).

3.10 Restated 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 Special Stock of Series G 10% Cumulative Preferred
Stock, dated April 21, 1997 (incorporated by reference to Exhibit No. 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997).

3.11 Articles of Amendment to the Articles of Incorporation of American Realty Trust, Inc. increasing the number of
authorized shares of Common Stock to 100,000,000 shares, dated March 26, 1998 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).

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

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

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 (incorporated by reference to Exhibit No.
10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996).

10.5 Amended and Restated Advisory Agreement between American Realty Trust, Inc. and Basic Capital Management,
Inc., dated April 1, 1997 (incorporated by reference to Exhibit No. 10.0 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997).

10.6 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 October 16, 1997, was filed with
respect to Item 2. "Acquisition or Disposition of Assets," and Item
7. "Financial Statements and Exhibits," which reports the acquisition
of the Collection Retail and Commercial Center and the Piccadilly
Hotels, filed October 24, 1997 and as amended on Form 8-K/A, filed
December 16, 1997.

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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 30, 1998 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/ Oscar W. Cashwell
---------------------------- ---------------------------------
Karl L. Blaha Oscar W. Cashwell
Director and President Director

By: /s/ Roy E. Bode By: /s/ Cliff Harris
---------------------------- ---------------------------------
Roy E. Bode Cliff Harris
Director Director

By: /s/ Al Gonzalez
---------------------------------
Al Gonzalez
Director

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

Dated: March 30, 1998

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ANNUAL REPORT ON FORM 10-K

EXHIBIT INDEX

FOR THE YEAR ENDED DECEMBER 31, 1997

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

3.11 Articles of Amendment to the Articles of 131
Incorporation of American Realty Trust, Inc.
increasing the number of authorized shares of
Common Stock to 100,000,000 shares, dated
March 26, 1998.

21.0 Subsidiaries of Registrant. 132

27.0 Financial Data Schedule. 133

130