AMERICAN REALTY TRUST INC, POS AM, 1997-09-08

AMERICAN REALTY TRUST INC
POS AM, 1997-09-08
REAL ESTATE OPERATORS (NO DEVELOPERS) & LESSORS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 1997
Registration Statement No. 333-21583

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------

POST-EFFECTIVE AMENDMENT NO. 1
ON
FORM S-4
TO
FORM S-2
AND
FORM S-4
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933

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

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

<TABLE>
<S> <C> <C>
GEORGIA 6513 54-0697989
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer Identification No.)
Classification Code Number)
</TABLE>
10670 NORTH CENTRAL EXPRESSWAY
SUITE 300
DALLAS, TEXAS 75231
(214) 692-4700
(Address and telephone number of principal executive offices)
ROBERT A. WALDMAN, ESQ.
10670 NORTH CENTRAL EXPRESSWAY
SUITE 300
DALLAS, TEXAS 75231
(214) 692-4700
(Name, address and telephone number of agent for service)
------------------------------

Copy to:
THOMAS R. POPPLEWELL, ESQ.
Andrews & Kurth L.L.P.
1717 Main St., Suite 3700
Dallas, Texas 75201

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

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

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
============================================================================================================================

PROPOSED
TITLE OF EACH CLASS PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PRICE PER UNIT(1) PRICE(1) REGISTRATION
FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Stock, $2.00 par value . . 12,500,000 Shares $10.00 $125,000,000.00 $37,878.79 (3)

- --------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value . . . . (2)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>

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

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

(3) Fee previously paid.
_________________________
<PAGE> 2

PURSUANT TO RULE 429, THE PROSPECTUS CONTAINED HEREIN ALSO RELATES TO
SHARES OF THE REGISTRANT'S PREFERRED STOCK AND COMMON STOCK PREVIOUSLY
REGISTERED ON FORM S-2 (REGISTRATION STATEMENT NO. 333-21583). THIS POST
EFFECTIVE AMENDMENT ALSO CONSTITUTES A POST-EFFECTIVE AMENDMENT NO. 1 TO FORM
S-2, FILED TO THE REGISTRATION STATEMENT NO. 333-21583.

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

<PAGE> 3
PROSPECTUS

AMERICAN REALTY TRUST, INC.
PREFERRED STOCK
COMMON STOCK

American Realty Trust, Inc. (the "Company"), a Georgia corporation, may
offer from time to time shares of preferred stock, par value $2.00 per share
(the "Preferred Stock"), and in the event such Preferred Stock is convertible,
common voting stock, par value $.01 per share (the "Common Stock"), into which
such Preferred Stock is convertible having a public offering price of up to an
aggregate of $125,000,000 (or its equivalent based on the exchange rate at the
time of sale) in amounts, at prices and on terms to be determined at the time
of the offering. The Preferred Stock may be offered in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each a "Prospectus Supplement").

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

It is expected that the terms of acquisitions involving the issuance of the
shares of Preferred Stock covered by this Prospectus will be determined by
direct negotiations with the owners or controlling persons of the assets,
businesses or securities to be acquired, and that the shares of Preferred Stock
issued will be valued at prices reasonably related to the market price of the
Preferred Stock either at the time an agreement is entered into concerning the
terms of the acquisition or at or about the time the shares are delivered. No
underwriting discounts or commissions will be paid, although finder's fees may
be paid in connection with certain acquisitions. Any person receiving such
fees may be deemed to be an "underwriter" within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"), and any profit on the resale of
shares of Preferred Stock purchased by them, or of Common Stock into which such
Preferred Stock is converted, may be deemed to be underwriting commissions or
discounts under the Securities Act.

SEE "RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

________________

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

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

________________

The date of this Prospectus is September 8, 1997

<PAGE> 4

CERTAIN STATEMENTS UNDER CAPTIONS "THE BUSINESS OF THE COMPANY" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT"). SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS
OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE
OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD- LOOKING STATEMENTS. SUCH
FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: GENERAL ECONOMIC AND BUSINESS
CONDITIONS, WHICH WILL, AMONG OTHER THINGS, AFFECT THE SUPPLY AND DEMAND FOR
COMMERCIAL REAL ESTATE, AVAILABILITY AND CREDIT WORTHINESS OF PROSPECTIVE
TENANTS, LEASE RATES AND THE AVAILABILITY OF FINANCING; ADVERSE CHANGES IN THE
REAL ESTATE MARKETS INCLUDING, AMONG OTHER THINGS, COMPETITION WITH OTHER
COMPANIES, RISKS ASSOCIATED WITH REAL ESTATE ACQUISITIONS; GOVERNMENTAL ACTIONS
AND INITIATIVES; ENVIRONMENTAL/SAFETY REQUIREMENTS; AND OTHER CHANGES AND
FACTORS REFERENCED IN THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE.

THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON
REQUEST FROM THE COMPANY. ANY SUCH REQUEST SHOULD BE DIRECTED TO AMERICAN
RELTY TRUST, INC., 10670 NORTH CENTRAL EXPRESSWAY, SUITE 300, CALLAS, TEXAS
75231, ATTENTION: INVESTOR RELATIONS. THE COMPANY'S TELEPHONE NUMBER IS (214)
692-4700.

-----------------------
AVAILABLE INFORMATION

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

The Company has filed with the Commission a Registration Statement on
Form S-4 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the shares of Preferred Stock
and Common Stock of the Company. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Preferred Stock and
Common Stock, reference is made to the Registration Statement and to the
exhibits thereto. Statements contained herein concerning the provisions of
certain documents are not necessarily complete and, in each instance, reference
is made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected without charge at the office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies thereof
may be obtained from the Commission upon payment of the prescribed fees.

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<PAGE> 5

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

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

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

2. The Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, as filed with the Commission on March 31, 1997.

3. The Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1997, as filed with the Commission on May 15, 1997.

4. The Company's Quarterly Report on Form 10-Q/A for the fiscal
quarter ended March 31, 1997, as filed with the Commission on August 11, 1997.

5. The Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997, as filed with the Commission on August 13, 1997.

6. The Annual Report on Form 10-K for Continental Mortgage and
Equity Trust ("CMET") for the year ended December 31, 1996, as filed with the
Commission on March 14, 1997.

7. The Quarterly Report on Form 10-Q for CMET for the fiscal
quarter ended March 31, 1997, as filed with the Commission on May 7, 1997.

8. The Quarterly Report on Form 10-Q for CMET for the fiscal
quarter ended June 30, 1997, as filed with the Commission on August 8, 1997.

9. The Current Report on Form 8-K for CMET dated July 18, 1997,
as filed with the Commission on August 19, 1997.

10. The Annual Report on Form 10-K for Income Opportunity Realty
Investors, Inc. ("IORI") for the year ended December 31, 1996, as filed with
the Commission on March 13, 1997.

11. The Quarterly Report on Form 10-Q for IORI for the fiscal
quarter ended March 31, 1997, as filed with the Commission on May 7, 1997.

12. The Current Report on Form 8-K for IORI dated June 11, 1997,
as filed with the Commission on June 27, 1997.

13. The Quarterly Report on Form 10-Q for IORI for the fiscal

quarter ended June 30, 1997, as filed with the Commission on August 4, 1997.

14. The Current Report on Form 8-K for IORI dated June 11, 1997,
as filed with the Commission on August 20, 1997.

15. The Annual Report on Form 10-K for Transcontinental Realty
Investors, Inc. ("TCI") for the year ended December 31, 1996, as filed with the
Commission on March 26, 1997.

16. The Quarterly Report on Form 10-Q for TCI for the fiscal
quarter ended March 31, 1997, as filed with the Commission on May 12, 1997.

17. The Quarterly Report on Form 10-Q for TCI for the fiscal
quarter ended June 30, 1997, as filed with the Commission on August 7, 1997.

18. The Annual Report on Form 10-K for National Realty, L.P.
("NRLP") for the year ended December 31, 1996, as filed with the Commission on
March 25, 1997.

19. The Quarterly Report on Form 10-Q for NRLP for the fiscal
quarter ended March 31, 1997, as filed with the Commission on May 13, 1997.

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<PAGE> 6

20. The Quarterly Report on Form 10-Q for NRLP for the fiscal
quarter ended June 30, 1997, as filed with the Commission on August 11, 1997.

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

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<PAGE> 7
RATIO OF EARNINGS TO FIXED CHARGES

The following table summarizes the ratio of the Company's earnings to
combined fixed charges and preferred stock dividends (the "Earnings to Combined
Fixed Charges Ratio") for each of the five fiscal years of the Company ended
December 31, 1996:

<TABLE>
<CAPTION> Year Ended December 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
* * * * *
</TABLE>
* Earnings were inadequate to cover fixed charges by $4,819,000, $189,000,
$1,390,000, $4,923,000 and $7,117,000 in 1996, 1995, 1994, 1993 and 1992,
respectively.

USE OF PROCEEDS

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

THE COMPANY

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

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

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

BCM is a company owned by a trust for the benefit of the children of
Gene E. Phillips, the Chairman of the Board and a Director of the Company until
November 16, 1992. Gene Phillips served as a director of BCM until December
22, 1989 and as Chief Executive Officer of BCM until September 1, 1992. Gene
Phillips currently serves as a representative of the trust for the benefit of
his children that owns BCM and, in such capacity, Gene Phillips has substantial
contact with the management of BCM and input with respect to BCM's performance
of advisory services to the Company. Ryan T. Phillips, the son of Gene
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 April 11, 1997, BCM owned 5,115,060 shares of
the Company's Common Stock, approximately 39.6% of the shares then outstanding.
BCM has been providing advisory services to the Company since February 6, 1989.
BCM also serves as advisor to CMET, IORI and TCI. 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) Syntek West,
Inc. ("SWI"), of which Gene Phillips is the sole shareholder, (ii) Gene
Phillips and

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<PAGE> 8
(ii) a trust for the benefit of the children of Gene Phillips. Carmel, Ltd.
subcontracts the property-level management of the Company's hotels, shopping
centers, one of its office buildings and the Denver Merchandise Mart to Carmel
Realty, Inc. ("Carmel Realty") which is owned by SWI. Carmel Realty is
entitled to receive property and construction management fees and leasing
commissions in accordance with the terms of its property-level management
agreement with Carmel, Ltd.

Affiliates of the Advisor are also entitled to receive real estate
brokerage commissions in accordance with the terms of the Advisory Agreement.
The Company has no employees. Employees of BCM render services to the Company.

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

THE BUSINESS OF THE COMPANY

GENERAL

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

The Company's primary business is investing in equity interests in
real estate (including equity securities of real estate-related entities),
leases, joint venture development projects and partnerships and financing real
estate and real estate activities through investments in mortgage loans,
including first, wraparound and junior mortgage loans. The Company's board of
directors has broad authority under the Company's governing documents to make
all types of real estate investments, including mortgage loans and equity real
estate investments, as well as investments in the securities of other entities,
whether or not such entities are engaged in real estate related activities.
The Company does not have a policy limiting the amount or percentage of assets
that may be invested in any particular property or type of property or in any
geographic area. The Company's governing documents do not contain any
limitation on the amount or percentage of indebtedness the Company may incur.

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

The Company may purchase or lease properties for long-term investment,
develop or redevelop its properties or sell such properties, in whole or in
part, when circumstances warrant. The Company currently participates and may
continue to participate with other entities in property ownership, through
joint ventures or other types of co-ownership. Equity investments may be
subject to existing mortgage financing and other indebtedness that have
priority over the Company's equity interest.

The Company may repurchase or otherwise reacquire the Common Stock,
Special Stock or other securities and may also invest in securities of other
entities engaged in real estate activities or securities of other issuers. The
Company may invest in the securities of other issuers in connection with
acquisitions of indirect interests in real estate (normally general or limited
partnership interests in special purpose partnerships owning one or more
properties). The Company may in the future acquire all or substantially all of
the securities or assets of REITs, management companies or similar entities
where such investments would be consistent with its investment policies. From
time to time, the Company may invest in securities of other issuers for the
purpose of exercising control. It is not intended that the Company's
investments in securities will require it to register as an "investment
company" under the Investment Company Act of 1940, as amended, and it is
intended that the Company would divest securities before any such registration
would be required.

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

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<PAGE> 9

investment objectives and policies may be changed at any time by the Company's
Board of Directors without the approval of the Company's shareholders.

To the extent that its Board of Directors determines to seek
additional capital, the Company may raise such capital through additional
equity offerings, debt financing or retention of cash flow, or a combination of
these methods. If the Company's Board of Directors determines to raise
additional equity capital, it may, without stockholder approval, issue
additional shares of Common Stock or Special Stock up to the amount of its
authorized capital in any manner (and on such terms and for such consideration)
as it deems appropriate, including in exchange for property. Such securities
may be senior to the outstanding Common Stock and may include additional
series' of Special Stock which may be convertible into Common Stock. Existing
stockholders of the Company will have no preemptive right to purchase shares in
any subsequent offering of securities by the Company, and any such offering
could cause a dilution of a stockholder's investment in the Company.

To the extent that the Company's Board of Directors determines to
obtain additional debt financing, the Company intends to do so generally
through mortgages on properties and drawings against revolving lines of credit.
Such mortgages may be recourse, non-recourse or cross-collateralized. The
Company does not have a policy limiting the number or amount of mortgages that
may be placed on any particular property, but mortgage financing instruments
usually limit additional indebtedness on such properties. The Company may also
borrow funds through bank borrowings, publicly- and privately-placed debt
instruments, or purchase money obligations to the sellers of properties, any of
which indebtedness may be unsecured or may be secured by any or all of the
assets of the Company or any existing or new property-owning entity in which
the Company holds an interest. The Company and may have full or limited
recourse to all or any portion of the assets of the Company, or any such
existing or new property-owning entity. Although the Company may borrow to fund
the payment of dividends, it currently has no intention or expectation that it
will do so.

The Company may seek to obtain unsecured or secured lines of credit or
may determine to issue debt securities (which may be convertible into capital
stock or be accompanied by warrants to purchase capital stock), or to sell or
securitize its receivables. The proceeds from any borrowings may be used to
finance acquisitions, to develop or redevelop properties, to refinance existing
indebtedness or for working capital or capital improvements. The Company also
may determine to finance acquisitions through the exchange of properties or
issuance of additional Common Stock, Special Stock or other securities.

The Company has not made loans to other entities or persons, including
its officers and directors. The Company may in the future make loans to joint
ventures or other entities in which it participates. The Company does not
intend to engage in (i) trading, underwriting or agency distribution or sale of
securities of other issuers or (ii) the active trade of loans and investments.

Except as required under the Exchange Act, the Company is not required
to make annual or other reports to its securityholders.

The specific composition of the Company's real estate and mortgage
notes receivable portfolios from time to time depends largely on the judgment
of the Company's management as to changing investment opportunities and the
level of risk associated with specific investments or types of investments.
The Company's management intends to continue to maintain real estate and
mortgage notes receivable portfolios diversified by location and type of
property. In addition to its equity investments in real estate and mortgage
notes, the Company has also invested in private and open market purchases of
the equity securities of CMET, IORI, TCI and NRLP.

GEOGRAPHIC REGIONS

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

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

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

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

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

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<PAGE> 10
Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. The Company has one commercial property and
one hotel in this region.

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

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

REAL ESTATE

At June 30, 1997, approximately 71% 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 and may mortgage, pledge or otherwise obtain financing for its
properties. The Company's Board of Directors may alter the types of and
criteria for selecting new real estate investments and for obtaining financing
without a vote of the Company's stockholders.

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

At June 30, 1997, the Company had no properties on which significant
capital improvements were in process.

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

The following table sets forth the percentages, by property type and
geographic region, of the Company's owned real estate (excluding the 29 parcels
of developed, partially developed and undeveloped land, and a single family
residence, described below) at June 30, 1997.

<TABLE>
<CAPTION>
Commercial
Region Properties Hotels
- ------ ---------- ------
<S> <C> <C>
Midwest . . . . . . . . . . 60% 34%
Mountain . . . . . . . . . . 20 33
Southwest . . . . . . . . . 20 -
Southeast . . . . . . . . . - 33
---- ----
100% 100%
</TABLE>

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 29 parcels of developed, partially
developed and undeveloped land consisting of: 6 developed residential lots in
a residential subdivision in Fort Worth, Texas, 2 parcels of partially
developed land in Las Colinas, Texas, totaling 122.19 acres, 3.5 acres of
undeveloped land in downtown Atlanta, Georgia, 42.7 acres of partially
developed land in Denver, Colorado, 567.7 acres of partially developed land in
Houston, Texas, 280.0 acres of partially developed land in Dallas, Texas, 78.45
acres of partially developed land in Lewisville, Texas, 452.0 acres of
partially developed land in Irving, Texas, 420.0 acres of undeveloped land in
Duchense, Utah, 82.4 acres of undeveloped land in Oceanside, California, 546
acres of undeveloped land in Tarrant County, Texas, 130.6 acres of undeveloped
land in Harris County, Texas, four parcels of undeveloped land in Collin County,
Texas, totaling 251.1 acres, 17.1 acres of undeveloped land in Farmer's Branch,
Texas, 60.5 acres of undeveloped land in Plano, Texas, 1,448 acres of
undeveloped land in Austin, Texas, 129.6 acres of undeveloped land in Collin
County, Texas, 811.8 acres of undeveloped land in Tarrant County, Texas, and
182.5 acres of undeveloped land in Collin County, Texas and 6 additional
parcels of land totaling approximately 74.5 acres.

-8-
<PAGE> 11

A summary of the activity in the Company's owned real estate portfolio
during 1996 and through June 30, 1997 is as follows:

<TABLE>
<S> <C>
Owned properties in real estate portfolio at January 1, 1996 15*
Properties acquired through purchase . . . . . . . . . . . 24
Properties sold . . . . . . . . . . . . . . . . . . . . . (1)
--
Owned properties in real estate portfolio at
June 30, 1997 . . . . . . . . . . . . . . . . . . . . . 38*
</TABLE>

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

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

Properties Held for Investment. Set forth below are the Company's
properties held for investment and the average annual rental rate for
commercial properties and the average daily room rate for hotels and occupancy
at December 31, 1996, 1995, 1994, 1993 and 1992 for commercial properties and
average occupancy during 1996, 1995, 1994, 1993 and 1992 for hotels:

<TABLE>
<CAPTION>
Rent Per Square Foot
Average Room Rate
--------------------
- ------------------------------------------------------------------------------------------------------------------
Square
Property Location Footage/Rooms 1996 1995 1994 1993 1992
-------- -------- ------------- ---- ---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Office Building:
Rosedale Towers Minneapolis, MN 84,798 Sq. Ft. $14.88 $13.16 $14.46 $14.00 $14.43
- --------------------------------------------------------------------------------------------------------------------
Shopping Center:
Oak Tree Village Lubbock, TX 45,623 Sq. Ft. 7.98 7.34 * * *
Park Plaza Manitowoc, WI 105,507 Sq. Ft. 5.61 5.72 5.65 5.65 5.25
- ---------------------------------------------------------------------------------------------------------------------
Merchandise Mart:
Denver Mart Denver, CO 509,008 Sq. Ft. 15.33 14.53 14.18 * *
- ---------------------------------------------------------------------------------------------------------------------
Hotels:
Best Western Virginia Beach, VA 110 Rooms 41.11 * * * *
Oceanside
Inn at the Mart Denver, CO 156 Rooms 46.66 44.69 42.38 * *
Kansas City
Holiday Inn Kansas City, MO 196 Rooms 66.46 61.66 52.47 * *
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

* Property was acquired in 1996, 1995 or 1994.

-9-
<PAGE> 12

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Occupancy
---------
- -------------------------------------------------------------------------
Property 1996 1995 1994 1993 1992
-------- ---- ---- ---- ---- ----
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Office Building:
Rosedale Towers 91% 90% 94% 92% 89%
- -------------------------------------------------------------------------
Shopping Center
Oak Tree Village 89% 91% * * *
Park Plaza 100% 93% 93% 86% 52%
- -------------------------------------------------------------------------
Merchandise Mart
Denver Mart 95% 96% 97% * *
- -------------------------------------------------------------------------
Hotels
Best Western 42% * * * *
Oceanside
Inn at the Mart 36% 40% 42% * *
Kansas City
Holiday Inn 79% 75% 75% * *
- ------------------------------------------------------------------------
</TABLE>

* Property was acquired in 1996 or 1995.

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

Denver Merchandise Mart. The Denver Merchandise Mart is a wholesale
trade mart located in Denver, Colorado. There are no tenants occupying ten
percent or more of the rentable square footage of the Denver Merchandise Mart.
The principal business carried on in or from the Denver Merchandise Mart is
wholesale sales of goods. The Company currently has no plans to renovate or
improve the Denver Merchandise Mart.

The following table shows selected vacancy and lease expiration
information for the tenants of the Denver Merchandise Mart at June 30, 1997:

[Remainder of Page Intentionally Left Blank]

-10-
<PAGE> 13

<TABLE>
<CAPTION>
% of
Gross 1997 1997
Number of Leased Minimum Minimum
Leases Area Annual annual
Year Expiring (a) (Sq. Ft.) Rent Rent
---- ------------ --------- ------------ --------
<S> <C> <C> <C> <C>
Month to Month -- -- $ -- --%

1997 14 17,856 225,828 4.62%

1998 131 73,774 1,150,524 23.54%

1999 143 103,318 1,634,016 33.43%

2000 117 92,823 1,564,260 32.00%

2001 26 18,711 313,464 6.41%

2002 -- -- -- --%

2003 -- -- -- --%

2004 -- -- -- --%

2005 -- -- -- --%

2006 and thereafter 1 2,278 1 --%
----- ------- ------------- ------

TOTAL 432 308,760 $ 4,888,093 100.00%
====== ======= ============= ======

- -----------------
</TABLE>

(a) Assumes no renewal options will be exercised in order to show the
earliest termination of the leases.

In April 1996, the Company refinanced the $5.1 million of mortgage
debt secured by the Denver Merchandise Mart for $15.0 million. The new loan is
secured by a mortgage against the Denver Merchandise Mart and a pledge of
632,000 newly issued shares of Common Stock. The Company received net
refinancing proceeds of $7.8 million after the payoff of the existing mortgage
debt, purchasing the ground lease on the Denver Merchandise Mart for $678,000
and payment of various closing costs associated with the refinancing. The new
loan bears interest at a variable rate, currently 10.5% per annum, requires
monthly principal and interest payments of $142,000 and matures in October
1997. The current principal balance of the new loan as of August 10, 1997 is
$14.8 million. The Company paid BCM a mortgage brokerage and equity refinancing
fee of $150,000 based upon the $15.0 million refinancing.

Real estate taxes are levied against the Denver Merchandise Mart for
county and township, and school tax purposes. Denver Merchandise Mart paid
$312,175 in real estate taxes in 1996. The 1996 millage rate was 8.8055/100.
The Company estimates that Denver Merchandise Mart will owe approximately
$300,000 in real estate taxes in 1997. Real estate taxes are substantially
reimbursed by the tenants through real estate tax recovery billings.

-11-
<PAGE> 14

As of December 31, 1996, for Federal income tax purposes, the Company
depreciates the Denver Merchandise Mart under the Modified Accelerated Cost
Recovery System (MACRS) as follows:

<TABLE>
<S> <C>
Buildings:

Gross Federal Income Tax Basis $4,938,057
Accumulated Depreciation $118,308
Depreciation Method MACRS - SL
Depreciable Life 40 years

Land Improvements:

Gross Federal Income Tax Basis $2,932,033
Accumulated Depreciation $136,637
Depreciation Method MACRS - SL
Depreciable Life 40 years

Personal Property:

Gross Federal Income Tax Basis $344,288
Accumulated Depreciation $78,478
Depreciation Method MACRS - 150%
Depreciable Life 10 years
</TABLE>

Oak Tree Village. Oak Tree Village is a retail shopping center
located in Lubbock, Texas. One tenant, American Home Patient, occupies over
ten percent of the rentable square footage of Oak Tree Village Shopping and
the principle nature of business of such tenant is the sale of home healthcare
equipment. The principal business carried on in or from the Oak Tree Village
is retail sales of goods and professional services. The Company currently has
no plans to renovate or improve Oak Tree Village.

The principal tenants of Oak Tree Village are American Home Patient,
Dr. Martinez and Uniform Today. The principal tenants of Oak Tree Village lease
their space and the underlying land pursuant to leases which are summarized
below.

Area Minimum Expiration Renewal
Principal Tenant (Sq. Ft.) Annual Rent Date Options
---------------- --------- ----------- ---- -------
<S> <C> <C> <C> <C>
American Home Patient 4,931 $29,900 3/31/99 No

Dr. Martinez 4,437 $28,841 11/30/98 No

Uniform Today 3,973 $40,723 2/28/02 No
</TABLE>

-12-
<PAGE> 15

The following table shows selected vacancy and lease expiration
information for the tenants of Oak Tree Village at June 30, 1997:

1997 -- -- -- --%

1998 3 7,973 54,971 16.12%

1999 6 9,769 77,165 22.63%

2000 7 13,198 119,043 34.91%

2001 2 4,925 36,431 10.68%

2002 2 5,922 53,392 15.66%

2003 -- -- -- --%

2004 -- -- -- --%

2005 -- -- -- --%

2006 and thereafter -- -- -- --%
-- ------ ----------- ------

TOTAL 20 41,787 $ 341,002 100.00%
== ====== =========== ======

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

</TABLE>

(a) Assumes no renewal options will be exercised in order to show the
earliest termination of the leases.

Real estate taxes are levied against Oak Tree Village for county and
township, and school tax purposes. Oak Tree Village paid $52,200 in real estate
taxes in 1996. The 1996 millage rate was 2.3536/100. The Company estimates
that Oak Tree Village will owe approximately $54,863 in real estate taxes in
1997. Real estate taxes are substantially reimbursed by the tenants through
real estate tax recovery billings.

As of December 31, 1996, for Federal income tax purposes, the Company
depreciates Oak Tree Village under the Modified Accelerated Cost Recovery
System (MACRS) as follows:

<TABLE>
<S> <C>
Buildings:

Gross Federal Income Tax Basis $1,430,781
Accumulated Depreciation $40,241
Depreciation Method MACRS - SL
Depreciable Life 40 years

Land Improvements:

Not applicable
Personal Property:

Not applicable
</TABLE>

-13-
<PAGE> 16

Park Plaza. Park Plaza is a retail shopping center located in
Manitowoc, Wisconsin. Sentry Foods, a grocery store, and Big Lots, a discount
department store, occupy ten percent or more of the rentable square footage of
Park Plaza. The principal business carried on in or from the Park Plaza is
retail sales of goods. The Company currently has no plans to renovate or
improve Park Plaza.

The principal tenants of Park Plaza lease their space and the
underlying land pursuant to leases which are summarized below.

Area Minimum Expiration Renewal
Principal Tenant (Sq. Ft.) Annual Rent Date Options
---------------- --------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Sentry Foods 45,000 $242,100 2/28/06 No
Big Lots 29,063 $100,000 11/30/98 No
- --------------------------------------------------------------------------------------------------------
</TABLE>

The following table shows selected vacancy and lease expiration
information for the tenants of Park Plaza at June 30, 1997:

1997 -- -- -- --%

1998 3 33,641 141,474 23.89%

1999 3 11,006 50,581 8.54%

2000 1 4,224 28,512 4.81%

2001 -- -- -- --%

2002 -- -- -- --%

2003 1 7,837 79,932 13.50%

2004 1 3,533 26,749 4.52%

2005 -- -- -- --%

2006 and thereafter 2 45,000 264,999 44.74%
-- ------- -------

TOTAL 11 105,241 $ 592,247 100.00%
== ======= =========== ======

</TABLE>

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

(a) Assumes no renewal options will be exercised in order to show the
earliest termination of the leases.

Real estate taxes are levied against Park Plaza for county and
township, and school tax purposes. Park Plaza paid $74,553 in real estate taxes
in 1996. The 1996 millage rate was 2.184/100. The Company estimates that Park
Plaza will owe approximately $95,173 in real estate taxes in 1997. Real estate
taxes are substantially reimbursed by the tenants through real estate tax
recovery billings.

As of December 31, 1996, for Federal income tax purposes, the Company
depreciates Park Plaza under the Modified Accelerated Cost Recovery System
(MACRS) as follows:

-14-
<PAGE> 17

<TABLE>
<S> <C>
Buildings:

Gross Federal Income Tax Basis $3,583,779
Accumulated Depreciation $414,373
Depreciation Method MACRS - SL
Depreciable Life 40 years

Land Improvements:

Gross Federal Income Tax Basis $1,058,435
Accumulated Depreciation $83,715
Depreciation Method MACRS - SL
Depreciable Life 40 years

Personal Property:

Not applicable.
</TABLE>

Rosedale Towers. Rosedale Towers is a commercial office building
located in Minneapolis, Minnesota. One tenant, Guasman & Moore, occupies ten
percent or more of the rentable square footage of the Rosedale Towers and the
principle nature of business of such tenant is engineering. The principal
businesses carried on in or from the Rosedale Towers are financial services and
insurance. The Company currently has no plans to renovate or improve Rosedale
Towers.

The principal tenants of Rosedale Towers are Guasman & Moore, FBS
Mortgage and Frank & Riach. The principal tenants of Rosedale Towers lease
their space and the underlying land pursuant to leases which are summarized
below.

Area Minimum Expiration Renewal
Principal Tenant (Sq. Ft.) Annual Rent Date Options
---------------- --------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Guasman & Moore 11,143 $161,574 3/31/03 No

FBS Mortgage 4,806 $73,292 6/30/98 No

Frank & Riach 4,432 $68,696 10/31/97 No
</TABLE>

-15-
<PAGE> 18

The following table shows selected vacancy and lease expiration
information for the tenants of the Rosedale Towers at June 30, 1997:

1997 8 10,354 161,914 14.62%

1998 9 16,423 252,404 22.80%

1999 9 18,088 271,374 24.51%

2000 7 10,852 168,880 15.25%

2001 4 7,214 84,307 7.61%

2002 -- -- -- --%

2003 1 11,143 161,574 14.60%

2004 -- -- -- --%

2005 -- -- -- --%

2006 and thereafter -- -- -- --%
-- ------ ---------

TOTAL 39 74,474 1,107,257 100.00%
== ====== ========= ======

- -----------------
</TABLE>

(a) Assumes no renewal options will be exercised in order to show the
earliest termination of the leases.

In August 1996, the Company refinanced the $2.4 million of mortgage
debt secured by the Rosedale Towers for $2.8 million. The Company received net
refinancing proceeds of $154,000 after the payoff of the existing mortgage debt
and payment of various closing costs associated with the refinancing. The
Company also received 564,704 shares of Common Stock that it had pledged as
additional collateral on the retired mortgage debt. The new loan bears interest
at 9.05% per annum, requires monthly principal and interest payments of $24,000
and matures in August 2006. The current principal balance of the new loan as
of August 1, 1997 is $2.8 million. The Company paid BCM a mortgage brokerage
and equity refinancing fee of $28,000 based upon the $2.8 million refinancing.

Real estate taxes are levied against Rosedale Towers for county and
township, and school tax purposes. Rosedale Towers paid $216,045 in real
estate taxes in 1996. The 1996 millage rate was 6.5468/100. The Company
estimates that Rosedale Towers will owe approximately $220,000 in real estate
taxes in 1997. Real estate taxes are substantially reimbursed by the tenants
through real estate tax recovery billings.

-16-
<PAGE> 19

As of December 31, 1996, for Federal income tax purposes, the Company
depreciates Rosedale Towers under the Modified Accelerated Cost Recovery System
(MACRS) as follows:

<TABLE>
<S> <C>
Buildings:

Gross Federal Income Tax Basis $1,893,482
Accumulated Depreciation $279,151
Depreciable Method MACRS - SL
Depreciable Life 40 years

Land Improvements:

Gross Federal Income Tax Basis $865,784
Accumulated Depreciation $45,778
Depreciation Method MACRS - SL
Depreciable Life 40 years

Personal Property:

Not applicable.
</TABLE>

Inn at the Mart. The Inn at the Mart is a 156 room hotel located in
Denver, Colorado. The Company currently has no plans to renovate or improve
the Inn at the Mart.

In August 1996, the Company financed the previously unencumbered Inn
at the Mart for $2.0 million to facilitate renovation of the property. the
Company received net financing proceeds of $890,000 after the payment of
various closing costs associated with the financing and a $1.1 million
renovation holdback. The lender advanced the $1.1 million renovation holdback
in December 1996. The new loan bears interest at a variable rate, currently
10.50% per annum and requires monthly interest only payments through February
1, 1998. Commencing March 1, 1998, monthly payments of interest plus a $3,000
principal paydown are required until maturity on September 1, 2001. The
current principal balance on the new loan as of August 1, 1997 is $2.0 million.
The Company paid BCM a mortgage brokerage and equity refinancing fee of $9,500
based upon the $2.0 million financing.

Real estate taxes are levied against Inn at the Mart for county and
township, and school tax purposes. Inn at the Mart paid $47,304 in real estate
taxes in 1996. The 1996 millage rate was 0.087871/100. The Company estimates
that Inn at the Mart will owe approximately $47,403 in real estate taxes in
1997. Real estate taxes are substantially reimbursed by the tenants through
real estate tax recovery billings.

As of December 31, 1996, for Federal income tax purposes, the Company
depreciates Inn at the Mart under the Modified Accelerated Cost Recovery System
(MACRS) as follows:

<TABLE>
<S> <C>
Buildings:

Gross Federal Income Tax Basis $402,916
Accumulated Depreciation $33,996
Depreciation Method MACRS - SL
Depreciable Life 40 years

Land Improvements:

Gross Federal Income Tax Basis $49,347
Accumulated Depreciation $4,165
Depreciation Method MACRS - SL
Depreciable Life 40 years
</TABLE>

-17-
<PAGE> 20

<TABLE>
<S> <C>
Personal Property:

Gross Federal Income Tax Basis $279,285
Accumulated Depreciation $80,164
Depreciation Method MACRS - 150%
Depreciable Life 10 years
</TABLE>

Best Western Oceanside. The Best Western Oceanside is a 110 room
hotel located in Virginia Beach, Virginia. In December 1996, the Company
purchased the Best Western Oceanside for $6.8 million. The Company acquired the
property through Ocean Beach Partners, L.P. ("Ocean LP"), a newly formed
partnership of which a wholly-owned subsidiary of the Company is the 1% general
partner and the Company is the 99% Class B limited partner. In conjunction with
the acquisition, Ocean, LP issued 1,813,660 Class A limited partner units in
Ocean LP having an agreed value of $1.00 per partnership unit to the former
owners of the property. The Class A limited partner units are entitled to a
$.095 per unit annual preferred return. The Class A limited partners do not
otherwise participate in the income, loss or cash flow of the partnership. The
Class A limited partner units may be exchanged for Series D Cumulative
Preferred Stock in the Company at a rate of 20 units per share of Preferred
Stock. The Company obtained new mortgage financing for the remaining $5.0
million of the purchase price. The new loan bears interest at 9.94% per annum,
requires monthly payments of principal and interest of $49,000 and matures in
January 2007. The current principal balance on the new loan as of August 1,
1997 is $5.0 million. The Company currently has no plans to renovate or improve
the Best Western Oceanside.

Real estate taxes are levied against Best Western Oceanside for county
and township, and school tax purposes. Best Western Oceanside paid $62,634 in
real estate taxes in 1996. The 1996 millage rate was 1.18/100. The Company
estimates that Best Western Oceanside will owe approximately $71,126 in real
estate taxes in 1997. Real estate taxes are substantially reimbursed by the
tenants through real estate tax recovery billings.

As of December 31, 1996, for Federal income tax purposes, the Company
depreciates Best Western Oceanside under the Accelerated Cost Recovery System
(ACRS) as follows:

<TABLE>
<S> <C>
Buildings:

Gross Federal Income Tax Basis $3,849,069
Accumulated Depreciation $2,748,157
Depreciation Method ACRS - SL
Depreciable Life 15 years

Land Improvements:

Gross Federal Income Tax Basis $51,189
Accumulated Depreciation $43,528
Depreciation Method ACRS - SL
Depreciable Life 15 years

Personal Property:

Gross Federal Income Tax Basis $472,741
Accumulated Depreciation $271,794
Depreciation Method 200% DB
Depreciable Life 7 years
</TABLE>

Kansas City Holiday Inn. The Kansas City Holiday Inn is a 196 room
hotel located in Kansas City, Missouri. In December 1996, the Company obtained
second lien financing on the Kansas City Holiday Inn of $3.2 million. The
Company received net financing proceeds of $3.0 million after the payment of
various closing costs associated with the financing. The mortgage bears
interest at 15% per annum, requires monthly interest payments of $41,000 and
matures in February 1999. The current principal balance on the second lien
loan as of August 1, 1997 is $3.2 million. In March 1995, the Company
exercised its option to extend the maturity date of the first lien loan secured
by the Kansas City Holiday Inn from March 1995 to March 1997. In April and
October 1995, the Company refinanced the first lien mortgage debt in the amount
of $6.0 million. The

-18-
<PAGE> 21

Company received net cash of $2.8 million after the payoff of $2.9 million of
the existing first lien mortgage debt and various closing costs associated with
the refinancing. The new first lien mortgage bears interest at 9.45% per
annum, requires monthly principal and interest payments of $56,000 and matures
in November 2005. The current principal balance of the first lien loan as of
August 1, 1997 is $5.8 million. The Company currently has no plans to renovate
or improve the Kansas City Holiday Inn.

Real estate taxes are levied against the Kansas City Holiday Inn for
county and township, and school tax purposes. The Kansas City Holiday Inn paid
$99,783 in real estate taxes in 1996. The 1996 millage rate was 7.08/100. The
Company estimates that the Kansas City Holiday Inn will owe approximately
$102,776 in real estate taxes in 1997. Real estate taxes are substantially
reimbursed by the tenants through real estate tax recovery billings.

As of December 31, 1996, for Federal income tax purposes, the Company
depreciates the Kansas City Holiday Inn under the Modified Accelerated Cost
Recovery System (MACRS) as follows:

<TABLE>
<S> <C>
Buildings:

Gross Federal Income Tax Basis $5,905,794
Accumulated Depreciation $436,783
Depreciation Method MACRS - SL
Depreciable Life 40 years

Land Improvements:

Gross Federal Income Tax Basis $2,025,540
Accumulated Depreciation $114, 243
Depreciation Method MACRS - SL
Depreciable Life 40 years

Personal Property:

Not applicable.
</TABLE>

Properties Held for Sale. Set forth below are the Company's properties
held for sale, primarily undeveloped, partially developed and undeveloped land,
and the average annual rental rate and an occupancy at December 31, 1996, 1995,
1994, 1993 and 1992 of its commercial property:

-19-
<PAGE> 22

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Rent Per Square Foot
--------------------
- -------------------------------------------------------------------------------------------------------------
Property Acres/Lots/
Office Building Location Square Footage 1996 1995 1994 1993 1992
--------------- -------- -------------- ---- ---- ---- ---- ----
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mopac St. Louis, MO 400,000 Sq. Ft. $ .16 $ .17 $ .14 $ .14 $ .14
- -------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Occupancy
---------
- --------------------------------------------------------------------
Property
Office Building 1996 1995 1994 1993 1992
--------------- ---- ---- ---- ---- ----
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mopac 100% 100% 100% 100% 100%
- --------------------------------------------------------------------
</TABLE>

Land

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

In October 1995, the Company purchased BP Las Colinas, a 92.6 acre
parcel of partially developed land in Las Colinas, Texas. In February 1996, the
Company entered into a contract to sell 72.5 acres of such parcel for $12.9
million. The contract called for the sale to close in two phases. In July 1996,
the Company completed the first phase sale of 32.3 acres for $4.9 million in
cash. In accordance with the terms of the term loan secured by such property,
the Company applied the net proceeds of the sale, $4.7 million, to pay down the
term loan, in exchange for that lenders' release of its collateral interest in
the 32.3 acres sold. The Company recognized a gain of $2.0 million on such
sale. In February 1997, the Company completed the second phase sale of 40.2
acres for $8.0 million, of which $7.2 million was paid in cash. Of the net
sales proceeds of $6.9 million, $1.5 million was used to payoff the underlying
debt secured by the BP Las Colinas parcel, pay a $500,000 maturity fee to the
lender, make a $1.5 million principal paydown on a note secured by Parkfield
land in Denver, Colorado with the same lender, and $1.0 million was applied as
a principal paydown on the term loan secured by the Las Colinas I land parcel.
In conjunction with the sale the Company provided $800,000 in purchase money
financing in the form of a six month unsecured loan. The loan bears interest at
12% per annum, with all accrued but unpaid interest and principal due at
maturity. The Company recognized a gain of $3.4 million on such sale, deferring
an additional $800,000 of gain until the loan is paid in full. 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 1996, the Company sold 2.3 acres of the Las Colinas I land
parcel for $961,000 in cash. In accordance with the provisions of the term loan
secured by such parcel, the Company applied the net proceeds of the sale,
$891,000, to pay down the term loan. The Company recognized a gain of $538,000
on the sale. In May 1996, the Company sold an additional 2.3 acres of the Las
Colinas I land parcel for $941,000 in cash. In accordance with the provisions
of the term loan secured by such parcel, the Company applied the net proceeds
of the sale of $864,000 to pay down the term loan. The Company recognized a
gain of $534,000 on the sale.

-20-
<PAGE> 23
$1.5 million. The excess financing proceeds of $500,000 were applied to the
payment of various closing costs associated with the acquisition. The loan
bears interest at 15% per annum, requires monthly interest only payments at a
rate of 12% per annum, with the remaining 3% being deferred and added to the
principal balance of the loan. The principal balance, accrued and unpaid
interest and a $600,000 "maturity fee" is due at the loan's maturity in June
1998. The Company paid a real estate brokerage commission of $255,000 to Carmel
Realty, based on the $8.5 million purchase price.

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

In July 1996, the Company purchased Pin Oak land, 567.7 acres of
partially developed land in Houston, Texas for $6.2 million. The Company paid
$451,000 in cash and obtained seller mortgage financing for the remaining $5.7
million of the purchase price. The loan bears interest at 9% per annum,
required a $500,000 principal and interest payment on November 1, 1996 and
requires quarterly principal and interest payments of $145,000, thereafter. The
loan matures in August 1998. The Company paid a real estate brokerage
commission of $187,000 to Carmel Realty based on the $6.2 million purchase
price. In September 1996, the Company entered into a contract to sell the land
for a price in excess of the land's purchase price and carrying and estimated
selling costs. The sale, should it be consummated, would close on or about
December 1, 1997.

In August 1996, the Company purchased a pool of assets for $3.1
million from Southmark Corporation ("Southmark"), consisting of a total of
151.5 acres of unimproved land in California, Indiana and Idaho, various
percentage interests, ranging from 15% to 45%, in five partnerships and trusts
that hold an unsecured note receivable with a principal balance of $3.4 million
and Southmark's 19.2% limited partner interest in SAMLP, as more fully
discussed in "Investments in Real Estate Investment Trusts and Real Estate
Partnerships," below. To complete the acquisition, the Company borrowed an
additional $3.0 million from the lender whose term loan is secured by the Las
Colinas I land in Las Colinas, Texas. The term loan was amended to increase the
loan amount from $10.9 million to $13.9 million. The $3.0 million advance is
secured by the 82.4 acres of unimproved land acquired from Southmark in
Oceanside, California and the 19.2% limited partner interest in SAMLP.

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

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

Also in November 1996, the Company purchased Lewisville land, 78.5
acres of undeveloped land in Lewisville, Texas, for $3.6 million. The Company
paid $1.1 million in cash and obtained mortgage financing for the remaining
$2.5 million of the purchase price. The mortgage bears interest at 10% per
annum, requires an annual interest payment of $250,000 on November 9, 1997, and
quarterly interest payments of $62,500 thereafter. The loan matures in October
1999. The Company paid a real estate brokerage commission of $237,000 to
Carmel Realty based on the $3.6 million purchase price.

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

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<PAGE> 24

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

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

In March 1997, the Company purchased Katy Road land, 130.6 acres of
undeveloped land in Harris County, Texas for $5.6 million. The Company paid
$1.6 million in cash and obtained seller financing for the remaining $4.0
million of the purchase price. The mortgage bears interest at 9% per annum,
requires quarterly interest-only payments of $92,000, and matures in March
2000. The Company paid a real estate brokerage commission of $209,000 to Carmel
Realty based on the $5.6 million purchase price.

In April 1997, the Company purchased McKinney Corners I, 30.4 acres of
undeveloped land in Collin County, Texas for $3.5 million. The Company paid
$1.0 million in cash and obtained mortgage financing for the remaining $2.5
million of the purchase price. The loan bears interest at 14% per annum,
requires monthly interest-only payments of $29,000 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.

In April 1997, the Company purchased McKinney Corners II, 173.9 acres
of undeveloped land in Collin County, Texas, for $5.7 million. The Company
paid $700,000 in cash and obtained mortgage financing for the remaining $5.0
million of the purchase price as a fourth advance under the term loan from the
Las Colinas I lender. The term loan was amended increasing the term loan
amount from $19.5 million to $24.5 million. The amendment also changed the
required principal reduction payments to $500,000 in June, July, September and
October 1997 and $1.0 million in August and November 1997. 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 $5.7 million purchase price of the property.

In April of 1997, the Company sold 3.115 acres of the Las Colinas I
land for $1.3 million in cash. The Company used $1.0 million of the sales
proceeds as a collateral escrow deposit in accordance with the provision of the
Valley Ranch land loan. The Company recognized a gain of $648,000 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, 15.5
acres 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.

In May 1997, the Company purchased Lacy Longhorn land, 17.1 acres of
undeveloped land in Farmers Branch, Texas, for $1.8 million. The Company paid
$200,000 in cash and obtained seller financing of the remaining $1.6 million of
the purchase price. The loan bears interest at 10% per annum, requires monthly
principal and interest payments of $400,000 and matures in October 1997. 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.

In May 1997, the Company purchased Chase Oaks land, 60.5 acres of
undeveloped land in Plano, Texas, for $4.2 million. The Company paid $200,000
in cash and obtained seller financing of the remaining $4.0 million of the
purchase price. The note bears interest at 18% per annum, requires monthly
interest only payments of $60,000 and matures 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, 1,448 acres
of undeveloped land in Austin, Texas, for $21.5 million. The Company paid $5.4
million in cash and obtained seller financing of the remaining $16.1 million of
the purchase price. The notes bear interest at 9.5% per annum, requires
monthly interest only payments of $127,000 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.

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<PAGE> 25

recognized a $215,000 gain 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 to Carmel Realty based on the $4.5
million sales price of a portion of the property.

Also in June 1997, the Company purchased Keller land, 811.8 acres of
undeveloped land in Tarrant County, Texas, for $6.3 million. The Company paid
$2.3 million in cash and obtained mortgage financing for the remaining $4.0
million of the purchase price. The loan bears interest at 12.95% per annum,
requires monthly interest only payments of $43,000 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.

In June 1997, the Company purchased McKinney Corners IV land, 31.3
acres of undeveloped land in Collin County, Texas, for $2.4 million. The
Company paid $400,000 in cash and obtained mortgage financing for the remaining
$2.0 million of the purchase price, as a fifth 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.

Also in June 1997, the Company purchased Pantex land, 182.5 acres of
undeveloped land in Collin County, Texas, for $5.4 million. The Company paid
$900,000 in cash and obtained seller financing of the remaining $4.5 million of
the purchase price. The note bears interest at 10.5% per annum, requires
semiannual interest only payments of $239,000 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.

In July 1997, the Company sold 3.9 acres 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
sales proceeds of $1.4 million, to paydown the term loan in exchange for that
lender's release of its collateral interest in such land. The Company will
record a gain of approximately $750,000 on such 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.

In July 1997, the Company purchased Dowdy and McKinney Corners V land,
which parcels are adjacent to the Company's other McKinney Corners land, and
consists of a total of 175 acres of undeveloped land in Collin County, Texas,
for $2.9 million. The Company obtained mortgage financing of $3.3 million as a
sixth advance under the term loan from the Las Colinas I lender. The Dowdy
land, McKinney Corners V land 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.

In July 1997, the Company purchased Perkins land, 645.4 acres 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
loan bears interest at 8.5% per annum, requires quarterly interest only
payments of $53,000 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 obtained a third mortgage loan of $2.0
million from the second mortgage lender on the Pin Oak land. The loan bears
interest at 12% per annum compounded monthly and matures in December 1997.

In July 1997, the Company purchased LBJ land, 10.4 acres of
undeveloped land in Dallas County, Texas, for $2.3 million. The Company paid
$300,000 in cash and obtained seller financing of the remaining $2.0 million of
the purchase price. The loan bears interest at 13% per annum, with interest
and principal payable at maturity in October 1997.

In July 1997, the Company purchased an additional 9% interest in
Campbell Center Joint Venture, for $868,000 in cash, increasing to 36% the
Company's interest in the Campbell Center Joint Venture.

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, 4 additional lots were sold for an aggregate gain of $8,000. At June 30,
1997, 6 lots remained to be sold.

In November 1991, the Company transferred the Porticos Apartments to
IORI 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.

MORTGAGE LOANS

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<PAGE> 26

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

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

Types of Properties Subject to Mortgages. The types of properties
securing the Company's mortgage notes receivable portfolio at June 30, 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 June 30, 1997, the obligors on $10.0 million or 20% of the
Company's mortgage notes receivable portfolio were affiliates of the Company.
Also at that date, $149,000 or 0.3% of the Company's mortgage notes receivable
portfolio was in default.

The following table sets forth the percentages (based on the
outstanding mortgage note balance at June 30, 1997), by both property type and
geographic region, of the properties that serve as collateral for the Company's
mortgage notes receivable at June 30, 1997.

<TABLE>
<CAPTION>
Commercial
Region Apartments Properties Total
------ ---------- ---------- -----
<S> <C> <C> <C>
Mountain . . . . -- 75.02% 75.02%
Southeast . . . -- 15.89 15.89
Southwest . . . 2.50 6.59 9.09
Midwest . . . . -- -- --
Northeast . . . -- -- --
----- ------ ------
2.50% 97.50% 100.0%
</TABLE>

A summary of the activity in the Company's mortgage notes receivable portfolio
during 1996 and through June 30, 1997 is as follows:

<TABLE>
<S> <C>
Loans in mortgage notes receivable portfolio
at January 1, 1996 . . . . . . . 10*
Loans funded . . . . . . . . . . . . 4
Loan paid in full . . . . . . . . . (4)

--
Loans in mortgage notes receivable portfolio
at June 30, 1997 . . . . . . . . 10
</TABLE>

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

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

During 1996, the Company collected $4.3 million in interest and $1.5
million in principal on its mortgage notes receivable. During the first six
months of 1997, the Company collected $2.1 million in interest and $5.3 million
in principal on its mortgage notes receivable. The Company plans, for the
foreseeable future, to hold, to the extent its liquidity permits, rather than
to sell in the secondary market, the mortgage notes in its portfolio.

First Mortgage Loans. The Company may invest in first mortgage loans,
with either short-, medium- or long-term maturities. First mortgage loans
generally provide for level periodic payments of principal and interest
sufficient to substantially repay the loan prior to maturity, but may involve
interest-only payments or moderate or negative amortization of principal and a
"balloon" principal payment at maturity. With respect to first mortgage loans,
it is the Company's general policy to require that the borrower provide a
mortgagee's title policy or an acceptable legal opinion of title as to the
validity and the priority of the

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<PAGE> 27
mortgage lien over all other obligations, except liens arising from unpaid
property taxes and other exceptions normally allowed by first mortgage lenders
in the relevant area. The Company may grant to other lenders participations in
first mortgage loans originated by the Company.

The following discussion briefly describes the events that affected
previously funded first mortgage loans during 1996 and through June 30, 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 approximately $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 events that affected
previously funded wraparound mortgage loans during 1996 and through June 30,
1997.

In February 1996, the Company refinanced the $7.8 million of debt
collateralized by a mortgage note receivable with a principal balance of $18.2
million at December 31, 1996, which is secured by a shopping center in Las
Vegas, Nevada, for $12.0 million. The Company received net refinancing proceeds
of $2.3 million after the payoff of the existing debt, payment of various
closing costs associated with the refinancing and making a $1.5 million paydown
on the term loan secured by the Las Colinas I land in Las Colinas, Texas, in
exchange for that lender's release of its participation in the note receivable.
The new loan bears interest at 15% per annum, requires monthly principal and
interest payments of $152,000 and matures in February 1998.

In August 1990, the Company foreclosed on its fourth lien note
receivable secured by the Continental Hotel and Casino in Las Vegas, Nevada.
The Company acquired the hotel and casino through foreclosure subject to first
and second lien mortgages totaling $10.0 million. In June 1992, the Company
sold the hotel and casino for a $22.0 million wraparound mortgage note
receivable, a $500,000 unsecured note receivable, which was collected in full,
and $100,000 in cash. The $22.0 million note bears interest at 11% and was
scheduled to mature in July 1995. The Company recorded a deferred gain of $4.6
million in connection with the sale of the hotel and casino resulting from a
disputed third lien mortgage being subordinated to the Company's wraparound
mortgage note receivable. The Company and the borrower agreed to extend the
Company's wraparound mortgage note receivable to December 31, 1995. A one
percent extension fee was added to the principal balance of the wraparound
mortgage note. The monthly payments on the note remained at $175,000 per month
as did the other terms of the note. At the note's extended maturity, the
Company and the borrower again agreed to extend the Company's wraparound
mortgage note to July 1, 1996. A one percent extension fee was again added to
the principal balance of the Company's wraparound mortgage note. The monthly
payments on the wraparound mortgage note remained at $175,000 per month as did
the other terms of the note. The Company's modified wraparound note continued
to accrue interest at 11% per annum with any unpaid interest being added
monthly to the principal balance. In March 1997, the wraparound note was again
modified and extended. The wraparound note now matures in June 1999 with the
borrower having two one year extension options. The modified wraparound note
bears interest at 10.5% per annum the first year, 11.5% per annum the second
year and $12.5% per annum the third year and in any extension period and
requires an annual $500,000 principal paydown. The borrower is also required to
invest $2.0 million in improvements to the hotel and casino within four months
of the March 1997 modification and an additional $2.0 million prior to December
1997. The borrower has also pledged 1,500,000 shares of common stock in Crowne
Ventures, Inc., as additional collateral. The borrower is making payments in
accordance with the terms of the modified note. The Company's wraparound
mortgage note receivable had a principal balance of $27.6 million at December
31, 1996. Prior to the March 1997 modification and extension, the Company
recognized interest income on this wraparound mortgage note only to the extent
interest was collected.

In April 1996, the underlying liens relating to this wraparound
mortgage note receivable were refinanced for $16.8 million. The Company
received net cash of $11.2 million after the payoff of the underlying liens
then totaling $2.9 million, the payment of various closing costs associated
with the refinancing and making a $1.4 million paydown on the term loan secured

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<PAGE> 28
by the Las Colinas I land in Las Colinas, Texas, in exchange for that lender's
release of its participation in the wraparound note receivable. The new
underlying lien bears interest at 16.5% per annum, requires monthly interest
only payments of $180,000, at a rate of 12.5% per annum, with the remaining 4%
being deferred and added to the loan's principal balance. The loan matures in
April 1998. The Company paid BCM a mortgage brokerage and equity refinancing
fee of $168,000 based upon the $16.8 million refinancing.

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

The following discussion briefly describes the junior mortgage loans
funded in 1996 and during the first six months of 1997 and the events that
affected previously funded junior mortgage notes during 1996 and the first six
months of 1997.

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

At December 31, 1996, the Company held a mortgage note receivable
secured by a third lien mortgage secured by a commercial property in South
Carolina and personal guaranties of several individuals. The note had an
extended maturity date of September 1, 1996. The Company and the borrower have
again agreed to extend the mortgage note receivable's maturity date to
September 1, 1997. The extension required an additional $90,000 principal
reduction payment payable in three equal monthly installments beginning
November 1, 1996. The Company received $85,000 of the required principal
reduction payments in 1996 and the remaining $5,000 in 1997. The monthly
interest, quarterly principal reduction payments of $25,000 and all other terms
remained the same. The principal balance of the note was $93,000 at December
31, 1996 and the note is performing in accordance with its modified terms.

The Company holds a junior mortgage note receivable secured by the
Williamsburg Hospitality House in Williamsburg, Virginia, that is subject to a
first lien mortgage of $12.0 million at December 31, 1996. In October 1993, the
then first lien debt was restructured and split into three pieces. During 1995,
the Company advanced the borrower $3.3 million to payoff the then second lien,
allowing the borrower to receive a $2.4 million discount offered by the lender
for early payoff of such lien. In conjunction with such advance, the Company
extended the maturity date of its note to April 1, 1996. All other terms of the
note remained unchanged. In December 1996, the underlying lien debt was
refinanced for $12.0 million. Of the loan proceeds, $9.0 million was used to
payoff the existing underlying lien, $700,000 was applied to the principal and
interest due the Company with the remainder of the loan proceeds being used to
fund a repair escrow and pay various closing costs associated with the
refinancing. The new first mortgage bears interest at 9.85% per annum, requires
monthly payments of principal and interest of $120,000 and matures in December
2001. The Company is the 1% general partner in the partnership owning the
property. The partnership paid a mortgage brokerage and equity refinancing fee
of $128,000 to BCM based on the $12.0 million purchase price.

At December 31, 1996, the Company held a mortgage note receivable
secured by an apartment complex in Merrillville, Indiana, with a principal
balance of $3.5 million. The property is owned by a subsidiary of Davister
Corp. ("Davister"), a general partner in a partnership that owns approximately
13.7% 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 from December 1996 to December 2000. In May 1997, the note, including
accrued and unpaid interest thereon, was paid in full.

INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS AND REAL ESTATE PARTNERSHIPS

The Company's investment in real estate entities at June 30, 1997
includes (i) equity securities of three publicly traded REITs (collectively the
"REITs"), CMET, IORI and TCI, (ii) units of limited partner interest of NRLP,
(iii) a general partner interest in NRLP and NOLP, through its 96% limited
partner interest in SAMLP, the general partner of NRLP and NOLP, and (iv)
interests in real estate joint venture partnerships. Gene E. Phillips,
Chairman of the Board and a 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 that serves as SAMLP's managing general partner. Randall
M. Paulson, Executive Vice President of the Company, serves as the sole
director and as President of SAMI. Mr. Phillips is also a general partner of
SAMLP. BCM, the Company's advisor, serves as advisor to the REITs, and performs
certain administrative and management functions for NRLP and NOLP on behalf of
SAMLP.

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

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<PAGE> 29

with respect to shares of the REITs at June 30, 1997 totaled $23.6 million, and
its cost with respect to units of limited partner interest in NRLP totaled
$22.8 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 $40.8 million at June 30, 1997 and the aggregate market
value of such equity securities was $107.7 million. The aggregate investee book
value of the equity securities of the REITs based upon the June 30, 1997
financial statements of each such entity was $66.9 million and the Company's
share of NRLP's revaluation equity at December 31, 1996 was $188.5 million.

The Company's Board of Directors authorized the expenditure by the
Company of up to an aggregate of $25.0 million to acquire, in open market
purchases, units of NRLP and shares of the REITs, excluding private purchase
transactions which were separately authorized. In February 1997, the Company's
Board of Directors increased such authorization to $35.0 million. As of June
30, 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 June 30, 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.

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 June 30, 1997, is summarized below
(dollars in thousands):

<TABLE>
<CAPTION>
Percentage Carrying Equivalent
of the Company's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee June 30, 1997 June 30, 1997 June 30, 1997 June 30, 1997
- -------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NRLP . . 54.4% 15,570 $ * $ 65,812
CMET . . 40.6 15,780 35,764 18,789
IORI . . 29.6 3,564 7,474 5,176
TCI . . . 30.5 5,904 23,693 17,907
------- ------ --------

$40,818 $107,684
</TABLE>

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

* At June 30, 1997, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity at December 31, 1996,
however, was $188.5 million. Revaluation equity is defined as the
difference between the appraised value of the partnership's real
estate, adjusted to reflect the partnership's estimate of disposition
costs, and the amount of the mortgage notes payable and accrued
interest encumbering such property as reported in NRLP's Annual Report
on Form 10-K for the year ended December 31, 1996.

Each of the REITs and NRLP own a considerable amount of real estate,
much of which, particularly in the case of NRLP, has been held for many years.
Because of depreciation, these entities may earn substantial amounts in periods
in which they sell real estate and will probably incur losses in periods in
which they do not. The Company's reported income or loss attributable to these
entities will differ materially from its cash flow attributable to them. The
Company does not have a controlling equity interest in any of the REITs and
therefore it cannot, acting by itself, determine either the individual
investments or the overall investment policies of such investees. However, due
to the Company's equity investments in, and the existence of common officers
with, each of the REITs, and that the REITs have the same advisor as the
Company and that Mr. Paulson, an Executive Vice President of the Company, is
also the President of the REITs and BCM, the Company's advisor, and is the
President and sole director of SAMI, a Company owned by BCM, that is the
managing general partner of SAMLP, the Company may be considered to have the
ability to exercise significant influence over the operating and investing
policies of these entities. The Company accounts for its investment in these
entities using the equity method. Under the equity method, the Company

-27-
<PAGE> 30
recognizes its proportionate share of the income or loss from the operations of
these entities currently, rather than when realized through dividends or on
sale. The Company continues to account for its investment in NRLP under the
equity method due to the pending resignation of SAMLP as general partner of
NRLP and NOLP, as more fully discussed in "NRLP" below. The carrying value of
the Company's investment in these entities, as set forth in the table above, is
the original cost of each such investment adjusted for the Company's
proportionate share of each entity's income or loss and distributions received.

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

NRLP. NRLP is a publicly traded master limited partnership which was
formed under the Delaware Uniform Limited Partnership Act on January 29, 1987.
It commenced operations on September 18, 1987 when, through NOLP, it acquired
all of the assets, and assumed all of the liabilities, of 35 public and private
limited partnerships sponsored by or otherwise related to Southmark. NRLP is
the sole limited partner of NOLP and owns 99% of the beneficial interest in
NOLP. NRLP and NOLP operate as an economic unit and, unless the context
otherwise requires, all references herein to the Partnership shall constitute
references to NRLP and NOLP as a unit. The general partner and owner of 1% of
the beneficial interest in each of NRLP and NOLP is SAMLP, a Delaware limited
partnership.

SAMI, a company owned by BCM, is the managing general partner of
SAMLP. In November 1992, NOLP transferred 52 apartment complexes and a
wraparound mortgage note receivable to Garden Capital, L.P. ("GCLP"), a
Delaware limited partnership in which NOLP owns a 99.3% limited partner
interest. Concurrent with such transfer, GCLP refinanced all of the mortgage
debt associated with the transferred properties and the wraparound mortgage
note under a new first mortgage in the amount of $223.0 million.

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

SAMI, as the managing general partner of SAMLP, has discretion in
determining methods of obtaining funds for the Partnership's operations, and
the acquisition and disposition of its assets. The Partnership's governing
documents place no limitation on the amount of leverage that the Partnership
may incur either in the aggregate or with respect to any particular property or
other investment. At December 31, 1996, the aggregate loan-to-value ratio of
the Partnership's real estate portfolio was 44.6% computed on the basis of the
ratio of total property-related debt to aggregate appraised values. As of
December 31, 1996 NRLP owned 83 properties located in 22 states. These
properties consisted of 67 apartment complexes comprising 16,848 units, seven
office buildings with an aggregate 495,594 square feet and nine shopping
centers with an aggregate of 1.1 million square feet.

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

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

The Partnership, SAMLP, Mr. Phillips and William S. Friedman, a
general partner of SAMLP until March 4, 1994, were among the defendants in a
class action lawsuit arising out of the transactions discussed above whereby
the Partnership was formed. An agreement settling such lawsuit as to the
defendants, the Partnership, SAMLP and Messrs. Phillips and Friedman (the
"Moorman Settlement Agreement"), became effective on July 5, 1990. The Moorman
Settlement Agreement provided for, among other things, the appointment of an
oversight committee for NRLP (the "NRLP Oversight Committee"); the
establishment of specified annually increasing targets for a five-year period
relating to the price of NRLP units; a limitation and deferral or waiver of
NRLP's reimbursement to SAMLP of certain future salary costs; and a deferral or
waiver of certain future compensation to SAMLP; the required distribution to
unitholders of all of the Partnership's cash from operations in excess of
certain renovation costs unless the NRLP oversight committee approves
alternative uses for such cash from operations; the issuance of unit purchase
warrants to members of the plaintiff class; the contribution by certain
co-defendants of cash and notes payable to the Partnership

-28-
<PAGE> 31
aggregating $5.5 million including a $2.5 million contributed by SAMLP. The
Partnership also agreed to pay certain settlement costs, including plaintiffs'
attorneys' fees in the amount of $3.4 million. The settlement plan remains in
effect until the withdrawal of SAMLP as general partner of NRLP and NOLP.

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

The withdrawal of SAMLP as general partner would require the
Partnership to purchase SAMLP's general partner interest (the "Redeemable
General Partner Interest") at its then fair value, and to pay certain fees and
other compensation as provided in the partnership agreement. SAMI, the managing
general partner of SAMLP, has calculated the fair value of such Redeemable
General Partner Interest to be $40.2 million at June 30, 1997 before reduction
for the principal balance ($4.2 million at June 30, 1997) and accrued interest
($6.7 million at June 30, 1997) on the note receivable from SAMLP for its
original capital contribution to the Partnership.

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

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

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

In September 1996, the Judge supervising the implementation of the
Moorman Settlement Agreement (the "Supervising Judge") entered an order
granting tentative approval of the Amended and Restated Implementation
Agreement and the form of notice to be sent to the original class members.
However, the order reserved jurisdiction to determine other matters which must
be resolved prior to final approval. On April 7, 1997, the Supervising Judge
issued an order granting final approval of the notice and scheduled a hearing
on June 27, 1997 for final approval of the Amended and Restated Implementation
Agreement. A notice was sent to all class members and unitholders in April
1997 and the hearing was held on June 27, 1997. As of August 8, 1997, the
Supervising Judge had not entered the order granting final approval of the
Amended and Restated Implementation Agreement. Upon final approval by the
Supervising Judge, the proposal to elect the successor general partner will be
submitted to NRLP's unitholders for a vote. In addition, the unitholders will
vote upon amendments to the Partnership Agreement which relate to the proposed
compensation of the successor general partner and other related matters.

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

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

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

-29-
<PAGE> 32
defendants had failed or refused to perform their obligations under the Moorman
Settlement Agreement and had breached the Moorman Settlement Agreement. The
motion also requested that SAMLP be removed as general partner and a receiver
be appointed to manage the Partnership. The motion also requested that the
Company be ordered to deliver to the Court all NRLP units which had been
purchased by the Company since August 7, 1991. A hearing was held on this
motion in October 1996. In January 1997, the Supervising Judge entered an order
denying the motion.

On January 27, 1997, Joseph B. Moorman filed motions to (i) discharge
the NRLP Oversight Committee and (ii) vacate the Court's orders and renewed his
prior motions to compel enforcement of the Moorman Settlement Agreement,
appoint a receiver over the Partnership, and for collateral relief against the
Company. Also on January 27, 1997, Robert A. McNeil filed motions to (i) be
installed as receiver for the Partnership, (ii) vacate the Court's orders, and
(iii) disband the NRLP Oversight Committee. A hearing on the motions to
discharge or disband the Oversight Committee and to vacate the Court's orders
was held on March 21, 1997, and the Supervising Judge ruled that neither Mr.
McNeil nor Mr. Moorman had standing to bring the motions.

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

For the year ended December 31, 1996, CMET reported a net income of
$8.7 million as compared with a net loss of $1.4 million for the year ended
December 31, 1995. CMET's 1996 net income includes gains on the sale of real
estate and marketable equity securities of $10.1 million and an extraordinary
gain of $812,000, whereas CMET's net loss for 1995 included no such gains.
CMET's cash flow from property operations (rents collected less payments for
property operating expenses) improved to $19.8 million in 1996 compared to
$15.1 million in 1995. At December 31, 1996 CMET had total assets of $250
million which consisted of $7.4 million in mortgage notes and interest
receivable (net of allowance for estimated losses), $214.5 million in real
estate held for investment, $5.4 million in real estate held for sale, $19.8
million in investments in partnerships and other assets and $3.0 million in
cash and cash equivalents.

For the quarter ended June 30, 1997, CMET reported a net income of
$5.2 million as compared with a net income of $4.5 million for the quarter
ended June 30, 1996. The increase in CMET's net income is due to the
acquisition by CMET of four apartment complexes and eight commercial properties
in 1996 and two apartment complexes and two commercial properties in the first
half of 1997. CMET's cash flow from property operations (rents collected less
payments for property operating expenses) improved to $10.8 million during the
first six months of 1997 as compared to $4.3 million during the corresponding
period in 1995. At June 30, 1997 CMET had total assets of $275 million which
consisted of $6.0 million in mortgage notes and interest receivable (net of
allowance for estimated losses), $231 million in real estate held for
investment, $5.7 million in real estate held for sale, $30.2 million in
investments in partnerships and other assets and $2.8 million in cash and cash
equivalents.]

CMET has paid regular quarterly distributions since the first quarter
of 1993. The Company received a total of $1.5 million and $392,000 in
distributions from CMET in 1996 and during the first six months of 1997,
respectively.

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

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

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<PAGE> 33
held for sale, $2.0 million in notes and interest receivable, $5.1 million in
investments in partnerships and other assets and $3.2 million in cash and cash
equivalents.

For the quarter ended June 30, 1997, IORI reported a net income of
$1.6 million as compared with a net loss of $229,000 for the quarter ended June
30, 1996. The increase in IORI's net income is due to a $1.5 million gain from
the sale of property. IORI's cash flow from property operations increased to
$1.7 million in the second quarter of 1997 from $922,000 in the corresponding
quarter of 1996. At June 30, 1997, IORI had total assets of $76.4 million
which consisted of $67.5 million in real estate held for investment, $1.0
million of real estate held for sale, $2.0 million in notes and interest
receivable, $4.8 million in investments in partnerships and other assets and
$1.1 million in cash and cash equivalents.

IORI has paid regular quarterly dividends since the first quarter of
1993. The Company received a total of $186,000 and $82,000 in dividends from
IORI in 1996 and during the first six months of 1997, respectively.

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

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

For the quarter ended June 30, 1997, TCI reported a net loss of $1.0
million as compared with a net loss of $4.0 million for the quarter ended June
30, 1996. The decrease in TCI's net loss is primarily due to TCI's acquisition
of ten properties subsequent to June 30, 1996 and second quarter 1996 results
including a $1.6 million provision for loss. No such provision was recorded in
the first half of 1997. TCI's cash flow from property operations increased to
$5.6 million in the second quarter of 1997 as compared to $4.1 million in the
corresponding quarter of 1996. At June 30, 1997, TCI had total assets of
$264.5 million, which consisted of $6.6 million in notes and interest
receivable (net of allowance for estimated losses), $236.8 million in real
estate held for investment, $281,000 in real estate held for sale, $15.8
million in investments in real estate entities and other assets and $5.0
million in cash and cash equivalents. At June 30, 1997, TCI owned 341,500
shares of IORI's common stock, approximately 22.5% of IORI's shares then
outstanding.

TCI resumed the payment of quarterly dividends in the fourth quarter
of 1995. The Company received $373,000 and $148,000 in dividends from TCI in
1996 and during the first six months of 1997, respectively.

SAMLP. As discussed in more detail under "Real Estate" above, in
August 1996, the Company purchased a pool of assets from Southmark for $3.1
million. Included in the asset pool was Southmark's 19.2% limited partner
interest in SAMLP. Such purchase increased the Company's limited partner
interest in SAMLP from 76.8% to 96%. Prior to February 25, 1992, the Company
had owned a 96% limited partner interest in SAMLP. In accordance with the
settlement of adversary proceedings with Southmark on February 25, 1992 the
Company assigned to Southmark a 19.2% limited partner interest in SAMLP. SAMLP
is the 1% general partner of and holder of a 1% interest in each of NRLP and
NOLP. Gene E. Phillips, a Director and Chairman of the Board of the Company
until November 16, 1992, is a general partner of SAMLP, and until March 4,
1994, William S. Friedman, a Director and President of the Company until
December 31, 1992, was also general Partner of SAMLP.

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

-31-
<PAGE> 34

River Trails II. In January 1992, the Company entered into a
partnership agreement with an entity affiliated with the owner of, at the time,
in excess of 14% of the Company's outstanding shares of Common Stock, to
acquire 287 developed residential lots adjacent to the Company's other
residential lots in Fort Worth, Texas. The partnership agreement designates the
Company as managing general partner. The partnership agreement also provides
each of the partners with a guaranteed 10% return on their respective
investments. Through December 31, 1996, 184 residential lots had been sold.
In the first six months of 1997, an additional 8 lots were sold. At June 30,
1997, 95 lots remained to be sold. During the first six months of 1997, each
partner received $21,000 in return of capital distributions from the
partnership.

R. G. Bond, Ltd. In June 1995, the Company purchased the corporate
general partner of a limited partnership which owns apartment complexes in
Illinois, Florida and Minnesota, with a total of 900 units. The corporate
general partner has a 1% interest in the partnership which is subordinated to a
priority return of the limited partner.

Campbell Center Associates, Ltd. In April 1996, the Company purchased
a 28% general partner interest in Campbell Center Associates, Ltd. which in
turn has a 56.25% interest in Campbell Centre Joint Venture, which owns a
413,175 square foot office building in Dallas, Texas. The purchase price of the
general partner interest was $550,000 in cash and a $500,000 note, which bears
interest at 8% per annum, requires monthly interest only payments commencing in
April 1997 and matures April 2000. In January 1997, the Company exercised its
option to purchase an additional 28% general partner interest in Campbell
Center Associates, Ltd. The purchase price was $300,000 in cash and a $750,000
note, which bears interest at 8% per annum, requires monthly interest only
payments commencing in April 1997 and matures in April 2000.

Highway 380/Preston Partners, Ltd. In June 1996, a newly formed
limited partnership, of which the Company is 1% general partner, purchased 580
acres of undeveloped land in Collin County, Texas for $5.7 million in cash.
The Company contributed $100,000 in cash to the partnership with the remaining
$5.6 million being contributed by the limited partner. The partnership
agreement designates the Company as the managing general partner. In September
1996, the partnership obtained financing of $2.8 million secured by the 580
acres of land and personal guarantees of the limited partner. The loan bears
interest at a variable rate currently 9.75% per annum, requires monthly
interest only payments of $23,000 and matures in September 1998. The
partnership agreement also provides that the limited partner receive a 12%
preferred cumulative return on his investment before any sharing of partnership
profits occurs. In April 1997, the partnership sold 35.0 acres for $1.3
million in cash. The net proceeds of $1.2 million were distributed to the
limited partners in accordance with the partnership agreement. The partnership
recognized a gain of $884,000 on the sale. In July 1997, the Partnership sold
an additional 24.6 acres 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 partners in accordance with the partnership agreement. The partnership
will record a gain of approximately $497,000 on the sale. The Company has
received no distributions from the partnership in 1997.

OTHER EQUITY INVESTMENTS

Pizza World Supreme, Inc. In April 1996, a wholly-owned subsidiary of
the Company purchased for $10.7 million in cash 80% of the common stock of
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 36.25% of the
Company's net investment in such subsidiary. Additionally, the Company held
negotiations with underwriters regarding a public offering of such subsidiary's
stock. The Company believed that such option will be exercised and, further,
that the subsidiary would become publicly held approximately one year from the
date of its acquisition. Accordingly, the Company believed its control of such
entity was temporary and accounted for such entity under the equity method
through April 1997. In May 1997, the Company acquired the remaining 20% of
PWSI and discontinued equity accounting.

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<PAGE> 35

<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
For the Years Ended December 31,
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ---------------- ------------------ ---------------- ----------------

(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Revenue . . . . . . . . . . . $ 26,979 $ 22,952 $ 23,070 $ 13,427 $ 11,481
Expense . . . . . . . . . . . 38,577 28,314 26,490 18,128 18,243
------------ ------------ ----------- ----------- -----------
(Loss) from operations . . . (11,598) (5,362) (3,420) (4,701) (6,762)
Equity in income (losses)
of investees . . . . . . 2,004 (851) 292 (4,014) (3,388)
Gain on sale of real estate . 3,659 2,594 379 481 566
------------ ------------ ----------- ----------- -----------
(Loss) before extraordinary
gain . . . . . . . . . . (5,935) (3,619) (2,749) (8,234) (9,584)
Extraordinary gain . . . . . 381 783 323 3,807 --
------------ ------------ ----------- ----------- -----------
Net (loss) . . . . . . . . . (5,554) (2,836) (2,426) (4,427) (9,584)
Preferred Dividend
Requirement . . . . . . (113) -- -- -- --
Redeemable Common Stock,
accretion of discount . -- -- -- (129) (258)
------------ ------------ ----------- ----------- -----------
(Loss) applicable to
Common Shares . . . . . $ (5,667) $ (2,836) $ (2,426) $ (4,556) $ (9,842)
============= ============= =========== =========== ===========
PER SHARE DATA
(Loss) before extraordinary
gain . . . . . . . . . . $ (.46) $ (.31) $ (.23) $ (.68) $ (.98)
Extraordinary Gain . . . . . .03 .07 .03 .31 .--
------------ ------------ ----------- ----------- ----------
Net (loss) (.43) (.24) (.20) (.37) (.98)
Redeemable Common Stock,
accretion of discount . -- -- -- (.01)- (.03)
------------ ------------ ----------- ----------- -----------
(Loss) applicable to
Common shares . . . . . $ (.43) $ (.24) $ (.20) $ (.38) $ (1.01)
============= ============= =========== =========== ===========
Dividends per share . . . . . $ .15 $ -- $ -- $ -- $ --
Weighted average shares
outstanding . . . . . . 12,765,082 11,716,656 12,208,876 12,101,100 9,813,168
</TABLE>

<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Notes and interest
receivable, net . . . . $ 48,485 $ 49,741 $ 45,664 $ 51,769 $ 72,808
Real estate, net . . . . . . 119,035 59,424 47,526 52,437 45,317
Total assets . . . . . . . . 235,037 162,033 137,362 139,861 151,010
Notes and interest payable . 127,863 61,163 45,695 53,693 63,698
Margin borrowings . . . . . . 40,044 34,017 26,391 16,147 9,681
Stockholders' equity . . . . 47,786 53,058 55,894 56,120 60,476
Book value per share . . . . $ 3.74 $ 4.53 $ 4.77 $ 5.56 $ 5.94
</TABLE>

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.

-33-
<PAGE> 36

<TABLE>
<CAPTION>
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------

EARNINGS DATA (dollars in thousands, except per share)

<S> <C> <C> <C> <C>
Revenue . . . . . . . . . . $ 9,667 $ 5,346 $ 17,166 $ 12,136
Expense . . . . . . . . . . $ 15,960 $ 8,555 $ 27,755 $ 16,810
----------- ----------- ----------- -----------

(Loss) from operations . . (6,293) (3,209) (10,589) (4,674)

Equity in income (losses)
of investees . . . . . 4,970 (1,530) 5,250 (2,420)

Gain on sale of real
estate . . . . . . . . 3,863 2,348 8,150 4,475
----------- ----------- ----------- -----------
Income (Loss) before
extraordinary gain . . . . 2,540 (2,391) 2,811 (2,619)

Extraordinary gain . . . . -- 247 -- 260
----------- ----------- ----------- -----------

Net income (loss) $ 2,540 $ (2,144) $ 2,811 $ (2,359)
=========== =========== =========== ===========

Preferred dividend
requirement . . . . . . (49) (17) (99) (17)

Redeemable Common Shares,
accretion of discount . -- -- -- --

Net Income (Loss) applicable
to Common shares . . . . . . $ 2,491 $ (2,161) $ 2,712 $ (2,376)
=========== =========== =========== ===========

PER SHARE DATA
Income (Loss) before extra-
ordinary gain . . . . . $ .21 $ (.19) $ .23 $ (.21)

Extraordinary Gain . . . . -- .02 -- .02
Net income (loss) applicable
to Common Shares . . . . . $ .21 $ (.17) $ .23 $ (.19)
=========== =========== =========== ===========

Redeemable Common Shares,
accretion of discount . -- -- -- --

Net Income (Loss) applicable
to Common shares . . . . . $ .21 $ (.17) $ .23 $ (.19)
=========== =========== =========== ===========

Dividends per share $ .05 $ .10 $ .10 $ .10

Weighted average Common
Shares outstanding . . . . 12,075,307 13,230,634 12,114,939 12,473,646
</TABLE>

-34-
<PAGE> 37

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
June 30, 1997 December 31, 1996
------------- -----------------
- --------------------------------------------------------------------------------
BALANCE SHEET DATA (dollars in thousands, except per share)

<S> <C> <C>
Note and interest receivable,
net . . . . . . . . . . . . . . $ 46,145 $ 48,485
- --------------------------------------------------------------------------------
Real Estate, net . . . . . . . 182,329 119,035
- --------------------------------------------------------------------------------
Total Assets . . . . . . . . . 322,515 235,037
- --------------------------------------------------------------------------------
Notes and interest payable . . 188,333 127,863
- --------------------------------------------------------------------------------
Margin Borrowings . . . . . . . 44,347 40,044
- --------------------------------------------------------------------------------
Stockholder's equity . . . . . 49,564 47,786
- --------------------------------------------------------------------------------
Book Value per share* . . . . . $ 4.09 3.74
- --------------------------------------------------------------------------------
</TABLE>

*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.

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 June 30, 1997 aggregated $4.8
million, compared with $1.3 million at December 31, 1996. Although the Company
anticipates that during 1997 it will generate excess cash from operations, as
discussed below, such excess cash is not sufficient to discharge all of the
Company's debt obligations as they mature. The Company will therefore again
rely on externally generated funds, including borrowings against its
investments in various real estate entities, mortgage notes receivable, the
sale or refinancing of properties and, to the extent available and necessary,
borrowings from its advisor to meet its debt service obligations, pay taxes,
interest and other non-property related expenses.

At December 31, 1996, notes payable totaling $36.0 million had either
scheduled maturities or required principal reduction payments during 1997.
Through July 31, 1997, the Company has paid off a total of $8.5 million of such
debt and has refinanced an additional $18.8 million. The Company intends to
either pay off, extend the maturity dates or obtain alternate financing for the
remaining $8.7 million of debt obligations that mature during the remainder of
1997. There can be no assurance, however, that these efforts to obtain
alternative financing or debt extensions will be successful.

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

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

In 1996, the Company purchased a total of 1,368.5 acres of land in
Denver, Colorado, Houston, Texas, Dallas County, Texas and Lewisville, Texas,
for a total of $32.1 million. The Company paid $5.4 million in cash, obtained
new or seller

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<PAGE> 38
financing of $25.4 million and issued 15,000 shares of the Company's Series C
10% Cumulative Preferred Stock with an aggregate liquidation value of $1.5
million.

In April 1996, the Company purchased for $10.7 million in cash 80% of
the common stock of an entity that had acquired 26 operating pizza parlors in
various communities in California's San Joaquin Valley. Also in April 1996, the
Company purchased a 28% general partner interest in a partnership which has an
interest in an office building in Dallas, Texas, for $550,000 in cash and a
$500,000 note.

In May 1996, the Company purchased a 2,271 square foot single family
residence in Dallas, Texas, for $266,000 in cash. In August 1996, the Company
financed the residence for $173,000. The Company received net financing
proceeds of $168,000 after the payment of various closing costs associated with
the financing.

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

In July 1996, a newly formed limited partnership of which the Company
is the 1% general partner acquired 580 acres of land in Collin County, Texas,
for $5.7 million in cash. The Company contributed $100,000 in cash to the
partnership.

In August 1996, the Company purchased a pool of assets for $3.1
million, from Southmark Corporation ("Southmark") consisting of undeveloped
land totaling 151.5 acres in California, Indiana and Idaho, various percentage
interests, ranging from 15% to 45%, in five partnerships and trusts that hold
an unsecured note receivable with a principal balance of $3.4 million and
Southmark's 19.2% limited partnership interest in Syntek Asset Management, L.P.
("SAMLP"). In connection with the acquisition, the Company borrowed $3.0
million.

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

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

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

In January 1997, the Company purchased 546 acres of undeveloped land
in Tarrant County, Texas, for $2.2 million. The Company paid $725,000 in cash
and obtained mortgage financing for the remaining $1.5 million of the purchase
price.

In March 1997, the Company purchased 130.6 acres of undeveloped land in
Harris County, Texas, for $5.6 million. The Company paid a total of $1.6
million in cash (which was advanced by the Company's Advisor) borrowing the
remaining $4.0 million of the purchase price.

In April 1997, the Company purchased McKinney Corners I, 30.4 acres of
undeveloped land in Collin County, Texas, for $3.5 million. The Company paid
$1.0 million in cash and obtained mortgage financing for the remaining $2.5
million of the purchase price.

In April 1997, the Company sold 3.1 acres of the Las Colinas I land
for $1.3 million in cash. The Company used $1.0 million of the net sales
proceeds as a collateral escrow deposit in accordance with the provisions of
the Valley Ranch land loan. The Company recognized a gain of $648,000 on the
sale.

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

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<PAGE> 39

In May 1997, the Company purchased the remaining 20% of PWSI for $5.0
million in unsecured promissory notes.

In July 1997, the Company sold 3.9 acres 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 proceeds
of the sale, $1.4 million, to paydown the term loan in exchange for that
lender's release of its collateral interest in such land. The Company will
record a gain of approximately $750,000 on such sale.

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

-37-
<PAGE> 40

Notes Receivable. The Company has received $5.3 million in principal
payments from its mortgage notes receivable during the six month period ended
June 30, 1997. Scheduled principal maturities of $20.4 million are due in 1997
of which $1.9 million is due on nonperforming notes receivable. In February
1997, the Company sold one of the nonperforming notes with a principal balance
at December 31, 1996 of $1.6 million for $1.8 million in cash. The balance of
the Company's mortgage notes receivable are due over the next one to ten years
and provide for "balloon" principal payments. It may be necessary for the
Company to consider extending certain notes if the borrowers do not have the
resources to repay the loans, are unable to sell the property securing such
loans, or are unable to refinance the debt owed.

The borrower on a $1.7 million mortgage note receivable secured by
land in Osceola, Florida failed to pay the note on its November 1, 1993
maturity. The Company instituted foreclosure proceedings and was awarded a
summary judgment in January 1994. During 1994 and 1995, the borrower paid the
Company a total of $270,000 in nonrefundable fees to delay foreclosure of the
property until April 24, 1995. On April 25, 1995, the borrower filed for
bankruptcy protection. On August 26, 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.

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 note matured in December 1996. The Company and
borrower have agreed to a modification and extension of the note. The modified
note receivable continues to bear interest at 10% per annum, requires monthly
payments of principal and interest of $42,000 and has an extended maturity date
of December 2000.

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

Loans Payable. The Company has margin arrangements with various
brokerage firms which provide for borrowings up to 50% of the market value of
marketable equity securities. The borrowings under such margin arrangements are
secured by such equity securities and bear interest rates ranging from 7.0% to
9.0%. Margin borrowings totaled $44.0 million at June 30, 1997.

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 June
30, 1997, 3,349,169 NRLP units with a market value of $64.0 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 Basic
Capital Management, Inc. ("BCM"), the Company's Advisor, with a market value of
$4.0 million. The Company received $2.0 million in net cash after the payment
of closing costs associated with the loan.

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

-38-
<PAGE> 41
In February 1996, the Company refinanced $7.8 million of underlying
debt collateralized by a mortgage note receivable with a balance of $18.4
million which is secured by the Las Vegas Shopping Center in Las Vegas, Nevada,
for $12.0 million. The Company received net cash of $2.3 million after the
payoff of the existing debt, payment of closing costs associated with the
refinancing and making a $1.5 million paydown on the term loan secured by the
Las Colinas I land in Las Colinas, Texas in exchange for that lender's release
of its participation in the note receivable.

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

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

In August 1996, the Company refinanced the $2.4 million existing
mortgage debt secured by the Rosedale Towers Office Building in Roseville,
Minnesota for $2.8 million. The Company received net refinancing proceeds of
$154,000 after the payoff of the existing debt and payment of various closing
costs associated with the refinancing.

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

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

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

In May 1997, the Company financed 10.6 acres of the BP Las Colinas
land for $3.1 million. The note matures in November 1997.

In May 1997, the Company obtained a second mortgage of $3.0 million on
the Pin Oak land. The note matures in October 1997.

In June 1997, the Company obtained a second mortgage of $3.0 million
on the Lewisville land. The loan matures in December 1997.

In June 1997, the Company refinanced the Valwood land for $15.8
million. The note matures in June 1998. The Company received net cash of $4.9
million after the payoff of the existing $6.2 million Valwood land loan, an
additional $3.0 million being applied to payoff the Jefferies land loan and
$1.4 million being applied to paydown the Las Colinas land loan.

In July 1997, the Company obtained a third mortgage of $2.0 million
from the second mortgage lender on the Pin Oak land. The note bears interest
at 12% per annum, compounded monthly, and matures in December 1997.

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.

-39-
<PAGE> 42
acquired. Such restrictions may reduce the Company's ability to realize the
full fair market value of such investments if the Company attempted to dispose
of such securities in a short period of time.

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

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

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

In July 1997, the Company purchased an additional 9% interest in
Campbell Centre Joint Venture, for $868,000 in cash, increasing to 36% the
Company's interest in the Campbell Centre Joint Venture.

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

RESULTS OF OPERATIONS

Six months ended June 30, 1997. For the three months ended June 30,
1997, the Company reported net income of $2.5 million, compared to a net loss
of $2.1 million for the three months ended June 30, 1996. For the six months
ended June 30, 1997, the Company reported net income of $2.8 million compared
with a net loss of $2.4 million for the six months ended June 30, 1996. The
primary factors contributing to the Company's operating results are discussed
in the following paragraphs.

Sales and cost of sales for the six months ended June 30, 1997 relate
to the operations of PWSI.

Rents increased from $4.1 million and $9.4 million for the three and
six months ended June 30, 1996 to $5.0 million and $10.9 million for the three
and six months ended June 30, 1997. The increases are principally due to
increased rents at the Company's commercial properties and increased rents and
occupancy at the Company's hotels. One of the Company's hotels, the Best
Western Oceanside was purchased in December 1996.

Interest income from mortgage notes receivable of $1.2 million and
$2.3 million for the three and six months ended June 30, 1997 approximated the
$1.2 million and $2.3 million for the three and six months ended June 30, 1996.
Interest income for the remainder of 1997 is expected to be less than in the
first six months of 1997 due to a note payoff in May 1997.

Other income increased from $127,000 and $469,000 for the three and
six months ended June 30, 1996 to $1.3 million and $1.8 million for the three
and six months ended June 30, 1997. The increases are primarily due to a
$34,000 increase and a $821,000 decrease in realized losses incurred on the
sale of trading portfolio securities and a $946,000 and a $673,000 increase in
unrealized gains on trading portfolio securities.

Property operating expenses increased from $3.9 million and $7.6
million for the three and six months ended June 30, 1996 to $4.0 million and
$8.5 million for the three and six months ended June 30, 1997. The increases
are primarily due to the acquisition of the Best Western Oceanside Hotel in
1996 and taxes and property maintenance on the Company's land parcels.

-40-
<PAGE> 43

were offset in part by a decrease of $969,000 due to the sale of 40.2 acres of
the BP Las Colinas land in February 1997. Interest expense is expected to
increase as the Company continues to acquire properties on a leveraged basis.

Advisory and mortgage servicing fees increased from $381,000 and
$701,000 for the three and six months ended June 30, 1996 to $585,000 and $1.0
million for the three and six months ended June 30, 1997. The increases are
primarily attributable to the increase in the Company's gross assets, the basis
for such fee. Such fee is expected to increase as the Company acquires
additional properties.

Depreciation and amortization expense increased from $453,00 and
$890,000 for the three and six months ended June 30, 1996 to the $600,000 and
$1.1 million for the three and six months ended June 30, 1997. The increases
are primarily due to the purchase of Best Western Oceanside Hotel in December
1996. Depreciation and amortization for the remainder of 1997 is expected to
be higher than in the first six months of 1997 due to the May 1997 acquisition
of PWSI.

General and administrative expenses increased from $595,000 and $1.2
million for the three and six months ended June 30, 1996 to $1.6 million and
$2.3 million for the three and six months ended June 30, 1997. The increase is
primarily attributable to legal fees and travel expenses incurred in 1997
relating to pending acquisitions and refinancings, increases in advisor cost
reimbursements, and the general and administrative expenses of PWSI.

Incentive compensation for the six months ended June 30, 1997 was
$299,000. Incentive compensation relates to the sale of Porticos Apartments.

Equity in income of investees improved from a loss of $1.5 million and
$2.4 million for the three and six months ended June 30, 1996 to income of $5.0
million and $5.2 million for the three and six months ended June 30, 1997. The
increases in equity income are attributable in part to an increase in the
combined operating income of REITs and NRLP. Such improvement is generally
attributable to improved occupancy and increased rental rates. The remainder
of the increase is due to gains on sale of real estate in the REITs.

Gains on sale of real estate were $3.9 million and $8.1 million for
the three and six months ended June 30, 1997 compared to $2.3 million and $4.5
million for the three and six months ended June 30, 1996. In June 1997, the
Company recognized a previously deferred gain of $3.0 million on the sale of
Porticos Apartments and a $216,000 gain on the sale of Kamperman land. In
April 1997, a gain of $668,000 on the sale of 3.1 acres of Las Colinas land.
In February 1997, a gain of $3.4 million on the sale of 40.2 acres of BP Las
Colinas land, a gain of $171,000 on the sale of Osceola land and a gain of
$676,000 on the sale of 3.0 acres of Las Colinas I land.

For the three months ended June 30, 1996, the Company recognized a
$538,000 gain on the sale of 2.3 acres of Las Colinas land, a $44,000 gain on
the sale of a parcel of land in Midland, Michigan and a $10,000 gain on the
sale of eight residential lots. The first six months of 1996 includes an
additional $538,000 gain on the sale of another 2.3 acres of land in Las
Colinas, Texas.

1996 Compared to 1995. The Company reported a net loss of $5.6 million
in 1996 as compared to a net loss of $2.8 million in 1995. The primary factors
contributing to the increase in the Company's net loss are discussed in the
following paragraphs.

Net rental income (rents less property operating expenses) increased
from $4.6 million in 1995 to $4.8 million in 1996. This increase is primarily
attributable to increased rents at the Denver Merchandise Mart and increased
room rates and occupancy at the Kansas City Holiday Inn. Net rental income is
expected to increase in 1997 from continued improvement at the Kansas City
Holiday Inn and from a full years operations of the Best Western Oceanside
Hotel which was acquired in December 1996.

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

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

Interest expense increased from $8.9 million in 1995 to $16.5 million
in 1996. The increase is primarily attributable to debt refinancings and the
debt incurred related to the purchase of six parcels of land in 1995 and 1996
and the Oaktree Shopping

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<PAGE> 44
Center obtained in November 1995. Offsetting the increase was a $161,000
decrease in interest expense due to the sale of an apartment complex in
February 1995. Interest expense for 1997 is expected to increase from the
continued acquisition of properties on a leveraged basis.

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

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

Equity in income of investees improved from a loss of $851,000 in 1995
to income of $2.0 million in 1996. The increase in equity income is primarily
attributable to an improvement in income from property operations for both CMET
and NRLP, from increased rental rates and a decrease in operating expenses. The
1995 gains are attributable to the Company's equity share ($1.8 million) of
NRLP's fourth quarter gain on the sale of two apartment complexes, the
Company's equity share ($2.5 million) of TCI's gain on the sale of land in the
third quarter and an apartment complex in the fourth quarter of 1995, a $4.6
million gain representing the Company's equity share of the REIT's gain on sale
of real estate.

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

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

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

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

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

Other income decreased from $1.1 million in 1994 to $154,000 in 1995.
This decrease is primarily attributable to the fourth quarter write down of the
Company's marketable equity securities trading portfolio by $998,000 due to a
decline in market value.

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

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

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

Equity in income of investees decreased from a income of $292,000 in
1994 to a loss of $851,000 in 1995. This decrease in equity income is primarily
attributable to an increase in net loss of both IORI and TCI, resulting from a
$1.5 million writedown of a wraparound mortgage note receivable to the balance
of the underlying first lien mortgage by a partnership in which IORI and TCI
are the sole partners. Offsetting such losses in part, is the Company's equity
share ($1.8 million) of NRLP's fourth quarter gain on the sale of two apartment
complexes, the Company's equity share ($2.5 million) of TCI's gain on the sale
of land in the third quarter and an apartment complex in the fourth quarter of
1995.

Gains on the sale of real estate increased from $292,000 in 1994 to
$2.6 million in 1995. The 1995 gains are attributable to a $1.6 million gain
recognized on the sale of 6.9 acres of Las Colinas I land in Las Colinas,
Texas, acquired by the Company in May 1995 and a $924,000 gain recognized by
the Company on the sale of the Boulevard Villas Apartments in February 1995.

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

CONTINGENCIES

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

Provided that the successor general partner is elected pursuant to the
terms of the Amended and Restated Implementation Agreement, SAMLP shall receive
$12.5 million from the Partnership. This amount represents a compromise
settlement of the net amounts owed by the Partnership to SAMLP upon SAMLP's
withdrawal as general partner and any amounts which SAMLP and its affiliates
may owe to the Partnership. This amount shall be paid to SAMLP pursuant to a
promissory note in accordance with the terms set forth in the Amended and
Restated Implementation Agreement.

In September 1996, the Judge appointed to supervise the class action
settlement (the "Supervising Judge") entered an order granting tentative
approval of the Amended and Restated Implementation Agreement and the form of
notice to be sent to the original class members. However, the order reserved
jurisdiction to determine other matters which must be resolved prior to final
approval. On April 7, 1997, the Supervising Judge issued an order granting
final approval of the notice and scheduled a hearing on June 27, 1997 for final
approval of the Amended and Restated Implementation Agreement. Upon final
approval by the Supervising Judge, the proposal to elect the successor general
partner will be submitted to the NRLP's unitholders for a vote. In addition,
the unitholders will vote upon amendments to the NRLP's Partnership Agreement
which relate to the proposed compensation of the successor general partner and
other related matters.

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

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

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On September 3, 1996, Joseph B. Moorman filed a Motion for Orders
Compelling Enforcement of the Moorman Settlement Agreement, Appointment of a
Receiver and Collateral Relief with the Court. The motion alleged that the
settling defendants had failed or refused to perform their obligations under
the Moorman Settlement Agreement and had breached the Moorman Settlement
Agreement. The motion also requested that SAMLP be removed as general partner
and a receiver be appointed to manage the Partnership. The motion also
requested that the Company be ordered to deliver to the Court all NRLP units
which had been purchased by the Company since August 7, 1991. A hearing was
held on this motion in October 1996. In January 1997, the Supervising Judge
entered an order denying the motion.

ENVIRONMENTAL MATTERS

Under various federal, state and local environmental laws, ordinances
and regulations, the Company may be potentially liable for removal or
remediation costs, as well as certain other potential costs relating to
hazardous or toxic substances (including governmental fines and injuries to
persons and property) where property-level managers have arranged for the
removal, disposal or treatment of hazardous or toxic substances. In addition,
certain environmental laws impose liability for release of asbestos-containing
materials into the air, and third parties may seek recovery from the Company
for personal injury associated with such materials.

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

INFLATION

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

RECENT ACCOUNTING PRONOUNCEMENT

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

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

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The adoption of SFAS No. 121 had no effect on the Company's net income
for the six months ended June 30, 1997, as the Company's one depreciable asset
classified as held for sale is fully depreciated and none of the Company's
other long lived assets are considered to be impaired.

ACQUISITION TERMS

This Prospectus covers Preferred Stock that may be issued from time to
time in the future by the Company on the completion of acquisitions of assets,
businesses or securities, or on the payment of dividends on or conversion of or
payment of interest on convertible notes issued in connection with such
acquisitions of other businesses or properties.

It is expected that the terms of acquisitions involving the issuance
of the Preferred Stock covered by this Prospectus will be determined by direct
negotiations with the owners or controlling persons of the assets, businesses
or securities to be acquired, and that the Preferred Stock issued will be
valued at prices reasonably related to the market price of the Preferred Stock
either at the time an agreement is entered into concerning the terms of the
acquisition or at or about the time the Shares are delivered. No underwriting
discounts or commissions will be paid, although finder's fees may be paid in
connection with certain acquisitions. Any person receiving such fees may be
deemed to be an 'underwriter' within the meaning of the Securities Act, and any
profit on the resale of shares of Common Stock purchased by them may be deemed
to be underwriting commissions or discounts under the Securities Act.

DESCRIPTION OF THE CAPITAL STOCK

GENERAL

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

COMMON STOCK

All shares of the Company's Common Stock are entitled to share equally
in dividends from funds legally available therefor, when declared by the
Company's Board of Directors, and upon liquidation or dissolution of the
Company, whether voluntary or involuntary (subject to any prior rights of
holders of the Special Stock), and to share equally in the assets of the
Company available for distributions to shareholders. Each holder of Common
Stock is entitled to one vote for each share held on all matters submitted to
the shareholders. There is no cumulative voting, redemption right, sinking
fund provision or right of conversion with respect to the Common Stock. The
holders of Common Stock do not have any preemptive rights to acquire additional
shares of Common Stock when issued. All outstanding shares of the Company are
fully paid and nonassessable. As of June 30, 1997, 13,479,348 shares of Common
Stock were issued and 11,954,721 shares of Common Stock were outstanding.

SPECIAL STOCK

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

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

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

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

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

Series A Preferred Stock; Terminated Rights Plan. On April 11, 1990,
the Board of Directors of the Company designated 500,000 shares of the Series A
Cumulative Participating Preferred Stock (the "Series A Preferred Stock"),
adopted a preferred share purchase rights plan and approved the distribution to
shareholders of a dividend of one preferred share purchase right on each
outstanding share of the Company's Common Stock (the "Rights"). The rights
plan provided that one Right would be distributed to all shareholders of the
Company for each share of Common Stock owned of record by them as of April 23,
1990. In addition, the rights plan required that the Company issue one Right
with each share of Common Stock that became outstanding thereafter so that all
shares of Common Stock would carry a Right. The Rights were primarily designed
to assure that all holders of Common Stock of the Company receive fair and
equal treatment in the event of any attempt to acquire the Company and to guard
the interest of such shareholders against partial tender offers, inadequate
offers, open market accumulations and other abusive or coercive tactics. The
rights plan was not adopted in response to any effort to acquire the Company,
and the Company has remained unaware of any such effort. On June 12, 1996, the
Board of Directors of the Company resolved to redeem the Rights held by the
shareholders of record as of June 21, 1996 at the redemption price of $.01 per
Right. The redemption price was paid on July 8, 1996. The decision by the
Board of Directors of the Company was based on a determination that the rights
plan was no longer necessary to protect the Company and its shareholders from
coercive tender offers.

On February 27, 1997, the Board of Directors of the Company deleted
the designation of the Series A Preferred Stock from the Articles of
Incorporation and none will be issued in the future.

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

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

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

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

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Series C Preferred Stock. The Board of Directors of the Company
designated 16,681 shares of Series C 10% Cumulative Preferred Stock (the
"Series C Preferred Stock") on May 23, 1996, with a par value of $2.00 per
share and a preference on liquidation of $100 per share plus all accrued and
unpaid dividends. The Series C Preferred Stock is non-voting except as
required by law. The Company is not required to maintain a sinking fund for
such stock.

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

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

The Company may from time to time redeem any or all of the Series C
Preferred Stock upon payment of the liquidation value of $100 per share plus
all accrued and unpaid dividends. There is no restriction on the repurchase or
redemption of the Series C Preferred Stock by the Company while there is any
arrearage in payment of dividends except that at the time of such repurchase or
redemption the Company must pay all accrued and unpaid dividends on the shares
being redeemed. As of August 29, 1997, 16,681 shares of the Series C
Preferred Stock were issued and outstanding.

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

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

The Company may from time to time after June 1, 2001 redeem any or all
of the Series D Preferred Stock upon payment of the liquidation value of $20.00
per share plus all accrued and unpaid dividends. There is no restriction on
the repurchase or redemption of the Series D Preferred Stock by the Company
while there is any arrearage in payment of dividends except that at the tine of
such repurchase or redemption the Company must pay all accrued and unpaid
dividends on the shares being redeemed. As of August 29, 1997, no shares of the
Series D Preferred Stock were issued and outstanding.

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

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

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

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

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Stock. The Series E Preferred Stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of Special Stock.

The Company may redeem any or all of the shares of Series E Preferred
Stock from time to time upon payment of $100.00 per share plus all accrued and
unpaid dividends. There is no restriction on the repurchase or redemption of
the Series E Preferred Stock by the Company while there is any arrearage in
payment of dividends except that at the time of such repurchase or redemption
the Company must pay all accrued and unpaid dividends on the shares being
redeemed. As of August 29, 1997, no shares of the Series E Preferred Stock were
issued and outstanding.

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

Series F Preferred Stock. On August 13, 1997, the Board of Directors
of the Company designated and authorized the issuance of a total of 7,500,000
shares of its Series F Cumulative Convertible Preferred Stock (the "Series F
Preferred Stock") with a par value of $2.00 per share and a preference on
liquidation of $10.00 per share plus payment of accrued and unpaid dividends
(the "Adjusted Liquidation Value"). The Series F Preferred Stock is non-voting
except (i) as provided by law and (ii) at any time or times when all or any
portion of the dividends on the Series F Preferred Stock for any six quarterly
dividends, whether or not consecutive, shall be in arrears and unpaid. In the
latter event, the number of directors constituting the board of directors of
the Company shall be increased by two and the holders of Series F Preferred
Stock, voting separately as a class, shall be entitled to elect two directors
to fill such newly created directorships with each holder being entitled to one
vote in such election for each share of Series F Preferred Stock held. The
Company is not obligated to maintain a sinking fund with respect to the Series
F Preferred Stock.

The Series F Preferred Stock is convertible at any time and from time
to time, in whole or in part, after the earliest to occur if (i) August 15,
2003; (ii) the first business day, if any, occurring after the fifteenth day
following the end of each calendar quarter, on which an amount equal to or in
excess of 5% of the $10.00 liquidation value (i.e., $.50 per share of Series F
Preferred Stock) is accrued and unpaid, or (iii) when the Company becomes
obligated to mail a statement to the holders of record of each of the Series F
Preferred Stock because of a proposal by the Company at any time before all of
the Series F Preferred Stock have been redeemed by or converted into the
Company's Common Shares, to merge or consolidate with or into any other
corporation (unless the Company is the surviving entity and holders of the
Company's Common Stock continue to hold such Common Stock without modification
and without receipt of any additional consideration), or sell, lease, or convey
all or substantially all its property or business, or to liquidate, dissolve or
wind up. Each share of Series F Preferred Stock is convertible into that
number of shares of Common Stock obtained by multiplying the number of shares
being converted by $10.00, then adding all accrued and unpaid dividends, then
dividing such sums by (in most instances) 90% of the simple average of the
daily closing price of the Company's Common Stock for the 20 business days
ending on the last business day of the calendar week immediately preceding the
date of conversion on the principal stock exchange on which such Common Stock
is then listed (the "Conversion Price"). Notwithstanding the foregoing, the
Company may elect to redeem shares of the Series F Preferred Stock sought to be
so converted instead of issuing shares of the Company's Common Stock by paying
to the holder thereof cash in an amount equal to the Conversion Price for those
shares of the Series F Preferred Stock so redeemed.

The Series F Preferred Stock bear a cumulative, compounded dividend per
share equal to 10% per annum of the Adjusted Liquidation Value, payable
quarterly on the 15th business day of the month following the end of the
related calendar quarter, and commencing accrual on August 16, 1998 whether or
not such dividends have been declared and whether or not there are profits,
surplus or other funds of the Company legally available for the payment of such
dividends. Dividends on the Series F Preferred Stock are in preference to and
with priority over dividends upon the Company's Common Stock. The Series F
Preferred Stock rank on a parity as to dividends and upon liquidation,
dissolution or winding up with all other shares of preferred stock issued by
the Company.

In addition to the Company's redemption rights described above upon a
conversion of Series F Preferred Stock, the Company may redeem any or all of
the Series F Preferred Stock at any time and from time to time, at its option,
for cash upon no less than twenty (20) days nor more than thirty (30) days
prior notice thereof. The redemption price of the Series F Preferred shall be
an amount per share equal to (i) 105% of the Adjusted Liquidation Value during
the period from August 15, 1997 through August 15, 1998; (ii) 104% of the
Adjusted Liquidation Value during the period from August 16, 1998 through
August 15, 1999; and (iii) 103% of the Adjusted Liquidation Value at any time
on or after August 16, 1999. Each Series F Preferred Share will be
convertible, at the option of the holder, into fully paid and nonassessable
Common Stock. As of September ___, 1997 there were no issued and outstanding
Series F Preferred Stock.

-48-
<PAGE> 51

PLAN OF DISTRIBUTION

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

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

LEGAL MATTERS

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

EXPERTS

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

-49-
<PAGE> 52
FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----

FINANCIAL STATEMENTS:
<S> <C>
Report of Independent Certified Public Accountants . . . . . . . . . . . . F-2

Consolidated Balance Sheets -
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Statements of Operations -
Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . F-5

Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . F-6

Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . F-7

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . F-10

INTERIM FINANCIAL STATEMENTS (UNAUDITED):

Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . F-31

Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1997 and 1996 . . . . . . . . . . F-33

Consolidated Statements of Stockholders' Equity -
Six Months Ended June 30, 1997 . . . . . . . . . . . . . . . . . . . . F-34

Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . F-35

Notes to Consolidated Interim Financial Statements . . . . . . . . . . . F-37
</TABLE>

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.

F-1
<PAGE> 53
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors of
American Realty Trust, Inc.

We have audited the accompanying consolidated balance sheets of American Realty
Trust, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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. 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. We believe our audits provide a reasonable basis for
our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Realty Trust, Inc. and Subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.

. . . . . . . .
. . . . . . . .
BDO Seidman, LLP

Dallas, Texas
March 26, 1997

F-2
<PAGE> 54
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION> December 31,
------------------------
1996 1995
--------- ----------
(dollars in thousands)

<S> <C> <C>
Assets
------
Notes and interest receivable
Performing (including $13,563 in 1996 and
$14,657 in 1995 from affiliate) . . . . . . . . $ 50,784 $ 51,840
Nonperforming, nonaccruing . . . . . . . . . . . 1,627 1,827
--------- ---------
52,411 53,667

Less - allowance for estimated losses . . . . . . . (3,926) (3,926)
--------- ---------
48,485 49,741
Real estate held for sale, net of accumulated
depreciation ($5,098 in 1996 and 1995) . . . . . 77,688 32,627

Less - allowance for estimated losses . . . . . . . -- (3,328)
--------- ---------
77,688 29,299
Real estate held for investment net of accumu-
lated depreciation ($4,234 in 1996 and $2,646
in 1995) . . . . . . . . . . . . . . . . . . . . 41,347 30,125

Marketable equity securities, at market value . . . 2,186 2,093
Cash and cash equivalents . . . . . . . . . . . . . 1,254 1,054
Investments in equity investees . . . . . . . . . . 55,880 41,072
Other assets (including $3,336 in 1995 from
affiliate) . . . . . . . . . . . . . . . . . . . 8,197 8,649
--------- ---------
$ 235,037 $ 162,033
========= =========
</TABLE>

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

F-3
<PAGE> 55
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED

<TABLE>
<CAPTION> December 31,
1996 1995
--------- ---------
(dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable (including $8,973 in
1996 and $8,556 in 1995 to affiliates) . . . . . $ 127,863 $ 61,163
Margin borrowings . . . . . . . . . . . . . . . . . 40,044 34,017
Accounts payable and other liabilities
(including $4,584 in 1995 to affiliate) . . . . . 8,433 12,698
--------- ---------
176,340 107,878

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

Commitments and contingencies

Stockholders' equity
Preferred Stock, $2.00 par value, authorized
20,000,000 shares; issued and outstanding
4,000 shares Series B . . . . . . . . . . . . . . 8 --
15,877 shares Series C . . . . . . . . . . . . . 32 --
Common Stock, $.01 par value, authorized
16,666,667 shares; issued 13,479,348 shares in
1996 and 11,716,656 shares in 1995 . . . . . . . 129 117
Paid-in capital . . . . . . . . . . . . . . . . . . 68,601 66,661
Accumulated (deficit) . . . . . . . . . . . . . . . (20,978) (13,720)
Treasury stock at cost, 564,704 shares . . . . . . (6) --
--------- ---------
47,786 53,058
--------- ---------

$ 235,037 $ 162,033
========= =========
</TABLE>

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

F-4
<PAGE> 56
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION> Years Ended December 31,
---------------------------------------
1996 1995 1994
----------- ----------- ----------

(dollars in thousands, except per share)

<S> <C> <C> <C>
Income
Rents . . . . . . . . . . . . . . . $ 20,658 $ 17,869 $ 18,013
Interest (including $539 in
1996, $506 in 1995 and $366
in 1994 from affiliates). . . . . 4,724 4,929 3,959
Other . . . . . . . . . . . . . . . 1,597 154 1,098
---------- ---------- ---------
26,979 22,952 23,070

Expenses
Property operations (including
$892 in 1996, $1,200 in
1995 and $899 in 1994 to
affiliates) . . . . . . . . . . . 15,874 13,260 13,013
Interest (including $418 in
1996, $437 in 1995 and $589
in 1994 to affiliates) . . . . . 16,450 8,941 7,875
Advisory and servicing fees to
affiliate . . . . . . . . . . . . 1,539 1,195 1,242
General and administrative
(including $691 in 1996,
$516 in 1995 and $434 in
1994 to affiliate) . . . . . . . 2,712 2,554 2,562
Depreciation and amortization . . . 2,002 1,691 1,620
Minority interest . . . . . . . . . -- 671 169
---------- ---------- ---------
38,577 28,312 26,481
---------- ---------- ---------

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

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

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

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

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

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

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

Earnings per share
(Loss) before extraordinary gain . . $ (.46) $ (.31) $ (.23)
Extraordinary gain . . . . . . . . . .03 .07 .03
---------- ---------- ---------
Net (loss) applicable to Common
shares . . . . . . . . . . . . . . $ (.43) $ (.24) $ (.20)
========== ========== =========
Weighted average Common shares
used in computing earnings
per share . . . . . . . . . . . . . 12,765,082 11,716,656 12,208,876
========== ========== ==========
</TABLE>

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

F-5
<PAGE> 57
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Series B Series C Accumulated
Preferred Preferred Common Treasury Paid-in Earnings Stockholders
Stock Stock Stock Stock Capital (Deficit) Equity
----- ----- ----- ----- ------- ---------- ----------
(dollars in thousands)

<S> <C> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1994 . . . . $ -- $ -- $ 102 $ -- $64,476 $ (8,458) $56,120

Reclassification of
Redeemable Common
Stock . . . . . . . . .
-- -- 14 -- 2,186 -- 2,200
Common Stock
Issued . . . . . . . . -- -- 9 -- (9) -- --

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

Net (loss) . . . . . . . -- -- -- -- -- (2,426) (2,426)
----- ----- ----- ----- ------- --------- -------
Balance
December 31, 1994 . . . -- -- 117 -- 66,661 (10,884) 55,894

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

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

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

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

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

Redemption of share
purchase rights
($.01 per right). . . . -- -- -- -- -- (101) (101)

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

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

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

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

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

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

F-6
<PAGE> 58
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

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

<S> <C> <C> <C>
Cash Flows From Operating Activities
Rents collected . . . . . . . . . . . $19,013 $18,473 $17,130

Interest collected ($385 in
1996, $399 in 1995 and $366 4,304 4,845 3,829
in 1994 from affiliates) . . . . . .

Distributions from equity investees' 9,054 1,464 1,642
operating activities . . . . . . . .

Interest paid (including $19 in
1995 and $213 in 1994 to
affiliate) . . . . . . . . . . . . . (9,601) (8,296) (4,286)

Payments for property operations
(including $892 in 1996, $1,200
in 1995 and $899 in 1994 to
affiliate) . . . . . . . . . . . . . (15,034) (13,442) (13,162)

Advisory fee paid to affiliate . . . (1,539) (1,195) (1,242)

General and administrative expenses
paid (including $691 in 1996, $516
in 1995 and $434 in 1994 to
affiliate) . . . . . . . . . . . . (3,095) (2,448) (2,384)

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

Other . . . . . . . . . . . . . . . (1,084) 500 235
------- ------- -------

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

Cash Flows From Investing Activities
Collections on notes receivable
(including $1,166 in 1996 and $394
in 1995 from affiliates) . . . . . . . 1,495 1,604 2,757

Purchase of marketable equity
securities . . . . . . . . . . . . . (22,613) (19,394) (16,518)

Proceeds from sale of marketable
equity securities. . . . . . . . . . 23,557 18,374 15,123

Notes receivable funded . . . . . . . (250) (3,295) (700)

Proceeds from sale of real estate . . 3,129 11,992 4,058

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

Acquisitions of real estate . . . . . (6,698) (21,394) --

Real estate improvements . . . . . . . (2,862) (1,802) (2,168)

Investment in equity investees . . . . (15,471) (7,169) (6,884)
------- ------ ------

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

</TABLE>

F-7
<PAGE> 59
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

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

<S> <C> <C> <C>
Cash Flows From Financing Activities
Proceeds from notes payable . . . . . . . . . $ 58,520 $ 36,211 $ 710

Margin borrowings, net . . . . . . . . . . . 2,981 7,626 8,598
Proceeds from issuance of Preferred Stock . . 400 -- --

Payments on notes payable (including
$990 in 1995, $1,320 in 1994 to (32,382) (22,268) (5,151)
affiliate) . . . . . . . . . . . . . . . .

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

Deferred borrowing costs. . . . . . . . . . . (5,028) (2,475) --

Net advances (payments) to/from affiliates. . (4,979) 3,050 (1,566)

Dividends paid . . . . . . . . . . . . . . . (1,617) -- --
-------- -------- -------

Net cash provided by financing
activities . . . . . . . . . . . . . . . 17,895 22,144 2,156
-------- -------- -------

Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . 200 861 (650)

Cash and cash equivalents, beginning
of year . . . . . . . . . . . . . . . . . . 1,054 193 843
-------- -------- -------
Cash and cash equivalents, end of year. . . . $ 1,254 $ 1,054 $ 193
======== ======== =======
Reconciliation of net (loss) to net
cash provided by (used in) operating
activities

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

Adjustments to reconcile net (loss) to net
cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . (381) (783) (323)

Extraordinary gain . . . . . . . . . . . .

Gain on sale of real estate . . . . . . . (3,659) (2,594) (379)

Depreciation and amortization . . . . . . 2,002 1,691 1,620

Equity in (income) losses of investees . . (2,004) 851 (292)

Distributions from equity investees'
operating activities . . . . . . . . . . 9,054 1,464 1,642

(Increase) decrease in accrued interest (117) 79 (18)

Decrease in other assets . . . . . . . . . 452 1,439 228

Increase (decrease) in accrued interest
payable. . . . . . . . . . . . . . . . . 1,417 (5) 575

Increase in accounts payable and other 733 495 150
liabilities . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . 75 -- 235
------- -------- -------
Net cash provided by (used in) operating $ 2,018 $ (199) $ 1,012
activities . . . . . . . . . . . . . . . ======== ======== =======

</TABLE>

F-8
<PAGE> 60
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

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

<S> <C> <C> <C>
Schedule of noncash investing
and financing activities

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

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

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

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

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

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

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

Carrying value of notes receivable
participation received . . . . . -- -- --

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

Carrying value of real estate
returned . . . . . . . . . . . . -- (2,183) --
</TABLE>

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

F-9
<PAGE> 61
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and company business. American Realty Trust, Inc.
("ART"), a Georgia corporation, is successor to a District of Columbia business
trust, that primarily invests in real estate and real estate-related entities
and purchases and originates mortgage loans.

Basis of consolidation. The Consolidated Financial Statements include
the accounts of ART, and all majority- owned subsidiaries and partnerships
other than National Realty, L.P. ("NRLP") and Pizza World Supreme, Inc.
("PWS"). The Company uses the equity method to account for its investment in
NRLP and PWS as control is considered to be temporary. See NOTE 2. "SYNTEK
ASSET MANAGEMENT, L.P." and NOTE 6. "INVESTMENTS IN EQUITY INVESTEES." All
significant intercompany transactions and balances have been eliminated.

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

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

Allowance for estimated losses. Valuation allowances are provided for
estimated losses on notes receivable considered to be impaired. 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 net realizable value of the collateral
securing such note, or fair value of the collateral if foreclosure is probable.

Real Estate Held for Investment and Depreciation. Real estate held
for investment is carried at cost. Statement of Financial Accounting Standards
No. 121 ("SFAS No. 121") requires that a property be considered impaired, if
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the property. If impairment exists,
an impairment loss is recognized by a charge against earnings, equal to the
amount by which the carrying amount of the property exceeds the fair value of
the property. If impairment of a property is recognized, the carrying amount of
the property is reduced by the amount of the impairment, and a new cost for the
property is established. Such new cost is depreciated over the property's
remaining useful life. Depreciation is provided by the straight-line method
over estimated useful lives, which range from 10 to 40 years.

Real Estate Held for Sale. Foreclosed real estate is initially
recorded at new cost, defined as the lower of original cost or fair value minus
estimated costs of sale. SFAS No. 121 also requires that properties held for
sale be reported at the lower of carrying amount or fair value less costs of
sale. If a reduction in a held for sale property's carrying amount to fair
value less costs of sale is required, a provision for loss shall be recognized
by a charge against earnings. Subsequent revisions, either upward or

F-10
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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 and amortizes such
premiums and discounts by the interest method over the lives of the related
notes. The factors considered in determining a market rate for notes receivable
include the borrower's credit standing, nature of the collateral and payment
terms of the note.

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

Fair value of financial instruments. The Company used the following
assumptions in estimating the fair value of its notes receivable, marketable
equity securities and notes payable. For performing notes receivable, the fair
value was estimated by discounting future cash flows using current interest
rates for similar loans. For nonperforming notes receivable the estimated fair
value of the Company's interest in the collateral property was used. For
marketable equity securities fair value was based on the year end closing
market price of each security. For notes payable the fair value was estimated
using current rates for mortgages with similar terms and maturities.

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

Earnings per share. Loss per share is computed based upon the weighted
average number of shares of Common Stock and redeemable Common Stock outstanding
during each year, adjusted for the two for one forward Common Stock splits
effected February 17, 1997 and January 2, 1996.

NOTE 2. SYNTEK ASSET MANAGEMENT, L.P.

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

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

F-11
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

agreement of limited partnership, SAMLP agreed to indemnify Messrs. Phillips
and Friedman, the individual general partners, at the time, of SAMLP, for the
$2.5 million payment to NRLP. The final annual installment of principal and
interest was paid by SAMLP in May 1994.

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

The withdrawal of SAMLP as general partner would require NRLP to
purchase SAMLP's general partner interest (The "Redeemable General Partner
Interest") at its then fair value, and to pay certain fees and other
compensation as provided in the partnership agreement. Syntek Asset Management,
Inc. ("SAMI"), the managing general partner of SAMLP, has calculated the fair
value of such Redeemable General Partner Interest to be $40.2 million at
December 31, 1996, before reduction for the principal balance ($4.2 million at
December 31, 1996) and accrued interest ($6.2 million at December 31, 1996) on
the note receivable from SAMLP for its original capital contribution to the
Partnership.

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

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

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

Upon approval by NRLP's unitholders, SAMLP shall resign as general
partner of NRLP and NOLP and the successor general partner shall take office.
If the required approvals are obtained, it is anticipated that the successor
general partner may be elected and take office during the third quarter of
1997.

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

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

On September 3, 1996, Joseph B. Moorman filed a Motion for Orders
Compelling Enforcement of the existing settlement agreement, appointment of a
receiver and collateral relief with the court. The motion alleges that the
settling defendants had failed or refused to perform their obligations under
the existing settlement agreements. The motion requested that SAMLP be removed
as general partner and a receiver be appointed to manage the Partnership. The
motion also requested that the Company be ordered to deliver to the court all
NRLP units which had been purchased by the Company since August 7, 1991.

F-12
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

A hearing was held on this motion on October 4, 1996, and the Court took the
matter under submission. On January 2, 1997, the Supervising Judge entered an
order denying the motion.

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

NOTE 3. NOTES AND INTEREST RECEIVABLE
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
<S> <C> <C> <C> <C>
Notes Receivable
Performing (including $13,563
in 1996 and $14,657 in 1995
from affiliates) . . . . . . $ 52,939 $ 55,161 $ 60,121 $ 56,335
Nonperforming, nonaccruing . . 1,884 1,584 1,784 1,784
-------- -------- -------- ----------
$ 54,823 $ 56,745 $ 61,905 58,119
======== ========

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

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

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

F-13
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

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

In August 1990, the Company foreclosed on its fourth lien note
receivable secured by the Continental Hotel and Casino in Las Vegas, Nevada.
The Company acquired the hotel and casino through foreclosure subject to first
and second lien mortgages totaling $10.0 million. In June 1992, the Company
sold the hotel and casino accepting as partial payment a $22.0 million
wraparound mortgage note receivable. The $22.0 million note bears interest at
11% and was scheduled to mature in July 1995. The Company recorded a deferred
gain of $4.6 million in connection with the sale of the hotel and casino
resulting from a disputed third lien mortgage being subordinated to the
Company's wraparound mortgage note receivable. The Company and the borrower
agreed to extend the Company's wraparound mortgage note receivable to December
31, 1995. A one percent extension fee was added to the principal balance of the
wraparound mortgage note. The monthly payments on the note remained at $175,000
per month as did the other terms of the note. At the note's extended maturity,
the Company and the borrower again agreed to extend the Company's wraparound
mortgage note to July 1, 1996. A one percent extension fee was again added to
the principal balance of the Company's wraparound mortgage note. The monthly
payments on the wraparound mortgage note remained at $175,000 per month as did
the other terms of the note. The Company's modified wraparound note continued
to accrue interest at 11% per annum with any unpaid interest being added
monthly to the principal balance. In March 1997, the wraparound note was again
modified and extended. The wraparound note now matures in June 1999 with the
borrower having two one year extension options. The modified wraparound note
bears interest at 10.5% per annum the first year, 11.5% per annum the second
year and $12.5% per annum the third year and in any extension periods, and
requires an annual $500,000 principal paydown. The borrower is also required to
invest $2.0 million in improvements to the hotel and casino within four months
of the March 1997 modification and an additional $2.0 million prior to December
1997. The borrower has also pledged 1,500,000 shares of common stock in Crowne
Ventures, Inc., as additional collateral. The borrower is making payments in
accordance with the terms of the modified note. The Company's wraparound
mortgage note receivable had a principal balance of $27.6 million at December
31, 1996. Prior to the modification and extension, the Company recognized
interest income on this wraparound mortgage note only to the extent interest
was collected.

At December 31, 1996, the Company held a mortgage note receivable
secured by a third lien on a commercial property in South Carolina and personal
guaranties of several individuals. The note had an extended maturity date of
September 1, 1996. The Company and the borrower have again agreed to extend the
mortgage note receivable's maturity date to September 1, 1997. The extension
required an additional $90,000 principal reduction payment payable in three
equal monthly installments beginning November 1, 1996. The Company received
$85,000 of the required principal reduction payments in 1996 and the remaining
$5,000 in 1997. The monthly interest, quarterly principal reduction payments of
$25,000 and all other terms remained the same. The principal balance of the
note was $93,000 at December 31, 1996 and the note is now performing in
accordance with its modified terms.

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

The borrower on a $1.7 million mortgage note receivable secured by
land in Osceola, Florida failed, to pay the note on its November 1, 1993
maturity. The Company instituted foreclosure proceedings and was awarded a
summary judgment in January 1994. During 1994 and 1995, the borrower paid the
Company a total of $270,000 in nonrefundable fees to delay foreclosure of the
property until April 24, 1995. On April 25, 1995, the borrower filed for
bankruptcy protection. On August 24, 1996, the bankruptcy court's stay was
lifted allowing the Company to proceed with foreclosure. The note had a
principal balance of $1.6 million at December 31, 1996. On February 2, 1997,
the Company sold its note for $1.8 million in cash. See NOTE 21. "SUBSEQUENT
EVENTS."

Related Party. The Company holds a junior mortgage note receivable
secured by the Williamsburg Hospitality House in Williamsburg, Virginia, that
is subject to a first lien mortgage of $12.0 million at December 31, 1996. In
October 1993, the

F-14
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

then first lien debt was restructured and split into three pieces. During 1995,
the Company advanced the borrower $3.3 million to payoff the then second lien,
allowing the borrower to receive a $2.4 million discount offered by the lender
for early payoff of such lien. In conjunction with such advance, the Company
extended the maturity date of its note to April 1, 1996. All other terms of the
note remained unchanged. In December 1996, the underlying lien debt was
refinanced for $12.0 million. Of the loan proceeds, $9.0 million was used to
payoff the existing underlying lien, $700,000 was applied to the principal and
interest due the Company with the remainder of the loan proceeds being used to
fund a repair escrow and pay various closing costs associated with the
refinancing. The Company is the 1% general partner of the partnership owning
the property.

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

NOTE 4. REAL ESTATE

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

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

In June 1996, the Company purchased Parkfield land, 442.7 acres of
partially developed land in Denver, Colorado, for $8.5 million. In connection
with the acquisition, the Company obtained mortgage financing of $7.5 million
and issued to the seller 15,000 shares of the Company's Series C Cumulative
Convertible Preferred Stock with an aggregate liquidation preference of $1.5
million. See NOTE 9. "PREFERRED STOCK." The excess financing proceeds of
$500,000 were applied to the payment of various closing costs associated with
the acquisition. The loan bears interest at 15% per annum, requires monthly
interest only payments at a rate of 12% per annum, with the remaining 3% being
deferred and added to the principal balance of the loan. The principal balance,
accrued and unpaid interest and a $600,000 "maturity fee" are due at the loan's
maturity in June 1998.

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

F-15
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

In July 1996, the Company purchased Pin Oak land, 567.7 acres of
partially developed land in Houston, Texas for $6.2 million. The Company paid
$451,000 in cash and obtained seller mortgage financing for the remaining $5.7
million of the purchase price. The loan bears interest at 9% per annum,
required a $500,000 principal and interest payment on November 1, 1996 and
requires quarterly principal and interest payments of $145,000, thereafter. The
loan matures in August 1998. In September 1996, the Company entered into a
contract to sell the land for a price in excess of the land's purchase price
and carrying and estimated selling costs. The sale, should it be consummated,
would close on or about December 1, 1997.

In August 1996, the Company purchased a pool of assets for $3.1
million from Southmark Corporation ("Southmark"), consisting of a total of
151.5 acres of unimproved land in California, Indiana and Idaho, various
percentage interests, ranging from 15% to 45%, in five partnerships and trusts
that hold an unsecured note receivable with a principal balance of $3.4 million
and Southmark's 19.2% limited partner interest in SAMLP. See NOTE 2. "SYNTEK
ASSET MANAGEMENT, L.P." To complete the acquisition, the Company borrowed an
additional $3.0 million from the lender whose term loan is secured by the
Company's Las Colinas I land in Las Colinas, Texas. The term loan was amended
to increase the loan amount from $10.9 million to $13.9 million. The $3.0
million advance is secured by the 82.4 acres of unimproved land acquired from
Southmark in Oceanside, California and the 19.2% limited partner interest in
SAMLP.

Also in August 1996, the Company purchased Valwood land, 280 acres of
partially developed land in Dallas County, Texas for $13.5 million. The Company
paid $3.8 million in cash and obtained new mortgage financing for the remaining
$9.7 million of the purchase price, as a third advance under the term loan from
the lender discussed above. The term loan was again amended increasing the
term loan amount from $13.9 million to $19.5 million with an additional $4.0
million being loaned on an overline advance note. The amendment also changed
the principal reduction payments to $3.0 million on the last day of March 1997,
June 1997, September 1997 and January 1998, and added 240 acres of the 280
acres of the Valwood land as additional collateral on the term loan. All other
terms of the term loan remained unchanged. The $4.0 million overline advance
was repaid in full in December 1996.

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

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

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

F-16

<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

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

In February 1995, the Company sold the Boulevard Villas Apartments in
Las Vegas, Nevada, for $9.6 million. The Company received net cash of $3.4
million, after the payoff of $5.9 million in existing mortgage debt and the
payment of various closing costs associated with the sale. The Company
recognized a gain of $924,000 on the sale.

In May 1995, the Company purchased Las Colinas I, a 74.9 acre parcel
of partially developed land in Las Colinas, Texas, for $13.5 million. In
connection with the acquisition, the Company borrowed $15.0 million under a
term loan. In September 1995, the Company sold 6.9 acres of the Las Colinas I
land parcel, for $2.9 million in cash. In accordance with the provisions of the
term loan, the Company applied the net proceeds of the sale, $2.6 million, to
pay down the term loan.

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

NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES

Activity in the allowance for estimated losses was as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
Balance January 1, . . . . $ 7,254 $ 8,201 $ 9,913
Amounts charged off . . . . -- (947) (1,712)
Writedown of property . . . (3,328) -- --
------ ------- -------

Balance December 31, . . . $ 3,926 $ 7,254 $ 8,201
======= ======= =======
</TABLE>

NOTE 6. INVESTMENTS IN EQUITY INVESTEES

Real estate entities. The Company's investment in real estate entities
at December 31, 1996, includes (i) equity securities of three publicly traded
real estate investment trusts Continental Mortgage and Equity Trust ("CMET"),
Income Opportunity Realty Investors, Inc. ("IORI"), and Transcontinental Realty
Investors, Inc. ("TCI") (Collectively the "REITs"), (ii) units of limited
partner interest of NRLP, (iii) a general partner interest in NRLP and NOLP,
the operating partnership of NRLP, through its 96% limited partner interest in
SAMLP and (iv) interests in real estate joint venture partnerships. Gene E.
Phillips, the Chairman of the Board and a Director of the Company until
November 16, 1992, is a general partner of SAMLP, the general partner of NRLP
and NOLP and was a director and Chief Executive Officer of SAMI until May 15,
1996. Randall M. Paulson, an Executive Vice President of the Company, serves as
the sole director of SAMI and as President of the REITs, SAMI and BCM. In
addition, BCM serves as advisor to the REITs, and performs certain
administrative and management functions for NRLP and NOLP on behalf of SAMLP.

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

F-17
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Substantially all of the Company's equity securities of the REITs and
NRLP are pledged as collateral for borrowings. See NOTE 9. "MARGIN
BORROWINGS."

The Company's investment in real estate entities, accounted for using
the equity method, at December 31, 1996 was as follows:

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

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

* At December 31, 1996, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity, however, was $188.5
million. Revaluation equity is defined as the difference between the
appraised value of the partnership's real estate, adjusted to reflect
the partnership's estimate of disposition costs, and the amount of the
mortgage notes payable and accrued interest encumbering such property
as reported in NRLP's Annual Report on Form 10-K for the year ended
December 31, 1996.

F-18
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company's investment in real estate entities, accounted for using the
equity method, at December 31, 1995 was as follows:
<TABLE>
<CAPTION>
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
- -------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
NRLP 51.1% $ 12,712 $ * $ 38,020
CMET 37.2 12,116 28,297 15,757
IORI 25.9 2,752 6,271 4,065
TCI 28.2 9,162 25,195 11,335
---------- --------
36,742 $ 69,177
========

General partner
interest in NRLP and NOLP 7,726
Other (3,396)
--------
$ 41,072
==========
</TABLE>

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

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

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

In April 1996, the Company purchased a 28% general partner interest in
Campbell Center Associates, Ltd. Which in turn has a 56.25% interest in
Campbell Centre Joint Venture, which owns a 413,175 square foot office building
in Dallas, Texas. The purchase price of the general partner interest was
$550,000 in cash and a $500,000 note, which bears interest at 8% per annum,
requires monthly interest only payments commencing in April 1997 and matures
April 2000. In January 1997, the Company exercised its option to purchase an
additional 28% general partner interest in Campbell Center Associates, Ltd. The
purchase price was $300,000 in cash and a $750,000 note, which bears interest
at 8% per annum, requires monthly interest only payments commencing in April
1997 and matures in April 2000.

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

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

F-19
<PAGE> 71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

In January 1992, the Company entered into a partnership which acquired
287 developed residential lots adjacent to the Company's other residential lots
in Fort Worth, Texas. The partnership agreement designates the Company as
managing general partner. The partnership agreement also provides each of the
partners with a guaranteed 10% return on their respective investments. Through
December 31, 1995, 132 of the residential lots owned by the partnership were
sold. During 1996, an additional 52 lots were sold with 103 lots remaining to
be sold at December 31, 1996. Through December 31, 1996, each partner had
received $172,000 in return of capital distributions and $181,000 in profit
distributions from the partnership.

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

F-20
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Property and notes
receivable, net .................. $ 240,552 $ 239,728
Other assets ........................ 59,409 53,202
Notes payable ....................... (352,441) (338,534)
Other liabilities ................... (19,294) (53,663)
--------- ---------
Equity .............................. $ (71,774) $ (99,267)
========= =========
</TABLE>

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

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

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:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income (loss) before gains on sale of
real estate ...................... $ 270 $(1,767) $(1,279)
Gains on sale of real estate ........ -- 1,884 1,923
------- ------- -------
Net income .......................... $ 270 $ 117 $ 644
======= ======= =======
</TABLE>

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

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

F-21
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues ....................... $ 101,246 $ 94,730 $ 74,093
Depreciation ................... (14,408) (13,950) (10,276)
Provision for losses ........... 844 (541) (1,429)
Interest ....................... (30,401) (28,102) (20,264)
Operating expenses ............. (69,698) (65,471) (54,213)
--------- --------- ---------
(Loss) before gains on sale of
real estate and extraordinary
gains ....................... (12,417) (13,334) (12,089)
Gains on sale of real estate ... 11,701 5,822 6,375
Extraordinary gains ............ 1,068 1,437 1,189
--------- --------- ---------
Net income (loss) .............. $ 352 $ (6,075) $ (4,525)
========= ========= =========
</TABLE>

The Company's equity share of:

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(Loss) before gains on sale of
real estate and extraordinary
gains ....................... (2,911) (3,356) (1,250)
Gains on sale of real estate ... 4,645 2,463 895
Extraordinary gains ............ 381 783 273
--------- --------- ---------
Net income (loss) .............. $ 2,115 $ (110) $ (82)
========= ========= =========
</TABLE>

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

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

NOTE 7. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO

In 1994, the Company began purchasing equity securities of entities
other than those of the REITs and NRLP to diversify and increase the liquidity
of its margin accounts. In 1996, the Company purchased $22.6 million and sold
$23.6 million of such securities. These equity securities are considered a
trading portfolio and are carried at market value. At December 31, 1996, the
Company recognized an unrealized decline in the market value of the equity
securities in its trading portfolio of $486,000. In 1996, the Company realized
a net gain of $29,000 from the sale of trading portfolio securities and
received $163,000 in dividends. At December 31, 1995, the Company recognized an
unrealized decline in the market value of the equity securities in its trading
portfolio of $998,000. In 1995, the Company realized a net gain of $349,000
from the sale of trading portfolio securities and received $852,000 in
dividends and $238,000 in return of capital distributions on such securities.
At December 31, 1994, the Company recognized an unrealized decline in the
market value of the equity securities in its trading portfolio of $24,000. In
1994, the Company realized a net loss of $101,000 from the sale of trading
portfolio securities and received $274,000 in dividends on such securities.
Unrealized and realized gains and losses in the trading portfolio are included
in other income in the accompanying Consolidated Statements of Operations.

F-22
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 8. NOTES AND INTEREST PAYABLE

Notes and interest payable consisted of the following:

<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Notes payable
Mortgage Loans ............ $ 40,680 $ 68,385 $ 18,376 $ 22,086
Borrowings from financial
institutions ........... 78,812 48,929 27,052 29,945
Notes payable to affiliates 1,658 4,176 1,554 4,176
-------- -------- -------- --------
$121,150 121,490 $ 46,982 56,207
======== ========

Interest payable (including
$4,798 in 1996 and $4,380
in 1995 to affiliate) 6,373 4,956
-------- --------
$127,863 $ 61,163
======== ========
</TABLE>

Scheduled principal payments on notes payable are due as follows:

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

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

In April 1996, the Company refinanced the $2.9 million of underlying
debt collateralized by a wraparound mortgage note receivable with a principal
balance of $27.6 million at December 31, 1996, which is secured by a hotel and
casino in Las Vegas, Nevada for $16.8 million. The Company received net cash of
$11.2 million after the payoff of the underlying liens, the payment of various
closing costs associated with the refinancing and making a $1.4 million paydown
on the term loan secured by the Las Colinas I land in Las Colinas, Texas, in
exchange for that lender's release of its participation in the wraparound note
receivable. The new loan bears interest at 16.5% per annum, requires monthly
interest only payments at a rate of 12.5% with the remaining 4% being deferred
and added to principal. The loan matures in April 1998.

F-23
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Also in April 1996, the Company refinanced the $5.1 million mortgage
debt secured by the Denver Merchandise Mart in Denver, Colorado, for $15.0
million. The Company pledged 1,264,000 newly issued shares of the Company's
common stock as additional collateral for such loan. See NOTE 10. "COMMON
STOCK." The Company received net refinancing proceeds of $7.8 million after the
payoff of the existing mortgage debt, purchasing the ground lease on Denver
Merchandise Mart for $678,000 and payment of various closing costs associated
with the refinancing. The new loan bears interest at a variable rate, currently
10.5% per annum, requires monthly principal and interest payments of $142,000
and matures in October 1997.

In August 1996, the Company refinanced the $2.4 million mortgage debt
secured by the Rosedale Towers Office Building in Roseville, Minnesota for $2.8
million. The Company received net refinancing proceeds of $154,000 after the
payoff of the existing mortgage debt and payment of various closing costs
associated with the refinancing. The Company also received 564,704 shares of
Common Stock of the Company that it had pledged as additional collateral on the
refinanced mortgage debt. Such shares are held as treasury stock by the
Company. The new loan bears interest at 9.05% per annum, requires monthly
principal and interest payments of $24,000 and matures in August 2006.

Also in August 1996, the Company financed the previously unencumbered
Inn at the Mart in Denver, Colorado for $2.0 million to facilitate renovation
of the property. The Company received net financing proceeds of $890,000 after
the payment of various closing costs associated with the financing and a $1.1
million renovation holdback. Upon completion of the renovations, the lender
advanced the $1.1 million renovation holdback in December 1996. The loan bears
interest a variable rate, currently 10.50% per annum and requires monthly
interest only payments through February 1, 1998. Commencing March 1, 1998,
monthly payments of interest plus a $3,000 principal paydown are required until
the loan's maturity in September 2001.

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

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

Notes payable to affiliates at December 31, 1996 and 1995 include a
$4.2 million note due to NRLP as payment for SAMLP's general partner interest
in NRLP. The note bears interest at 10% per annum compounded semi-annually and
is due at the earlier of September 2007, the liquidation of NRLP or the
withdrawal of SAMLP as general partner of NRLP. See NOTE 2. "SYNTEK ASSET
MANAGEMENT, L.P."

NOTE 9. MARGIN BORROWINGS

The Company has margin arrangements with various brokerage firms which
provide for borrowings of up to 50% of the market value of the Company's
marketable equity securities. The borrowings under such margin arrangements are
secured by equity securities of the REITs, NRLP and the Company's trading
portfolio and bear interest rates ranging from 7.0% to 11.0%. Margin borrowings
were $40.0 million at December 31, 1996, and $34.0 million at December 31,
1995, 34.5% and 47%, respectively, of the market values of such equity
securities at such dates.

In August 1996, the Company consolidated its existing NRLP margin debt
held by the various brokerage firms into a single loan of $20.3 million. The
loan is secured by the Company's NRLP units with a market value of at least 50%
of the principal balance of the loan. As of December 31, 1996, 3,418,319 NRLP
units with a market value of $44.9 million were pledged as security for such
loan.

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

F-24
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE 10. COMMON STOCK

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

Also in April 1996, the Company issued 1,264,000 newly issued shares
of Common Stock to Garden Capital Merchandise Mart, Inc., a wholly-owned
subsidiary of the Company, which pledged such shares as additional collateral
for the loan secured by Denver Merchandise Mart, in Denver, Colorado. See NOTE
8. "NOTES AND INTEREST PAYABLE."

NOTE 11. DIVIDENDS

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

NOTE 12. PREFERRED STOCK

In April 1996, the Company filed Articles of Amendment to its Articles
of Incorporation creating and designating a Series B 10% Cumulative Convertible
Preferred Stock, par value $2.00 per share, with a liquidation preference of
$100.00 per share. The Series B Preferred Stock consists of a maximum of 4,000
shares, all of which were sold April 4, 1996 for $400,000 in cash in a private
transaction. Dividends are payable at the rate of $10.00 per year or $2.50 per
quarter to stockholders of record on the 15th day of each March, June,
September and December when and as declared by the Board of Directors of the
Company. The Series B Preferred Stock may be converted to Common Stock of the
Company at 90% of the average closing price of the Company's Common Stock on
the prior 20 trading days.

In June 1996, the Company filed Articles of Amendment to its Articles
of Incorporation creating and designating a Series C 10% Cumulative Convertible
Preferred Stock, par value $2.00 per share, with a liquidation preference of
$100.00 per share. The Series C Preferred Stock consists of a maximum of 16,500
shares, of which 15,000 were issued on June 4, 1996 in connection with the
purchase of Parkfield land in Denver, Colorado. See NOTE 4. "REAL ESTATE."
Dividends are payable at a rate of $10.00 per year or $2.50 per quarter to
stockholders of record on the 15th day of each March, June, September and
December when and as declared by the Board of Directors of the Company. The
dividends for the first four quarters are to be paid in shares of Series C
Preferred Stock. In 1996, the Company issued a total of 877 shares of Series C
Preferred Stock to the Series C Preferred Stock stockholders in lieu of cash
dividends. The Series C Preferred Stock may be converted to Common Stock of the
Company at 90% of the average closing price of the Company's Common Stock on
the prior 20 trading days. At December 31, 1996, 15,877 shares of Series C
Preferred Stock was issued and outstanding.

In December 1996, the Company filed Articles of Amendment to its
Articles of Incorporation, creating and designating a Series D 9.50% Cumulative
Preferred Stock, par value of $2.00 per share, with a liquidation preference of
$20.00 per share. The Series D Preferred Stock consists of a maximum of 91,000
shares. Dividends are payable at a rate of $1.90 per year of $.475 per quarter
to stockholders of record on the 15th day of each March, June, September and
December when and as declared by the Board of Directors of the Company. The
Class A limited partner units of Ocean L.P. may be exchanged for Series D
Preferred Stock at a rate of 20 units per share of Series D Preferred Stock. No
more than one-third of the Class A units held may be

F-25
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

exchanged between January 1, 1997 and May 31, 2001. Between June 1, 2001 and
May 31, 2006 all unexchanged Class A units are exchangeable. At December 31,
1996, none of the Series D Preferred Stock was issued. See NOTE 4. "REAL
ESTATE."

Also in December 1996 the Company field Articles of Amendment to its
Articles of Incorporation, creating and designating a Series E 10% Cumulative
Convertible Preferred Stock, par value $2.00 per share, with a liquidation
preference of $100.00 per share. The Series E Preferred Stock consists of a
maximum of 80,000 shares. Dividends are payable at a rate of 10.00 per year or
$2.50 per quarter to Stockholders of record on the 15th day of each March,
June, September and December when and as declared by the Board of Directors of
the Company, for the period from November 4, 1996 to November 4, 1999 and
$11.00 per year, $2.75 per quarter thereafter. The Class A limited partner
units of VRLP may be exchanged for Series E Preferred Stock at a rate of 100
Class A units per share of Preferred Stock. No more than one-half of the Class
A units may be exchanged prior to May 4, 1997, thereafter all unexchanged Class
A units are exchangeable. Beginning November 4, 1998, the Series E Preferred
Stock may be converted to Common Stock of the Company at 80% of the average
closing price of the Company's Common Stock on the prior 20 trading days. Up to
37.50% of the preferred shares may be converted between November 4, 1998 and
November 3, 1999. Between November 4, 1999 and November 3, 2001 an additional
12.50% of the original preferred shares may be converted, and the remaining can
be converted as of November 4, 2001 and thereafter. At December 31, 1996, none
of the Series E Preferred Stock was issued. See NOTE 4. "REAL ESTATE."

NOTE 13. ADVISORY AGREEMENT

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

BCM has been providing advisory services to the Company since February
6, 1989. BCM is a company owned by a trust for the benefit of the children of
Gene E. Phillips. Mr. Phillips served as Chairman of the Board and as a
Director of the Company until November 16, 1992. Mr. Phillips also served as a
director of BCM until December 22, 1989, and as Chief Executive Officer of BCM
until September 1, 1992. Mr. Phillips serves as a representative of the trust
for the benefit of his children that owns BCM and, in such capacity, has
substantial contact with the management of BCM and input with respect to BCM's
performance of advisory services to the Company. Ryan T. Phillips, a Director
of the Company until June 6, 1996, is a director of BCM and a trustee of the
trust that owns BCM. Oscar W. Cashwell, a Director of the Company, served as
Executive Vice President of BCM until January 10, 1997.

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

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

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.

F-26
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

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

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

NOTE 14. PROPERTY MANAGEMENT

Since February 1, 1990, affiliates of BCM have provided property
management services to the Company. Currently, Carmel Realty Services, Ltd.
("Carmel, Ltd.") provides property management services for a fee of 5% or less
of the monthly gross rents collected on the properties under its management.
Carmel, Ltd. subcontracts with other entities for the property-level management
services to the Company at various rates. The general partner of Carmel, Ltd.
is BCM. The limited partners of Carmel, Ltd. are (i) Syntek West, Inc.
("SWI"), of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and
(iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd.
subcontracts the property- level management of the Company's hotels, shopping
centers, one of its office buildings and the Denver Merchandise Mart to Carmel
Realty, Inc. ("Carmel Realty"), which is a company owned by SWI. Carmel Realty
is entitled to receive property and construction management fees and leasing
commissions in accordance with the terms of its property-level management
agreement with Carmel, Ltd.

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

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

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
Fees
<S> <C> <C> <C>
Advisory and mortgage
servicing ............... $1,539 $1,195 $1,242
Brokerage commissions ...... 1,889 905 497
Property and construction
management and leasing
commissions* ............ 892 1,200 899
Loan arrangement ........... 806 95 25
------ ------ ------
$5,126 $3,395 $2,663
====== ====== ======

Cost reimbursements ........... $ 691 $ 516 $ 434
====== ====== ======
</TABLE>

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

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

NOTE 16. INCOME TAXES

Financial statement income varies from taxable income, principally due
to the accounting for income and losses of investees, gains and losses from
asset sales, depreciation on owned properties, amortization of discounts on
notes receivable and

F-27
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

payable and the difference in the allowance for estimated losses. At December
31, 1996, the Company had a tax net operating loss carryforward of $17.7
million expiring through 2010.

At December 31, 1996, the Company has a deferred tax benefit of $5.2
million due to tax deductions available to it in future years. However, due to,
among other factors, the Company's inconsistent earnings history, the Company
was unable to conclude that the future realization of such deferred tax
benefit, which requires the generation of taxable income, was more likely than
not. Accordingly, a valuation allowance for the entire amount of the deferred
tax benefit has been recorded.

The components of tax expense are as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income tax provision
Current ............... $ - $ 2 $ 9
======= ======= =======
</TABLE>

NOTE 17. EXTRAORDINARY GAIN

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

In 1995, the Company recognized an extraordinary gain of $783,000
representing its equity share of TCI's extraordinary gain from the early payoff
of debt.
In 1994, the Company recognized an extraordinary gain of $273,000
representing its equity share of TCI's extraordinary gain from settlement of
claims against it by a lender. The Company also recognized $50,000 from
forgiveness of a portion of a first mortgage due to the early payoff of the
second mortgage.

NOTE 18. RENTS UNDER OPERATING LEASES

The Company's operations include the leasing of an office building, a
merchandise mart and shopping centers. The leases thereon expire at various
dates through 2006. The following is a schedule of minimum future rents on non-
cancelable operating leases as of December 31, 1996:

<TABLE>
<S> <C>
1997 . . . . . . . . . . . . . . $ 1,899
1998 . . . . . . . . . . . . . . 1,555
1999 . . . . . . . . . . . . . . 1,075
2000 . . . . . . . . . . . . . . 740
2001 . . . . . . . . . . . . . . 599
Thereafter . . . . . . . . . . . 1,444
------------
$ 7,302
===========
</TABLE>

NOTE 19. COMMITMENTS AND CONTINGENCIES

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

F-28
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 20. QUARTERLY RESULTS OF OPERATIONS

The following is a tabulation of the Company's quarterly results of
operations for the years 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------
1996 March 31, June 30, September 30, December 31,
---- --------- -------- ------------- ------------
<S> <C> <C> <C> <C>
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
Gain on sale of
real estate ........... 559 547 1,961 592
Extraordinary gain ........ 13 247 121 --
-------- -------- -------- --------
Net income (loss) ......... (215) (2,144) 770 (3,965)

Preferred dividend
requirement ........... -- (17) (48) (48)
-------- -------- -------- --------
Net income (loss)
applicable 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)
======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------
1995 March 31, June 30, September 30, December 31,
---- --------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue .................... $ 6,080 $ 5,552 $ 7,066 $ 4,254
Expense .................... 6,940 7,311 6,523 7,540
------- ------- ------- -------
Income (loss) from
operations ............. (860) (1,759) 543 (3,286)
Equity in income (losses)
of investees ........... (1,260) (1,699) (1,410) 3,518
Gains on sale of real estate 924 24 1,596 50
Extraordinary gain ......... 315 12 431 25
------- ------- ------- -------
Net income (loss) .......... $ (881) $(3,422) $ 1,160 $ 307
======= ======= ======= =======

Earnings per share
Income (loss) before extra-
ordinary gain .......... $ (.20) $ (.59) $ .13 $ .05
Extraordinary gain ......... .05 -- .07 .01
------- ------- ------- -------
Net income (loss) .......... $ (.15) $ (.59) $ .20 $ .06
======= ======= ======= =======
</TABLE>

F-29
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 21. SUBSEQUENT EVENTS

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

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

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

In March 1997, the Company purchased Katy Road land, 130.6 acres of
undeveloped land in Harris County, Texas for $5.0 million. The Company paid
$958,000 in cash and obtained seller financing for the remaining $4.0 million
of the purchase price. The mortgage bears interest at 9% per annum, requires
quarterly interest payments of $92,000 and matures in March 2000.

F-30
<PAGE> 82
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ---------
(dollars in thousands)
Assets

<S> <C> <C>
Notes and interest receivable
Performing ............................................................. $ 49,922 $ 50,784
Nonperforming .......................................................... 149 1,627
--------- ---------
50,071 52,411

Less - allowance for estimated losses .................................... (3,926) (3,926)
--------- ---------
46,145 48,485

Real estate held for sale, net of accumulated
depreciation ($5,098 in 1997 and 1996) ................................ 139,361 77,688

Real estate held for investment, net of accumulated
depreciation ($5,115 in 1997 and $4,234 in 1996) ....................... 42,968 41,347

Plant and equipment, net of accumulated depreciation
($521 in 1997) ......................................................... 3,999 --

Marketable equity securities, at market value ............................ 5,502 2,186
Cash and cash equivalents ................................................ 4,827 1,254
Investments in equity investees .......................................... 46,219 55,880
Intangibles, net of accumulated amortization ($407
in 1997) ............................................................... 15,482 --
Other assets ............................................................. 18,012 8,197
--------- ---------

$ 322,515 $ 235,037
========= =========
</TABLE>

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

F-31
<PAGE> 83

AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS -CONTINUED
(UNAUDITED)

<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ---------
(dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------

Liabilities
Notes and interest payable ($9,183 in 1997 and
$8,973 in 1996 to affiliates) ...................... $ 188,333 $ 127,863
Margin borrowings .................................... 44,347 40,044
Accounts payable and other liabilities (including
$22,340 in 1997 to affiliate) ...................... 29,360 8,433
--------- ---------

262,040 176,340

Minority interest .................................... 10,911 10,911

Commitments and contingencies

Stockholders' equity
Preferred Stock, $2.00 par value, authorized
20,000,000 shares, issued and outstanding
4,000 shares Series B .............................. 8 8
16,681 shares Series C ............................. 33 32
Common stock, $.01 par value; authorized
16,667,000 shares, issued 13,479,348 shares
in 1997 and 1996 .................................. 120 129
Paid-in capital` ..................................... 68,700 68,601
Accumulated (deficit) ................................ (19,282) (20,978)
Treasury stock at cost, 1,524,704 shares in 1997
and 564,704 shares in 1996 ........................ (15) (6)
--------- ---------

49,564 47,786
--------- ---------

$ 322,515 $ 235,037
========= =========
</TABLE>

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

F-32
<PAGE> 84

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

<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Income
Sales ......................... $ 2,181 $ -- $ 2,181 $ --
Rents ......................... 5,014 4,084 10,922 9,394
Interest ...................... 1,176 1,135 2,297 2,273
Other ......................... 1,296 127 1,766 469
------------ ------------ ------------ ------------
9,667 5,346 17,166 12,136
------------ ------------ ------------ ------------

Expenses
Cost of sales ................. 1,688 -- 1,688 --
Property operations ........... 4,018 3,856 8,471 7,566
Interest ...................... 6,870 3,270 12,074 6,416
Advisory and servicing fees
to affiliate .................. 585 381 1,009 701
Incentive compensation to
affiliate ..................... 299 -- 299 --
General and administrative .... 1,556 595 2,351 1,237
Depreciation and
amortization .................. 600 453 1,147 890
Minority interest ............. 344 -- 716 --
------------ ------------ ------------ ------------
15,960 8,555 27,755 16,810
------------ ------------ ------------ ------------

(Loss) from operations ......... (6,293) (3,209) (10,589) (4,674)
Equity in income (loss) of
investees ..................... 4,970 (1,530) 5,250 (2,420)
Gain on sale of real estate .... 3,863 2,348 8,150 4,475
------------ ------------ ------------ ------------

Income (loss) before
extraordinary gain ............ 2,540 (2,391) 2,811 (2,619)

Extraordinary gain ............. -- 247 -- 260
------------ ------------ ------------ ------------
Net income (loss) .............. 2,540 (2,144) 2,811 (2,359)

Preferred dividend requirement . (49) (17) (99) (17)
------------ ------------ ------------ ------------
Net income (loss) applicable
to Common shares .............. $ 2,491 $ (2,161) $ 2,712 $ (2,376)
============ ============ ============ ============

Earnings per share
Income (loss) before
extraordinary gain ............ $ .21 $ (.19) $ .23 $ (.21)
Extraordinary gain ............ -- .02 -- .02
------------ ------------ ------------ ------------
Net income (loss) applicable to
Common shares ................. $ .21 $ (.17) $ .23 $ (.19)
============ ============ ============ ============

Weighted average Common shares
used in computing earnings
per share ..................... 12,075,307 13,230,634 12,114,939 12,473,646
============ ============ ============ ============
</TABLE>

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

F-33
<PAGE> 85

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

FOR THE SIX MONTHS ENDED JUNE 30, 1997

<TABLE>
<CAPTION>
Series B Series C
Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Capital (Deficit) Equity
-------- -------- -------- -------- -------- ------- -------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ... $ 8 $ 32 $ 129 $ (6) $ 68,601 $(20,978) $ 47,786

Dividends
Common Stock ($.10 per
share) ........... -- -- -- -- -- (1,013) (1,013)
Series B Preferred Stock
($5.00 per share) -- -- -- -- -- (20) (20)

Series C Preferred Stock
($5.00 per share) -- 1 -- -- 81 (82) --

Treasury stock, at cost .... -- -- (9) (9) 18 -- --

Net income ................. -- -- -- -- -- 2,811 2,811
-------- -------- -------- -------- -------- ------- -------

Balance, June 30, 1997 ..... $ 8 $ 33 $ 120 $ (15) $ 68,700 $(19,282) $ 49,564
======== ======== ======== ======== ======== ======== ========
</TABLE>

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

F-34
<PAGE> 86

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

<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------------
1997 1996
-------- --------
(dollars in thousands)

<S> <C> <C>
Cash Flows From Operating Activities
Revenues collected ..................................... $ 12,624 $ 8,677
Interest collected ..................................... 2,071 2,250
Distributions received from equity investees'
operating cash flow .................................. 1,315 5,982
Payments for property operations and cost of
sales ............................................... (7,626) (8,209)
Interest paid .......................................... (7,517) (3,688)
Advisory and servicing fees paid to affiliate .......... (1,009) (701)
General and administrative expenses paid ............... (2,404) (1,274)
Other .................................................. (396) (98)
-------- --------
Net cash provided by (used in) operating
activities ...................................... (2,942) 2,939

Cash Flows From Investing Activities
Collections on notes receivable ........................ 5,499 449
Funding of notes receivable ............................ (2,888) (100)
Proceeds from sale of real estate ...................... 12,385 1,951
Proceeds from sale of marketable equity
securities ........................................... 4,613 17,122
Purchases of marketable equity securities .............. (6,345) (18,421)
Investment in real estate entities ..................... (463) (13,545)
Acquisition of real estate ............................. (37,063) (798)
Deposits ............................................... (3,883) (1,865)
Real estate improvements ............................... (3,162) (731)
-------- --------
Net cash (used in) investing activities .............. (31,307) (15,938)

Cash Flows From Financing Activities
Proceeds from notes payable ............................ 39,472 43,750
Payments on notes payable .............................. (22,535) (20,050)
Deferred borrowing costs ............................... (2,454) (1,735)
Net advances (payments) to/from affiliates ............. 22,735 (3,960)
Margin (payments) borrowings, net ...................... 2,353 (6,281)
Common dividends paid .................................. (1,013) --
Proceeds from issuance of Series B Preferred
Stock ............................................... -- 400
Preferred dividends paid ............................... (20) (6)
Distributions to minority interest ..................... (716) --
-------- --------
Net cash provided by financing activities ............ 37,822 12,118

Net increase (decrease) in cash and cash
equivalents....................................... 3,573 (881)

Cash and cash equivalents, beginning of period ........... 1,254 1,054
-------- --------

Cash and cash equivalents, end of period ................. $ 4,827 $ 173
======== ========
</TABLE>

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

F-35
<PAGE> 87

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

<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
---------------------
1997 1996
-------- ---------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities
Net income (loss) ................................ $ 2,811 $ (2,359)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Extraordinary gain ............................ -- (260)
Depreciation and amortization ................. 1,147 890
Amortization of deferred borrowing cost ....... 1,712 --
Gain on sale of real estate ................... (8,150) (4,475)
Distributions from equity investees' operating
cash flow .................................. 14,448 5,982
Equity in (income) losses of investees ........ (5,250) 2,420
Unrealized (gain) on marketable equity
securities ................................. (1,600) (663)
(Increase) decrease in accrued interest
receivable ................................. (93) 11
(Increase) decrease in other assets ........... (5,856) 1,882
(Decrease) in accrued interest payable ........ (1,680) 219
(Decrease) in accounts payable and other
liabilities ................................ (613) (843)
Other ......................................... 182 135
-------- ---------
Net cash provided by operating activities ... $ 2,942 $ 2,939
======== =========

Schedule of noncash investing activities

Issuance of 15,000 shares of Series B Preferred
Stock with an aggregate liquidation value of
$1.5 million .................................. $ -- $ 1,500

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

Notes payable from acquisition of real estate .... 32,154 --

Notes payable from acquisition of minority
interest ...................................... 5,000 --

Note receivable from sale of real estate ......... 800 --

Acquisition of Pizza World Supreme, Inc. ...........

Carrying value of intangibles .................... $ 15,482 $ --

Carrying value of plant and equipment ............ 3,998 --

Carrying value of note receivable retired ........ 13,387 --

Carrying value of accounts payable and other
liabilities ................................... 1,314 --
</TABLE>

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

F-36
<PAGE> 88

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements of American Realty Trust,
Inc. and consolidated entities (the "Company") have been prepared in conformity
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Operating results for the six month period ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K").

Certain balances for 1996 have been reclassified to conform to the 1997
presentation. Shares and per share data have been restated for the two for one
forward share split effected February 17, 1997.

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 June 30, 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
for the above mentioned defendants became effective on July 5, 1990. The
settlement agreement provided for, among other things, the appointment of an
NRLP oversight committee; the establishment of specified annually increasing
targets for five years relating to the price of NRLP's units of limited partner
interest; a limitation and deferral or waiver of NRLP's reimbursement to SAMLP
of certain future salary costs; a deferral or waiver of certain future
compensation to SAMLP; the required distribution to unitholders of all of
NRLP's cash from operations in excess of certain renovation costs unless the
NRLP oversight committee approves alternative uses for such cash from
operations; the issuance of unit purchase warrants to members of the plaintiff
class; and the contribution by the then individual general partners of $2.5
million to NRLP over a four-year period. In accordance with the
indemnification provisions of SAMLP's agreement of limited partnership, SAMLP
agreed to indemnify Messrs. Phillips and Friedman, the individual general
partners, at the time, of SAMLP, for the $2.5 million payment to NRLP. The
final annual installment of principal and interest was paid by SAMLP in May
1994.

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

The withdrawal of SAMLP as general partner would require NRLP to purchase
SAMLP's general partner interest (the "Redeemable General Partner Interest") at
its then fair value, and to pay certain fees and other compensation as provided
in the partnership agreement. Syntek Asset Management, L.P. ("SAMI"), the
managing general partner of SAMLP, has calculated the fair value of such
Redeemable General Partner Interest to be $40.2 million at June 30, 1997,
before reduction for the principal balance ($4.2 million at June 30, 1997) and
accrued interest ($6.7 million at June 30, 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 provides for the
nomination of a successor general partner to succeed SAMLP and for the
resolution of all related matters under the class action settlement. On
February 20, 1996, the parties to the Implementation Agreement executed an
Amended and Restated Implementation Agreement.

F-37
<PAGE> 89
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - CONTINUED

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

as the successor general partner of NRLP and NOLP. Such indemnification will
stand behind any indemnification to which Mr. Elliott or any entity controlled
by Mr. Elliott may be entitled to under the NRLP partnership agreement.

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

In September 1996, the Judge appointed to supervise the class action settlement
(the "Supervising Judge") entered an order granting tentative approval of the
Amended and Restated Implementation Agreement and the form of notice to be sent
to the original class members. On April 7, 1997, the Supervising Judge entered
an order amending the September 23, 1996 order, approving the formal notice and
setting a hearing on the Amended and Restated Implementation Agreement for June
27, 1997. A notice was sent to all class members and unitholders in April 1997
and the hearing was held on June 27, 1997. As of August 8, 1997, the
Supervising Judge had not entered the order granting final approval of the
Amended and Restated Implementation Agreement. Upon final approval by the
Supervising Judge, the proposal to elect the successor general partner will be
submitted to the NRLP unitholders for a vote. In addition, the unitholders
will vote upon amendments to NRLP's partnership agreement which relate to the
proposed compensation of the successor general partner and other related
matters.

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

Upon approval by NRLP's unitholders, SAMLP shall resign as general partner of
NRLP and NOLP and the successor general partner shall take office. If the
required approvals are obtained, it is anticipated that the successor general
partner may be elected and take office during the fourth quarter of 1997.

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

NOTE 3. NOTES AND INTEREST RECEIVABLE

The borrower on a $1.7 million mortgage note receivable secured by land in
Osceola, Florida failed to pay the note on its November 1, 1993 maturity. The
Company instituted foreclosure proceedings and was awarded a summary judgment
in January 1994. During 1994 and 1995, the borrower paid the Company a total
of $270,000 in nonrefundable fees to delay foreclosure of the property until
April 24, 1995. On April 25, 1995, the borrower filed for bankruptcy
protection. On August 26, 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.

Related Party. In December 1996, the Company and the borrower on a $3.7
million note receivable secured by an apartment complex in Merrillville,
Indiana agreed to an extension of the notes December 1996 maturity date to
December 2000. The property is owned by a subsidiary of Davister Corp.
("Davister"), a general partner in a partnership that owns approximately 13.7%
of the Company's outstanding shares of Common Stock. In May 1997, the note
plus accrued but unpaid interest was paid in full. See NOTE 10. "CERTAIN
RELATIONSHIPS AND TRANSACTIONS."

F-38
<PAGE> 90
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - CONTINUED

NOTE 4. REAL ESTATE

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

In January 1997, the Company purchased Scout land, 546 acres of undeveloped
land in Tarrant County, Texas, for $2.2 million. The Company paid $725,000 in
cash and obtained mortgage financing for the remaining $1.5 million of the
purchase price. The mortgage bears interest at 16% per annum, requires
quarterly interest only payments of $61,000, and matures in January 2000. The
Company paid a real estate brokerage commission of $135,000 to Carmel Realty,
Inc. ("Carmel Realty"), an affiliate of Basic Capital Management, Inc.
("BCM"), the Company's advisor, based on the $2.2 million purchase price of the
property.

In October 1995, the Company purchased BP Las Colinas land, a 92.6 acre parcel
of partially developed land in Las Colinas, Texas. In February 1996, the
Company entered into a contract to sell 72.5 acres of such parcel for $12.9
million. The contract called for the sale to close in two phases. In July
1996, the Company completed the first phase sale of 32.3 acres. In February
1997, the Company completed the second phase sale of 40.2 acres for $8.0
million, of which $7.2 million was paid in cash. Of the net sales proceeds of
$6.9 million, $1.5 million was used to payoff the underlying debt secured by
the BP Las Colinas parcel, pay a $500,000 maturity fee to the lender, make a
$1.5 million principal paydown on note secured by Parkfield land in Denver,
Colorado with the same lender, and $1.0 million was applied as a principal
paydown on the term loan secured by the Las Colinas I land parcel. In
conjunction with the sale the Company provided $800,000 in purchase money
financing in the form of a six month unsecured loan. The loan bears interest
at 12% per annum, with all accrued but unpaid interest and principal due at
maturity 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 is paid
in full. 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, 130.6 acres 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 mortgage bears interest at 9% per
annum, requires quarterly interest only payments of $92,000 and matures in
March 2000. The Company paid a real estate brokerage commission of $209,000 to
Carmel Realty based on the $5.6 million purchase price of the property.

In April 1997, the Company purchased McKinney Corners I land, 30.4 acres of
undeveloped land in Collin County, Texas, for $3.5 million. The Company paid
$1.0 million in cash and obtained mortgage financing for the remaining $2.5
million of the purchase price. The loan bears interest at 14% per annum,
requires monthly interest only payments of $29,000 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.

In April 1997, the Company purchased McKinney Corners II land, 173.9 acres of
undeveloped land in Collin County, Texas, for $5.7 million. The Company paid
$700,000 in cash and obtained mortgage financing for the remaining $5.0 million
of the purchase price as a fourth advance under the term loan from the Las
Colinas I lender. The term loan was amended increasing the term loan amount
from $19.5 million to $24.5 million. The amendment also changed the required
principal reduction payments to $500,000 in June, July, September and October
1997 and $1.0 million in August and November 1997. 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 $5.7
million purchase price of the property.

In April 1997, the Company sold 3.115 acres of the Las Colinas I land for $1.3
million in cash. The Company used $1.0 million of the sales proceeds as a
collateral escrow deposit in accordance with the provision of the Valley Ranch
land loan. The Company recognized a gain of $648,000 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.

F-39
<PAGE> 91
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - CONTINUED

NOTE 4. REAL ESTATE (Continued)

In May 1997, the Company purchased McKinney Corners III land, 15.5 acres
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.

In May 1997, the Company purchased Chase Oaks land, 60.5 acres of undeveloped
land in Plano, Texas, for $4.2 million. The Company paid $200,000 in cash and
obtained seller financing of the remaining $4.0 million of the purchase price.
The note bears interest at 18% per annum, requires monthly interest only
payments of $60,000 and matures 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, 1,448 acres of
undeveloped land in Austin, Texas, for $21.5 million. The Company paid $5.4
million in cash and obtained seller financing of the remaining $16.1 million of
the purchase price. The notes bear interest at 9.5% per annum, requires
monthly interest only payments of $127,000 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.

In June 1997, the Company purchased Kamperman land, 129.6 acres of undeveloped
land in Collin County, Texas, for $5.0 million in cash. The Company
simultaneously closed on a sale of 99.7 acres for $4.5 million in cash. The
Company recognized a $215,000 gain 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 to Carmel Realty based on the $4.5
million sales price of a portion of the property.

In June 1997, the Company purchased McKinney Corners IV land, 31.3 acres of
undeveloped land in Collin County, Texas, for $2.4 million. The Company paid
$400,000 in cash and obtained mortgage financing for the remaining $2.0 million
of the purchase price, as a fifth 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 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, 4 additional
lots were sold for an aggregate gain of $8,000. At June 30, 1997, 6 lots
remained to be sold.

F-40
<PAGE> 92
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - CONTINUED

NOTE 4. REAL ESTATE (Continued)

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 5. INVESTMENT IN EQUITY INVESTEES."

NOTE 5. INVESTMENT IN EQUITY INVESTEES

Real estate entities. The Company's investment in real estate entities at June
30, 1997, includes (i) equity securities of three publicly traded Real Estate
Investment Trusts (collectively the "REITs"), Continental Mortgage and Equity
Trust ("CMET"), IORI and Transcontinental Realty Investors, Inc. ("TCI"), (ii)
units of limited partner interest of NRLP, (iii) a general partnership interest
in NRLP and NOLP, the operating partnership of NRLP, through the Company's 96%
limited partner interest in SAMLP and (iv) interests in real estate joint
venture partnerships. BCM, the Company's advisor, serves as advisor to the
REITs, and performs certain administrative and management functions for NRLP
and NOLP on behalf of SAMLP.

The Company accounts for its investment in the REITs, NRLP and the joint
venture partnerships under the equity method. The Company continues to account
for its investment in NRLP under the equity method due to the pending
resignation of SAMLP as general partner of NRLP and NOLP. 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 7.
"NOTES AND INTEREST PAYABLE."

The Company's investment in real estate entities, accounted for using the
equity method, at June 30, 1997 was as follows:

<TABLE>
<CAPTION>
Equivalent
Percentage Carrying Investee
of the Company's Value of Book Value Market Value
Ownership at Investment at at of Investment at
Investee June 30, 1997 June 30, 1997 June 30, 1997 June 30, 1997
- -------- ----------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
NRLP 54.4% $ 15,570 $ * $ 65,812
CMET 40.6 15,780 35,764 18,789
IORI 29.6 3,564 7,474 5,176
TCI 30.6 5,904 23,693 17,907
---------- ---------
40,818 $ 107,684
=========
General partner interest in
NRLP and NOLP 6,419
Other equity investees (1,018)
----------
$ 46,219
==========
</TABLE>

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

* At June 30, 1997, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity at December 31, 1996,
was

F-41
<PAGE> 93
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - CONTINUED

NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)

$188.5 million. Revaluation equity is defined as the difference between the
appraised value of the partnership's real estate, adjusted to reflect the
partnership's estimate of disposition costs, and the amount of the mortgage
notes payable and accrued interest encumbering such property as reported in
NRLP's Annual Report on Form 10-K for the year ended December 31, 1996.

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

The Company's management continues to believe that the market value of each of
the REITs and NRLP undervalues their assets and the Company may, therefore,
continue to increase its ownership in these entities in 1997.

Other equity investees. 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 believes that such
option will be exercised and further, 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 and discontinued
equity accounting. See NOTE 8. "ACQUISITION OF PIZZA WORLD SUPREME, INC."

Set forth below is summarized results of operations for the Company's equity
investees for the six months ended June 30, 1997:

Equity investees owned over 50%:

<TABLE>
<S> <C>
Revenues ........................................................ $54.527
Property operating expenses ..................................... 42,680
Depreciation .................................................... 5,222
Interest expense ................................................ 17,325
-------
(Loss) from operations .......................................... (700)
Gain on sale of real estate ..................................... 3,587
-------
Net income ...................................................... $ 2,887
=======
</TABLE>

The Company's share of over 50% owned equity investees' operations was $773,000
for the six months ended June 30, 1997. The Company's share of equity
investees gains on sale of real estate was $1.9 million for the six months
ended June 30, 1997. Equity investees owned less than 50%:

<TABLE>
<S> <C>
Revenues ........................................................ $ 58,605
Equity in income (loss) of partnerships ......................... 896
Property operating expenses ..................................... 38,221
Depreciation .................................................... 8,272
Interest expense ................................................ 17,,325
--------
(Loss) from operations .......................................... (700)

Gain on sale of real estate ..................................... 11,587
--------
Net income ...................................................... $ 7,153
========
</TABLE>

F-42
<PAGE> 94
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - CONTINUED

NOTE 5. INVESTMENT IN EQUITY INVESTEES (Continued)

The Company's share of less than 50% owned equity investees' loss from
operations was $1.3 million for the six months ended June 30, 1997. The
Company's share of equity investees gains on sale of real estate was $4.0
million for the six months ended June 30, 1997.

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 paid regular
quarterly distributions since the first quarter of 1993, NRLP since the fourth
quarter of 1993 and TCI since the fourth quarter of 1995. In the first six
months of 1997, the Company received aggregate distributions of $1.3 million
from the REITs and NRLP.

In the first six months of 1997, the Company purchased a total of $173,000 of
equity securities of the REITs and NRLP.

In January 1992, the Company entered into a partnership agreement with an
entity affiliated with the owner, at the time, of in excess of 14% of the
Company's outstanding shares of Common Stock, to acquire 287 developed
residential lots adjacent to the Company's other residential lots in Fort
Worth, Texas. The partnership agreement designates the Company as managing
general partner. The partnership agreement also provides each of the partners
with a guaranteed 10% return on their respective investments. Through December
31, 1996, 184 residential lots had been sold. In the first six months of 1997
an additional 8 lots were sold. At June 30, 1997, 95 lots remained to be sold.
In 1997, each partner has received $21,000 in return of capital distributions.

In June 1996, a newly formed limited partnership, of which the Company is a 1%
general partner, purchased 580 acres of undeveloped land in Collin County,
Texas. In April 1997, the partnership sold 35.0 acres for $1.3 million in
cash. The net proceeds of $1.2 million were distributed to the limited
partners in accordance with the partnership agreement. The partnership
recognized a gain of $884,000 on the sale. In July 1997, the Partnership sold
an additional 24.6 acres 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 partners in accordance with the partnership agreement. The partnership
will record a gain of approximately $497,000 on the sale. The Company has
received no distributions from the partnership in 1997.

NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO

In the first quarter of 1994, the Company began purchasing equity securities of
entities other than those of the REITs and NRLP to diversify and increase the
liquidity of its margin accounts. In the first six months of 1997, the Company
purchased $6.3 million and sold $4.4 million of such securities. These equity
securities are considered a trading portfolio and are carried at market value.
At June 30, 1997, the Company recognized an unrealized increase in the market
value of its trading portfolio securities of $1.3 million. Also in the first
six months of 1997, the Company realized a net gain of $161,000 from the sale
of trading portfolio securities and received $62,000 in dividends. Unrealized
and realized gains and losses on trading portfolio securities are included in
other income in the accompanying Consolidated Statements of Operations.

NOTE 7. NOTES AND INTEREST PAYABLE

In May 1997, the Company financed 10.6 acres of the BP Las Colinas land for
$3.1 million. The note bears interest at 9.5% per annum, requires monthly
interest only payments of $24,000 and matures in November 1997.

In May 1997, the Company obtained a second mortgage of $3.0 million on the Pin
Oak land. The note bears interest at 12.5% per annum compounded monthly, and
matures in October 1997. See NOTE 10. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."

F-43
<PAGE> 95
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - CONTINUED

In June 1997, the Company obtained a second mortgage of $3.0 million on the
Lewisville land. The note bears interest at 12.5% per annum, compounded
monthly and matures in December 1997. See NOTE 10. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."

In June 1997, the Company refinanced the Valwood land for $15.8 million. The
note bears interest at prime plus 4.5% per annum, currently 13%, requires
monthly interest only payments of $176,000 and matures in June 1998. The
Company received net refinancing proceeds of $4.9 million, after $6.2 million
was applied to the Valwood debt, $3.0 million being applied to payoff Jefferies
land loan and $1.4 million being applied to paydown Las Colinas I land loan.

The Company has margin arrangements with various brokerage firms which provide
for borrowing of up to 50% of the market value of the Company's marketable
equity securities. The borrowings under such margin arrangements are secured
by equity securities of the REITs, NRLP and the Company's trading portfolio and
bear interest rates ranging from 7.0% to 9.0%. Margin borrowings totaled $44.0
million at June 30, 1997.

In August 1996, the Company consolidated its existing NRLP margin debt held by
various brokerage firms into a single loan of $20.3 million. The loan is
secured by the Company's NRLP units with a market value of at least 50% of the
principal balance of the loan. As of June 30, 1997, 3,349,169 NRLP units with
a market value of $64.0 million were pledged as security for such loan. In
July, the lender advanced an additional $3.7 million, increasing the loan
balance to $24.0 million.

NOTE 8. 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 PWSI, an entity which had acquired
26 operating pizza parlors in various communities in California's San Joaquin
Valley. The Company accounted for such subsidiary under the equity method.
See NOTE 5. "INVESTMENT IN EQUITY INVESTEES."

In May 1997, the Company purchased the remaining 20% of the common stock of
PWSI for $5.0 million in unsecured promissory notes. The notes bear interest
at 8% per annum, for three years and 10% per annum thereafter, require
quarterly interest only payments of $100,000 and mature in May 2007. The
Company now consolidates PWSI's operations.

NOTE 9. INCOME TAXES

Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated
losses. The Company had no taxable income or provision for income taxes in the
six months ended June 30, 1997, due to operating loss carryforwards.

NOTE 10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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 13.7% of the Company's outstanding shares
of Common Stock.

NOTE 11. COMMITMENTS AND CONTINGENCIES

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

F-44
<PAGE> 96
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - CONTINUED

NOTE 12. SUBSEQUENT EVENTS

In July 1997, the Company sold 3.9 acres 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 sales
proceeds of $1.4 million, to paydown the term loan in exchange for that
lender's release of its collateral interest in such land. The Company will
record a gain of approximately $750,000 on such 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.

In July 1997, the Company purchased Dowdy and McKinney Corners V land, which
parcels are adjacent to the Company's other McKinney Corners land, and consists
of a total of 175 acres of undeveloped land in Collin County, Texas, for $2.9
million. The Company obtained mortgage financing of $3.3 million as a sixth
advance under the term loan from the Las Colinas I lender. The Dowdy land,
McKinney Corners V land 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.

In July 1997, the Company purchased Perkins land, 645.4 acres 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 loan bears
interest at 8.5% per annum, requires quarterly interest only payments of
$53,000 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 obtained a third mortgage loan of $2.0 million from
the second mortgage lender on the Pin Oak land. The loan bears interest at 12%
per annum compounded monthly and matures in December 1997. See NOTE 10.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

In July 1997, the Company purchased LBJ land, 10.4 acres of undeveloped land in
Dallas County, Texas, for $2.3 million. The Company paid $300,000 in cash and
obtained seller financing of the remaining $2.0 million of the purchase price.
The loan bears interest at 13% per annum, with interest and principal payable
at maturity in October 1997.

In July 1997, the Company purchased an additional 9% interest in Campbell
Center Joint Venture, for $868,000 in cash, increasing to 36% the Company's
interest in the Campbell Center Joint Venture.

[THIS SPACE INTENTIONALLY LEFT BLANK.]

F-45
<PAGE> 97

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

Introduction

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

Liquidity and Capital Resources

General. Cash and cash equivalents at June 30, 1997 aggregated $4.8 million,
compared with $1.3 million at December 31, 1996. Although the Company
anticipates that during the remainder of 1997 it will generate excess cash flow
from operations, as discussed below, such excess cash is not expected to be
sufficient to discharge all of the Company's debt obligations as they mature.
The Company will therefore continue to rely on externally generated funds,
including borrowings against its investments in various real estate entities,
mortgage notes receivable, the sale or refinancing of properties and, to the
extent available or necessary, borrowings from its advisor, which totaled $22.3
million at June 30, 1997, to meet its debt service obligations, pay taxes,
interest and other non-property related expenses.

At December 31, 1996, notes payable totaling $36.0 million had either scheduled
maturities or principal payments required during 1997. Through July 31, 1997,
the Company has paid a total of $8.5 million of such debt and refinanced an
additional $18.8 million. The Company intends to either pay off, extend the
maturity dates or obtain alternate financing for the remaining $8.7 million of
debt obligations that mature during the remainder of 1997. There can be no
assurance, however, that these efforts to obtain alternative financing or debt
extensions will be successful.

The Company expects an increase in cash flow from property operations during
the remainder of 1997. Such increase is expected to be derived from operations
of the Inn at the Mart, Kansas City Holiday Inn, Best Western Oceanside Hotel,
Rosedale Towers Office Building and the Oak Tree Village Shopping Center. The
Company also expects continued lot sales at its Texas residential subdivisions
and substantial sales of its Las Colinas, Texas land and its Valley Ranch land
to generate additional cash flow. See NOTE 4. "REAL ESTATE."

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

F-46
<PAGE> 98
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

In April 1997, the Company purchased McKinney Corners II, 173.9 acres of
undeveloped land in Collin County, Texas, for $5.7 million. The Company paid
$700,000 in cash and obtained mortgage financing for the remaining $5.0 million
of the purchase price as a fourth advance under the term loan from the Las
Colinas I lender. The term loan was amended changing the required principal
reduction payments to $500,000 in June, July, September and October 1997 and
$1.0 million in August and November 1997. In April 1997, the Company sold 3.1
acres of the Las Colinas I land for $1.3 million in cash. The Company used
$1.0 million of the net sales proceeds as a collateral escrow deposit in
accordance with the provisions of the Valley Ranch land loan. The Company
recognized a gain of $648,000 on the sale.

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

In May 1997, the Company purchased the remaining 20% of Pizza World Supreme,
Inc. ("PWSI"), for $5.0 million in unsecured promissory notes. See NOTE 8.
"ACQUISITION OF PIZZA WORLD SUPREME, INC."

In July 1997, the Company sold 3.9 acres 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 proceeds of
the sale, $1.4 million, to paydown the term loan in exchange for that lender's
release of its collateral interest in such land. The Company will record a
gain of approximately $750,000 on such sale.

F-47
<PAGE> 99
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Company obtained mortgage financing of $3.3 million as a sixth advance under
the term loan from the Las Colinas I lender. The Dowdy land, McKinney Corners
V land and McKinney Corners III land were added as additional collateral on the
term loan.

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, 4 additional
lots were sold for an aggregate gain of $8,000. At June 30, 1997, 6 lots
remained to be sold.

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

Notes Receivable. The Company has received $5.3 million in principal payments
on its notes receivable in the six months ended June 30, 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 a summary judgment
in January 1994. During 1994 and 1995, the borrower paid the Company a total
of $270,000 in nonrefundable fees to delay foreclosure of the property until
April 24, 1995. On April 25, 1995, the borrower filed for bankruptcy
protection. On August 26, 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 December 1996, the Company and the borrower on a $3.7 million note
receivable secured by an apartment complex in Merrillville, Indiana agreed to
an extension of the note's maturity to December 2000. In May 1997, the Company
received $3.7 million plus accrued but unpaid interest in full payment of the
loan. See NOTE 3. "NOTES AND INTEREST RECEIVABLE."

Loans Payable. In May 1997, the Company financed 10.6 acres of the BP Las
Colinas land for $3.1 million. The note matures in November 1997.

In May 1997, the Company obtained a second mortgage of $3.0 million on the Pin
Oak land. The note matures in October 1997. In June 1997, the Company
obtained a second mortgage of $3.0 million on the Lewisville land. The loan
matures in December 1997.

In June 1997, the Company refinanced the Valwood land for $15.8 million. The
note matures in June 1998. The Company received net cash of $4.9 million after
the payoff of the existing $6.2 million Valwood land loan, an additional $3.0
million being applied to payoff the Jefferies land loan and $1.4 million being
applied to paydown the Las Colinas land loan.

In July 1997, the Company obtained a third mortgage of $2.0 million on the Pin
Oak land. The note matures in December 1997.

F-48
<PAGE> 100
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Margin debt. The Company has margin arrangements with various brokerage firms
which provide for borrowing up to 50% of the market value of the Company's
marketable equity securities. The borrowing under such margin arrangements are
secured by equity securities of the REITs, NRLP and the Company's trading
portfolio and bear interest rates ranging from 7.0% to 9.0%. Margin borrowing
totaled $44.0 million at June 30, 1997.

In August 1996, the Company consolidated its existing NRLP margin debt held by
the various brokerage firms into a single loan of $20.3 million. The loan is
secured by the Company's NRLP units with a market value of at least 50% of the
principal balance of the loan. As of June 30, 1997, 3,349,169 NRLP units with
a market value of $64.0 million were pledged as security for such loans. In
July 1997, the lender advanced an additional $3.7 million, increasing the loan
balance to $24.0 million.

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

Equity securities of the REITs and NRLP held by the Company may be deemed to be
"restricted securities" under Rule 144 of the Securities Act of 1933
("Securities Act"). Accordingly, the Company may be unable to sell such equity
securities other than in a registered public offering or pursuant to an
exemption under the Securities Act for a period of one year 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. CMET and IORI have paid regular
quarterly distributions since the first quarter of 1993, NRLP since the fourth
quarter of 1993 and TCI since the fourth quarter of 1995. The Company received
distributions totaling $1.3 million in the first six months of 1997 from the
REITs and NRLP.

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 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.

Commitments and Contingencies

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

F-49
<PAGE> 101
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Commitments and Contingencies (Continued)

net amounts owed by the Partnership to SAMLP upon SAMLP's withdrawal as general
partner and any amounts which SAMLP and its affiliates may owe to the
Partnership. This amount shall be paid to SAMLP pursuant to a promissory note
in accordance with the terms set forth in the Amended and Restated
Implementation Agreement.

Upon approval by NRLP's unitholders, SAMLP shall withdraw as General Partner
and the successor general partner shall take office. If the required approvals
are obtained, it is anticipated that the successor general partner will be
elected and take office during the fourth quarter of 1996.

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

Upon election and taking office of the successor general partner, the class
action settlement and the NRLP oversight committee shall be terminated. If the
successor general partner is not elected, the existing class action settlement
shall remain in full force and effect and all of the provisions of the Amended
and Restated Implementation Agreement shall be voided, including the compromise
settlement of amounts owed by SAMLP and NRLP to each other. See NOTE 2.
"SYNTEK ASSET MANAGEMENT, L.P."

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

Results of Operations

For the three months ended June 30, 1997, the Company reported net income of
$2.5 million, compared to a net loss of $2.1 million for the three months ended
June 30, 1996. For the six months ended June 30, 1997, the Company reported
net income of $2.8 million compared with a net loss of $2.4 million for the six
months ended June 30, 1996. The primary factors contributing to the Company's
operating results are discussed in the following paragraphs.

Sales and cost of sales for the three and six months ended June 30, 1997 relate
to the operations of PWSI. See NOTE 8. "ACQUISITION OF PIZZA WORLD SUPREME,
INC."

Rents increased from $4.1 million and $9.4 million for the three and six months
ended June 30, 1996 to $5.0 million and $10.9 million for the three and six
months ended June 30, 1997. The increases are principally due to increased
rents at the Company's commercial properties and increased rents and occupancy
at the Company's hotels. One of the Company's hotels, the Best Western
Oceanside was purchased in December 1996.

Interest income from mortgage notes receivable of $1.2 million and $2.3 million
for the three and six months ended June 30, 1997 approximated the $1.2 million
and $2.3 million for the three and six months ended June 30, 1996. Interest
income for the remainder of 1997 is expected to be less than in the first six
months of 1997 due to a note payoff in May 1997.

F-50
<PAGE> 102
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

Other income increased from $127,000 and $469,000 for the three and six months
ended June 30, 1996 to $1.3 million and $1.8 million for the three and six
months ended June 30, 1997. The increases are primarily due to a $34,000
increase and a $821,000 decrease in realized losses incurred on the sale of
trading portfolio securities and a $946,000 and a $673,000 increase in
unrealized gains on trading portfolio securities.

Property operating expenses increased from $3.9 million and $7.6 million for
the three and six months ended June 30, 1996 to $4.0 million and $8.5 million
for the three and six months ended June 30, 1997. The increases are primarily
due to the acquisition of the Best Western Oceanside Hotel in 1996 and taxes
and property maintenance on the Company's land parcels.

Interest expense increased from $3.3 million and $6.4 million for the three and
six months ended June 30, 1996 to $6.9 million and $12.0 million for the three
and six months ended June 30, 1997. The increases are primarily due to the
debt incurred related to the acquisition of 14 parcels of land and the Best
Western Oceanside Hotel subsequent to June 1996. These increases were offset
in part by a decrease of $969,000 due to the sale of 40.2 acres of the BP Las
Colinas land in February 1997. Interest expense is expected to increase as the
Company continues to acquire properties on a leveraged basis.

Advisory and mortgage servicing fees increased from $381,000 and $701,000 for
the three and six months ended June 30, 1996 to $585,000 and $1.0 million for
the three and six months ended June 30, 1997. The increases are primarily
attributable to the increase in the Company's gross assets, the basis for such
fee. Such fee is expected to increase as the Company acquires additional
properties.

Depreciation and amortization expense increased from $453,00 and $890,000 for
the three and six months ended June 30, 1996 to the $600,000 and $1.1 million
for the three and six months ended June 30, 1997. The increases are primarily
due to the purchase of Best Western Oceanside Hotel in December 1996.
Depreciation and amortization for the remainder of 1997 is expected to be
higher than in the first six months of 1997 due to the May 1997 acquisition of
PWSI.

General and administrative expenses increased from $595,000 and $1.2 million
for the three and six months ended June 30, 1996 to $1.6 million and $2.3
million for the three and six months ended June 30, 1997. The increase is
primarily attributable to legal fees and travel expenses incurred in 1997
relating to pending acquisitions and refinancings, increases in advisor cost
reimbursements, and the general and administrative expenses of PWSI. See NOTE
8. "ACQUISITION OF PIZZA WORLD SUPREME, INC."

Incentive compensation for the six months ended June 30, 1997 was $299,000.
Incentive compensation relates to the sale of Porticos Apartments. See NOTE 4.
"REAL ESTATE."

Equity in income of investees improved from a loss of $1.5 million and $2.4
million for the three and six months ended June 30, 1996 to income of $5.0
million and $5.2 million for the three and six months ended June 30, 1997. The
increases in equity income are attributable in part to an increase in the
combined operating income of REITs and NRLP. Such improvement is generally
attributable to improved occupancy and increased rental rates. The remainder
of the increase is due to gains on sale of real estate in the REITs. See NOTE
5. "INVESTMENT IN EQUITY INVESTEES."

Gains on sale of real estate were $3.9 million and $8.1 million for the three
and six months ended June 30, 1997 compared to $2.3 million and $4.5 million
for the three and six months ended June 30, 1996. In June 1997, the Company
recognized a previously deferred gain of $3.0 million on the sale of Porticos
Apartments and a $216,000 gain on the sale of Kamperman land. In April 1997, a
gain of $668,000 on the sale of 3.1 acres of Las Colinas land. In February
1997, a gain of $3.4 million on the sale of 40.2 acres of BP Las Colinas land,
a gain of $171,000 on the sale of Osceola land and a gain of $676,000 on the
sale of 3.0 acres of Las Colinas I land. See NOTE 3. "NOTES AND INTEREST
RECEIVABLE" and NOTE 4. "REAL ESTATE."

F-51
<PAGE> 103
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

For the three months ended June 30, 1996, the Company recognized a $538,000
gain on the sale of 2.3 acres of Las Colinas land, a $44,000 gain on the sale
of a parcel of land in Midland, Michigan and a $10,000 gain on the sale of
eight residential lots. The first six months of 1996 includes an additional
$538,000 gain on the sale of another 2.3 acres of land in Las Colinas, Texas.

Environmental Matters

Under various federal, state and local environmental laws, ordinances and
regulations, the Company may be potentially liable for removal or remediation
costs, as well as certain other potential costs relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the Company for personal injury
associated with such materials.

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

Inflation

The effects of inflation on the Company's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with inflationary
increases and decreases in housing 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.

F-52
<PAGE> 104

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Explanatory Note . . . . . . . . . . . . . . . . . . 1
Available Information . . . . . . . . . . . . . . . . 2
Incorporation of Certain Information
by Reference . . . . . . . . . . . . . . . . . . 2
Ratio of Earnings to Fixed Charges . . . . . . . . . 4
Use of Proceeds . . . . . . . . . . . . . . . . . . . 4
The Company . . . . . . . . . . . . . . . . . . . . . 4
The Business of the Company . . . . . . . . . . . . . 5
Selected Financial Data . . . . . . . . . . . . . . . 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . 23
Acquisition Terms . . . . . . . . . . . . . . . . . . 30
Description of the Capital Stock . . . . . . . . . . 31
Plan of Distribution . . . . . . . . . . . . . . . . 34
Legal Matters . . . . . . . . . . . . . . . . . . . . 34
Experts . . . . . . . . . . . . . . . . . . . . . . . 35
Index to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . F-1
Report of Independent Accountants . . . . . . . . . F-2
Consolidated Balance Sheets, December 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations, Three Years
Ended December 31, 1996, 1995 and 1994 . . . . F-5
Consolidated Statements of Stockholders' Equity,
Years Ended December 31, 1996, 1995 and 1994 . F-6
Consolidated Statements of Cash Flows, Three Years
Ended December 31, 1996, 1995 and 1994 . . . . F-7
Notes to Consolidated Financial Statements . . . . F-10
Consolidated Balance Sheets, June 30, 1997
and December 31, 1996 . . . . . . . . . . . . F-31
Consolidated Statements of Operations, Three and Six
Months Ended June 30, 1997 and 1996 . . . . . F-33
Consolidated Statements of Stockholders' Equity,
Six Months Ended June 30, 1997 . . . . . . . . F-34
Consolidated Statements of Cash Flows, Six Months
Ended June 30, 1997 and 1996 . . . . . . . . . F-35
Notes to Consolidated Interim Financial Statements F-37
</TABLE>

PREFERRED STOCK

COMMON STOCK

AMERICAN REALTY TRUST,
INC.

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

PROSPECTUS

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

September 8, 1997

<PAGE> 105
PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS

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

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

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

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

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

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

<TABLE>
<S> <C>
*3.1 -- Articles of Incorporation

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

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

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

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

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

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

II-1
<PAGE> 106

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

*3.9 -- Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other
Special Rights, and Qualifications, Limitations or Restrictions
thereof of Series E Cumulative Convertible Preferred Stock of
American Realty Trust, Inc. dated as of December 3, 1996
*3.10 -- Articles of Amendment of the Articles of Incorporation deleting
Certificate of Designation of Series A Cumulative Participating
Preferred Stock, dated as of February 28, 1997.
#3.11 -- Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other
Special Rights, and Qualifications, Limitations or Restrictions
thereof of Series F Cumulative Convertible Preferred Stock of
American Realty Trust, Inc. dated as of August 13, 1996

*4.1 -- Instruments defining the rights of security holders (included
in Exhibits 3.1 through 3.11)
#5.1 -- Opinion of Holt Ney Zatcoff & Wasserman, LLP as to the legality of
the Preferred Stock being offered

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

***12.1 -- Statement re: computation of ratios

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

*21.1 -- Subsidiaries of the registrant
#23.1 -- Consent of BDO Seidman LLP (American Realty Trust, Inc.)
#23.2 -- Consent of BDO Seidman LLP (Continental Mortgage and Equity Trust)
#23.3 -- Consent of BDO Seidman LLP (Income Opportunity Realty Investors,
Inc.)
#23.4 -- Consent of BDO Seidman LLP (Transcontinental Realty Investors,
Inc.)
#23.5 -- Consent of BDO Seidman LLP (National Realty, L.P.)
#23.6 -- Consent of Holt Ney Zatcoff & Wasserman, LLP (incorporated in
Exhibit 5.1)
##24.1 -- Power of Attorney
**29.1 -- Financial Data Schedule
#99.1 -- Form of Prospectus Supplemental
</TABLE>

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

* Previously filed.

** Incorporated by reference to Exhibit 27.9 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1997, as filed with the
Commission on August 13, 1997.

*** Not Applicable.

# Included herewith.

## Filed as an Exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-21591), filed with the Commission on February 11, 1997 and
incorporated by reference therein.

ITEM 22. UNDERTAKINGS.

(a) The undersigned Company hereby undertakes:

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

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

II-2
<PAGE> 107
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the change in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;

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

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

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

(b) The undersigned Company hereby undertakes to respond to requests
for information that is incorporated by reference into the Prospectus pursuant
to Items 4, 10(b), 11 or 13 of Form S-4 within one business day of such request,
and to send the incorporated documents by first class mail or other equally
prompt means. This includes any information contained in any documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.

(c) The undersigned Company hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.

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

II-3
<PAGE> 108
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Post-Effective
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 8th day of September, 1997.

AMERICAN REALTY TRUST, INC.

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

Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ KARL L. BLAHA President (Principal Executive September 8, 1997
- -------------------------- Officer) and Director
Karl L. Blaha

* Director September 8, 1997
- --------------------------
Roy E. Bode

* Director September 8, 1997
- --------------------------
Oscar W. Cashwell

* Director September 8, 1997
- --------------------------
Al Gonzalez

* Director September 8, 1997
- --------------------------
Dale A. Crenwelge

Director September , 1997
- --------------------------
Cliff Harris

* Executive Vice President and September 8, 1997
- -------------------------- Chief Financial Officer
Thomas A. Holland (Principal Financial and
Accounting Officer)
</TABLE>

*By: /s/ KARL L. BLAHA
---------------------
Karl L. Blaha
Attorney-in-Fact

II-4
<PAGE> 109
INDEX TO EXHIBITS
<TABLE>
<CAPTION>

Exhibit
Number Description
- ------- -----------
<S> <C>
*3.1 -- Articles of Incorporation

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

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

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

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

<PAGE> 110

*3.10 -- Articles of Amendment of the Articles of Incorporation deleting
Certificate of Designation of Series A Cumulative Participating
Preferred Stock, dated as of February 28, 1997.

#3.11 -- Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other
Special Rights, and Qualifications, Limitations or Restrictions
thereof of Series F Cumulative Convertible Preferred Stock of
American Realty Trust, Inc. dated as of August 13, 1996

*4.1 -- Instruments defining the rights of security holders (included
in Exhibits 3.1 through 3.11)

#5.1 -- Opinion of Holt Ney Zatcoff & Wasserman, LLP as to the legality of
the Series F Preferred Stock and the Common Stock

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

*** 12.1 -- Statement re: computation of ratios

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

*21.1 -- Subsidiaries of the registrant

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

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

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

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

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

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

##24.1 -- Power of Attorney

**29.1 -- Financial Data Schedule

#99.1 -- Form of Prospectus Supplement
</TABLE>

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

* Previously filed.

** Incorporated by reference to Exhibit 27.9 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1997, as filed with the
Commission on August 13, 1997.

*** Not Applicable.

# Included herewith.

## Filed as an Exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-21591), filed with the Commission on February 11, 1997 and
incorporated by reference therein.

ITEM 22. UNDERTAKINGS.

(a) The undersigned Company hereby undertakes:

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

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

II-2

<PAGE> 1
Exhibit 3.11

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

SERIES F CUMULATIVE CONVERTIBLE PREFERRED STOCK

AMERICAN REALTY TRUST, INC.

(Pursuant to Section 14-2-602(d) of the
Georgia Business Corporation Code)

__________________________

American Realty Trust, Inc., a corporation organized and existing under
the Georgia Business Corporation Code (hereinafter called the "Corporation"),
hereby certifies:

THAT, pursuant to the authority conferred upon the board of Directors
(the "Board of Directors") by the articles of incorporation, as amended
("Articles of Incorporation") of the Corporation, and pursuant to Section 14-2-
602(d) of the Georgia Business Corporation Code (which Section provides that no
shareholder action is required in order to effect these articles of amendment),
the Board of Directors, by unanimous written consent dated August 13, 1997,
duly adopted certain recitals and resolutions providing for the designations,
preferences and relative participating, optional or other special rights and
qualifications, limitations or other restrictions thereof, of a series of
special stock of the Corporation, specifically the Series F Cumulative
Convertible Preferred Stock, which recitals and resolutions are as follows:

WHEREAS, Article Five of the Articles of Incorporation authorizes the
Corporation to issue not more than 16,666,667 shares of common voting stock,
$0.01 par value per share (the "Common Stock"), and 20,000,000 shares of a
special class of stock, $2.00 par value per share (the "Special Stock"), which
Special Stock may be issued from time to time in one or more series and shall
be designated as the Board of Directors may determine to have such voting
powers, preferences,
<PAGE> 2
limitations and relative rights with respect to the shares of each series of
the class of Special Stock of the Corporation as expressly provided in a
resolution or resolutions providing for the issuance of such series adopted by
the Board of Directors which is vested with the authority in respect thereof;

WHEREAS, 4,000 shares of such Special Stock have been previously
designated as the Series B 10% Cumulative Preferred Stock prior to the date
hereof, all of which have been issued and are outstanding;

WHEREAS, 16,681 shares of such Special Stock have been previously
designated as the Series C 10% Cumulative Preferred Stock prior to the date
hereof, all of which have been issued and are outstanding;

WHEREAS, 91,000 shares of such Special Stock have been previously
designated as the Series D Cumulative Preferred Stock prior to the date hereof,
none of which has been issued or is outstanding;

WHEREAS, 80,000 shares of such Special Stock have been previously
designated as the Series E Cumulative Convertible Preferred Stock prior to the
date hereof, none of which has been issued or is outstanding; and

WHEREAS, the Board of Directors now desires to further amend the
Articles of Incorporation to designate an additional series of the Special
Stock.

NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority granted
to the Board of Directors by Article Five of the Articles of Incorporation, the
Board of Directors hereby further amends the Articles of Incorporation to
provide for the issuance of a single series of Special Stock consisting of the
number of shares in such series as set forth below and, subject to the
provisions of Article Five of the Articles of Incorporation, hereby fixes and
determines with respect to such series the following designations, preferences
and relative participating, optional or other special rights, if any, and
qualifications, limitations and restrictions thereof:

1. Designation and Amount. The shares of such series shall be designated
as "Series F Cumulative Convertible Preferred Stock" (the "Series F
Preferred Stock") and each share of the Series F Preferred Stock shall
have a par value of $2.00 per share and a preference on liquidation as
specified in Section 6 below. The number of shares constituting the
Series F Preferred Stock shall be 7,500,000. Such number of shares may
be increased or decreased by the Board of Directors by filing articles
of amendment as provided in the Georgia Business Corporation Code;
provided, that no decrease shall reduce the number of shares of Series F
Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the
exercise of outstanding options, rights or warrants; provided further,
that no increase in the authorized amount of shares constituting Series
F Preferred Stock shall be made without the prior written consent of the
holders of a majority of shares of Series F Preferred Stock then
outstanding voting separately as a class.

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<PAGE> 3
2. Dividends and Distributions.

(A) The holders of shares of Series F Preferred Stock shall be
entitled to receive, when, as, and if declared by the Board of
Directors and to the extent permitted under the Georgia Business
Corporation Code, out of funds legally available for the purpose
and in preference to and with priority over dividends upon all
Junior Securities, quarterly cumulative dividends payable in
arrears in cash on the fifteenth day following the end of each
calendar quarter (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on October 15,
1998, in an amount per share (rounded to the next highest cent)
equal to 10% per annum of the Adjusted Liquidation Value, as
determined immediately prior to the beginning of such calendar
quarter assuming each year consists of 360 days and each quarter
consists of 90 days. The term "Adjusted Liquidation Value" shall
mean Liquidation Value (as defined in Section 6) plus all accrued
and unpaid dividends through the applicable date. The foregoing
is intended to provide a 10% cumulative return, compounded on a
quarterly basis, on the Liquidation Value from August 16, 1998.

(B) Dividends shall commence accruing cumulatively on outstanding
shares of the Series F Preferred Stock from August 16, 1998 to
and including the date on which the Redemption Price (as defined
in Section 9(A), below) of such shares is paid, whether or not
such dividends have been declared and whether or not there are
profits, surplus or other funds of the Corporation legally
available for the payment of such dividends. Dividends for the
first Quarterly Dividend Payment Date shall accrue and shall be
payable for a period of 45 days. Dividends payable on each
Quarterly Dividend Payment Date shall be dividends accrued and
unpaid through the last Business Day (as defined in Section 3(A)
below) of the immediately preceding calendar month. The Board
of Directors may fix a record date for the determination of
holders of shares of Series F Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon other than
a quarterly dividend paid on the Quarterly Dividend Payment Date
immediately after such dividend accrued; which record date shall
be not more than 50 days prior to the date fixed for the payment
thereof.

(C) So long as any shares of the Series F Preferred Stock are
outstanding, the Corporation will not make, directly or
indirectly, any distribution (as such term is defined in the
Georgia Business Corporation Code) in respect of Junior
Securities unless on the date specified for measuring
distributions in Section 14-2-640(e) of the Georgia Business
Corporation Code (a) all accrued dividends on the Series F
Preferred Stock for all past quarterly dividend periods have been
paid in full and the full amount of accrued dividends for the
then current quarterly dividend period has been paid or declared
and a sum sufficient for the payment thereof set apart and (b)
after giving effect to such distribution (i) the Corporation
would not be rendered

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<PAGE> 4
unable to pay its debts as they become due in the usual course of
business and (ii) the Corporation's total assets would not be
less than the sum of its total liabilities plus the amount that
would be needed, if the Corporation were to be dissolved at the
time of the distribution, to satisfy the preferential rights upon
dissolution of the holders of the Series F Preferred Stock as
provided in these Articles of Amendment. Dividends shall not be
paid (in full or in part) or declared and set apart for payment
(in full or in part) on any series of Special Stock (including
the Series F Preferred Stock) for any dividend period unless all
dividends, in the case dividends are being paid in full on the
Series F Preferred Stock, or a ratable portion of all dividends
(i.e., so that the amount paid on each share of each series of
Special Stock as a percentage of total accrued and unpaid
dividends for all periods with respect to each such share is
equal), in the case dividends are not being paid in full on the
Series F Preferred Stock, have been or are, contemporaneously,
paid and declared and set apart for payment on all outstanding
series of Special Stock (including the Series F Preferred Stock)
entitled thereto for each dividend period terminating on the same
or earlier date. If at any time the Corporation pays less than
the total amount of dividends then accrued with respect to the
Series F Preferred Stock, such payment will be distributed
ratably among the then holders of Series F Preferred Stock so
that an equal amount is paid with respect to each outstanding
share.

3. Conversion Rights.

(A) The Series F Preferred Stock may be converted at any time and
from time to time in whole or in part after the earliest to occur
of (i) August 15, 2003, (ii) the first Business Day, if any,
occurring after a Quarterly Dividend Payment Date on which
dividends equal to or in excess of 5% of the Liquidation Value
(i.e., $0.50 per share) are accrued and unpaid, or (iii) the
Corporation becomes obligated to mail a statement pursuant to
subsection (G)(iv) below, at the option of the holders thereof,
in accordance with subsection (D) below at the Conversion Price
(as defined below in subsection (D)) into fully paid and
nonassessable Common Stock of the Corporation by dividing (i) the
Adjusted Liquidation Value for such share of Series F Preferred
Stock as of the date of conversion by (ii) the Conversion Price;
provided, however, that as to any shares of Series F Preferred
Stock which shall have been called for redemption, the right of
conversion shall terminate at the close of business on the second
full Business Day (unless otherwise provided, "Business Day"
herein shall mean any day other than a Saturday, a Sunday or a
day on which banking institutions in Dallas, Texas are authorized
or obligated by law or executive order to remain closed) prior to
the date fixed for redemption. Notwithstanding anything to the
contrary herein provided, the Corporation may elect to redeem the
shares of Series F Preferred Stock sought to be converted
hereunder instead of issuing shares of Common Stock in
replacement thereof in accordance with the provisions of Section
3(D), below.

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<PAGE> 5
(B) For purposes of this Section 3, the term "Conversion Price" shall
be and mean the amount obtained (rounded upward to the next
highest cent) by multiplying (i) 0.9 by (ii) the simple average
of the daily closing price of the Common Stock for the twenty
Business Days ending on the last Business Day of the calender
week immediately preceding the date of conversion on the New York
Stock Exchange or, if the shares of Common Stock are not then
being traded on the New York Stock Exchange, then on the
principal stock exchange (including without limitation NASDAQ NMS
or NASDAQ Small Cap) on which such Common Stock is then listed or
admitted to trading as determined by the Corporation (the
"Principal Stock Exchange") or, if the Common Stock is not then
listed or admitted to trading on a Principal Stock Exchange, the
average of the last reported closing bid and asked prices on such
days in the over-the-counter market or, if no such prices are
available, the fair market value per share of the Common Stock,
as determined by the Board of Directors of the Corporation in its
sole discretion. The Conversion Price shall not be subject to
any adjustment as a result of the issuance of any additional
shares of Common Stock by the Corporation for any purpose, except
for stock splits (whether accomplished by stock dividend or
otherwise). For purposes of calculating the Conversion Price,
the term "Business Day" shall mean a day on which the exchange
looked to for purposes of determining the Conversion Price is
open for business or, if no such exchange, the term "Business
Day" shall have the meaning given such term in Section 3(A),
above.

(C) Upon any conversion, fractional shares of Common Stock shall not
be issued but any fractions shall be adjusted by the delivery of
one additional share of Common Stock in lieu of any cash. Any
accrued but unpaid dividends shall be convertible into shares of
Common Stock as provided for in this Section. The Corporation
shall pay all issue taxes, if any, incurred in respect to the
issuance of Common Stock on conversion, provided, however, that
the Corporation shall not be required to pay any transfer or
other taxes incurred by reason of the issuance of such Common
Stock in names other than those in which the Series F Preferred
Stock surrendered for conversion may stand.

(D) Any conversion of Series F Preferred Stock into Common Stock
shall be made by the surrender to the Corporation, at the office
of the Corporation set forth in Section 12 hereof or at the
office of the transfer agent for such shares, of the certificate
or certificates representing the Series F Preferred Stock to be
converted, duly endorsed or assigned (unless such endorsement or
assignment be waived by the Corporation), together with a written
request for conversion. The Corporation shall either (i) issue
as of the date of receipt by the Corporation of such surrender
shares of Common Stock calculated as provided above and evidenced
by a stock certificate delivered to the holder as soon as
practicable after the date of such surrender or (ii) within two
Business Days after the date of such surrender advise the holder
of the Series F Preferred Stock that the Corporation is
exercising its option to redeem the Series F Preferred Stock
pursuant to Section 3(A), above, in which case the Corporation
shall

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<PAGE> 6
have thirty (30) days from the date of such surrender to pay to
the holder cash in an amount equal to the Conversion Price for
each share of Series F Preferred Stock so redeemed. The date of
surrender of any Series F Preferred Stock shall be the date of
receipt by the Corporation or its agent of such surrendered
shares of Series F Preferred Stock.

(E) A number of authorized shares of Common Stock sufficient to
provide for the conversion of the Series F Preferred Stock
outstanding upon the basis hereinbefore provided shall at all
times be reserved for such conversion. If the Corporation shall
propose to issue any securities or to make any change in its
capital structure which would change the number of shares of
Common Stock into which each share of Series F Preferred Stock
shall be convertible as herein provided, the Corporation shall at
the same time also make proper provision so that thereafter there
shall be a sufficient number of shares of Common Stock authorized
and reserved for conversion of the outstanding Series F Preferred
Stock on the new basis.

(F) The term "Common Stock" shall mean stock of the class designated
as Common Stock of the Corporation on the date the Series F
Preferred Stock is created or stock of any class or classes
resulting from any reclassification or reclassifications thereof,
the right of which to share in distributions of both earnings and
assets is without limitation in the Articles of Incorporation of
the Corporation as to any fixed amount or percentage and which
are not subject to redemption; provided, that if at any time
there shall be more than one such resulting class, the shares of
each such class then issuable on conversion of the Series F
Preferred Stock shall be substantially in the proportion which
the total number of shares of stock of each such class resulting
from all such reclassifications bears to the total number of
shares of stock of all such classes resulting from all such
reclassifications.

(G) In case the Corporation shall propose at any time before all
shares of the Series F Preferred Stock have been redeemed by or
converted into Common Stock of the Corporation:

(i) to pay any dividend on the Common Stock outstanding
payable in Common Stock or to make any other distribution, other
than cash dividends to the holders of the Common Stock
outstanding; or

(ii) to offer for subscription to the holders of the
Common Stock outstanding any additional shares of any class or
any other rights or option; or

(iii) to effect any re-classification or recapitalization
of the Common Stock outstanding involving a change in the Common
Stock, other than a subdivision or combination of the Common
Stock outstanding; or

-6-
<PAGE> 7
(iv) to merge or consolidate with or into any other
corporation (unless the Corporation is the surviving entity and
holders of Common Stock continue to hold such Common Stock
without modification and without receipt of any additional
consideration), or to sell, lease, or convey all or substantially
all its property or business, or to liquidate, dissolve or wind
up;

then, in each such case, the Corporation shall mail to the holders of
record of each of the shares of Series F Preferred Stock at their last
known addresses as shown by the Corporation's records a statement,
signed by an officer of the Corporation, with respect to the proposed
action, such statement to be so mailed at least thirty (30) days prior
to the date of the taking of such action or the record date for holders
of the Common Stock for the purposes thereof, whichever is earlier. If
such statement relates to any proposed action referred to in clauses
(iii) or (iv) of this subsection (G), it shall set forth such facts with
respect thereto as shall reasonably be necessary to inform the holders
of the Series F Preferred Stock as to the effect of such action upon the
conversion rights of such holders.

4. Voting Rights and Powers. The holders of shares of Series F Preferred
Stock shall have only the following voting rights:

(A) Except as may otherwise be specifically required by law under
Section 14-2-1004 of the Georgia Business Corporation Code or
otherwise provided herein, the holders of the shares of Series F
Preferred Stock shall not have the right to vote such stock,
directly or indirectly, at any meeting of the shareholders of the
Corporation, and such shares of stock shall not be counted in
determining the total number of outstanding shares to constitute
a quorum at any meeting of shareholders;

(B) In the event that, under the circumstances, the holders of the
Series F Preferred Stock are required by law to vote upon any
matter, the approval of such series shall be deemed to have been
obtained only upon the affirmative vote of the holders of a
majority of the shares of the Series F Preferred Stock then
outstanding;

(C) Except as set forth herein, or as otherwise provided by the
Articles of Incorporation or by law, holders of the Series F
Preferred Stock shall have no voting rights and their consent
shall not be required for the taking of any corporate action;

(D) Notwithstanding anything herein to the contrary, if and whenever
at any time or times all or any portion of the dividends on
Series F Preferred Stock for any six quarterly dividends, whether
or not consecutive, shall be in arrears and unpaid, then and in
any such event, the number of Directors constituting the Board of
Directors shall be increased by two, and the holders of Series F
Preferred Stock, voting separately as a class, shall be entitled
at the next annual meeting of shareholders, or at a special
meeting of holders of Series F Preferred Stock called as
hereinafter provided, to elect two Directors to fill such newly
created Directorships. Each holder

-7-
<PAGE> 8
shall be entitled to one vote in such election for each share of
Series F Preferred Stock held. At such time as all arrearages in
dividends on the Series F Preferred Stock shall have been paid in
full and dividends thereon for the current quarterly period shall
have been paid or declared and a sum sufficient for the payment
thereof set aside, then (i) the voting rights of holders of
Series F Preferred Stock described in this subsection (D) shall
cease (subject always to revesting of such voting rights in the
event of each and every similar future arrearages in quarterly
dividends), (ii) the term of the Directors then in office as a
result of the voting rights described in this subsection (D)
shall terminate and (iii) the number of Directors shall be
reduced by the number of Directors then in office elected
pursuant to this subsection (D). A vacancy in the class of
Directors elected pursuant to this subsection (D) shall be filled
by a Director chosen by the remaining Directors of the class,
unless such vacancy is filled pursuant to the final sentence of
subsection (G);

(E) At any time when the voting right described in subsection (D)
shall have vested and shall remain in the holders of Series F
Preferred Stock, such voting right may be exercised initially
either at a special meeting of holders of Series F Preferred
Stock or at any annual or special shareholders' meeting called
for the purpose of electing Directors, but thereafter it shall be
exercised only at annual shareholders' meetings. If such voting
right shall not already have been initially exercised, the
Secretary of the Corporation may, and upon the written request of
the holders of record of at least 10% of the shares of Series F
Preferred Stock then outstanding shall, call a special meeting of
the holders of Series F Preferred Stock for the purpose of
electing two Directors pursuant to subsection (D), and notice
thereof shall be given to the holders of Series F Preferred Stock
in the same manner as that required to be given to holders of the
Corporation's Common Stock for the annual meeting of
shareholders. Such meeting shall be held at the earliest
practicable date upon the notice required for special meetings of
shareholders of the Corporation, or, if none, at a time and place
designated by the Secretary of the Corporation.

(F) At any meeting held for the purpose of electing Directors at
which the holders of Series F Preferred Stock shall have the
right to elect Directors as provided in subsection (D) above, the
presence in person or by proxy of the holders of at least thirty-
five percent (35%) of the then outstanding shares of Series F
Preferred Stock shall be required and be sufficient to constitute
a quorum of Series F Preferred Stock for the election of
Directors by Series F Preferred Stock, and the vote of the
holders of a majority of such shares so present in person or by
proxy at any such meeting at which there shall be such a quorum
shall be required and be sufficient to elect the members of the
Board of Directors which the holders of Series F Preferred Stock
are entitled to elect as hereinabove provided. At any such
meeting or adjournment thereof, (i) the absence of a quorum of
the holders of Series F Preferred Stock shall not prevent the
election of Directors other than the Directors to be elected by
the holders of Series F Preferred Stock and (ii) in the case of
holders of Series F

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<PAGE> 9
Preferred Stock entitled to vote for the election of Directors,
a majority of the holders present in person or by proxy of such
class, if constituting less than a quorum as hereinabove
provided, shall have the power to adjourn the meeting for the
election of the Directors that the holders of such class are
entitled to elect, from time to time until a quorum shall be
present, and notice of such adjourned meeting need not be given
unless otherwise required by law, provided that nothing herein
shall affect the conduct of the meeting with respect to
shareholders of any other class.

(G) Any Director who shall have been elected or appointed pursuant to
Section 4(D) shall hold office for a term expiring (subject to
the earlier termination of the default in quarterly dividends) at
the next annual meeting of shareholders, and during such term may
be removed at any time, either with or without cause, only by the
affirmative vote of the holders of record of a majority of the
shares of Series F Preferred Stock then outstanding at a special
meeting of such shareholders called for such purpose. Any
vacancy created by such removal may also be filled at such
meeting.

5. Reacquired Shares. Any shares of Series F Preferred Stock purchased or
otherwise acquired by the Corporation in any manner whatsoever or
surrendered for conversion hereunder shall no longer be deemed to be
outstanding and all rights with respect to such shares of stock,
including the right, if any, to receive notices and to vote, shall
forthwith cease except, in the case of stock surrendered for conversion
hereunder, rights of the holders thereof to receive Common Stock in
exchange therefor. All shares of Series F Preferred Stock obtained by
the Corporation shall be retired and canceled promptly after the
acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Special Stock and may be
reissued as part of a new series of Special Stock subject to the
conditions and restrictions on issuance set forth herein, in the
Articles of Incorporation, or in any other Certificates of Designations
creating a series of Special Stock or any similar stock or as otherwise
required by law.

6. Liquidation, Dissolution or Winding Up. The Liquidation Value of the
Series F Preferred Stock shall be $10.00 per share. Upon any
liquidation, dissolution or winding up of the Corporation, and after
paying and providing for the payment of all creditors of the
Corporation, the holders of shares of the Series F Preferred Stock then
outstanding shall be entitled, before any distribution or payment is
made upon any Junior Securities (defined to be and mean the Common Stock
and any other equity security of any kind which the Corporation at any
time has issued, issues or is authorized to issue if the Series F
Preferred Stock has priority over such securities as to dividends or
upon liquidation, dissolution or winding up), to receive a liquidation
preference in an amount in cash equal to the Adjusted Liquidation Value
as of the date of such payment, whether such liquidation is voluntary or
involuntary, and the holders of the Series F Preferred Stock shall not
be entitled to any other or further distributions of the assets. If,
upon any liquidation, dissolution or winding up of the affairs of the
Corporation, the net assets available for distribution shall be
insufficient to permit payment to the holders of all outstanding shares
of all series of Special Stock of the

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<PAGE> 10
amount to which they respectively shall be entitled, then the assets of
the Corporation to be distributed to such holders will be distributed
ratably among them based upon the amounts payable on the shares of each
such series of Special Stock in the event of voluntary or involuntary
liquidation, dissolution or winding up, as the case may be, in
proportion to the full preferential amounts, together with any and all
arrearages to which they are respectively entitled. Upon any such
liquidation, dissolution or winding up of the Corporation, after the
holders of Special Stock have been paid in full the amounts to which
they are entitled, the remaining assets of the Corporation may be
distributed to holders of Junior Securities, including Common Stock, of
the Corporation. The Corporation will mail written notice of such
liquidation, dissolution or winding up, not less than twenty (20) nor
more than fifty (50) days prior to the payment date stated therein to
each record holder of Series F Preferred Stock. Neither the
consolidation nor merger of the Corporation into or with any other
corporation or corporations, nor the sale or transfer by the Corporation
of less than all or substantially all of its assets, nor a reduction in
the capital stock of the Corporation, nor the purchase or redemption by
the Corporation of any shares of its Special Stock or Common Stock or
any other class of its stock will be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this
Section 6.

7. Ranking. Except as provided in the following sentence, the Series F
Preferred Stock shall rank on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of Special
Stock issued by the Corporation. The Corporation shall not issue any
shares of Special Stock of any series which are superior to the Series F
Preferred Stock as to dividends or rights upon liquidation, dissolution
or winding up of the Corporation as long as any shares of the Series F
Preferred Stock are issued and outstanding, without the prior written
consent of the holders of at least 66 2/3 of such shares of Series F
Preferred Stock then outstanding voting separately as a class.

8. Redemption at the Option of the Holder. The shares of Series F
Preferred Stock shall not be redeemable at the option of a holder of
Series F Preferred Stock.

9. Redemption at the Option of the Corporation.

(A) In addition to the redemption right of the Corporation set forth
in Section 3(A), above, the Corporation shall have the right to
redeem all or a portion of the Series F Preferred Stock issued
and outstanding at any time and from time to time, at its option,
for cash. The redemption price of the Series F Preferred Stock
pursuant to this Section 9 shall be an amount per share (the
"Redemption Price") equal to (i) 105% of the Adjusted Liquidation
Value as of the Redemption Date (as defined in subsection (B)
below) during the period from August 15, 1997 through August 15,
1998; (ii) 104% of the Adjusted Liquidation Value as of the
Redemption Date during the period from August 16, 1998 through
August 15, 1999; and (iii) 103% of the Adjusted Liquidation Value
as of the Redemption Date at any time on or after August 16,
1999.

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<PAGE> 11
(B) The Corporation may redeem all or a portion of any holder's
shares of Series F Preferred Stock by giving such holder not less
than twenty (20) days nor more than thirty (30) days notice
thereof prior to the date on which the Corporation desires such
shares to be redeemed, which date shall be a Business Day (the
"Redemption Date"). Such notice shall be written and shall be
hand delivered or mailed, postage prepaid, to the holder (the
"Redemption Notice"). The Redemption Notice, once given, shall
be irrevocable. If mailed, such notice shall be deemed to be
delivered when deposited in the United States Mail, postage
prepaid, addressed to the holder of shares of Series F Preferred
Stock at his address as it appears on the stock transfer records
of the Corporation. The Redemption Notice shall state (i) the
total number of shares of Series F Preferred Stock held by such
holder; (ii) the total number of shares of the holder's Series F
Preferred Stock that the Corporation intends to redeem; (iii) the
Redemption Date and the Redemption Price; and (iv) the place at
which the holder(s) may obtain payment of the applicable
Redemption Price upon surrender of the share certificate(s).

(C) If fewer than all shares of the Series F Preferred Stock at any
time outstanding shall be called for redemption, such shares
shall be redeemed pro rata, by lot drawn or other manner deemed
fair in the sole discretion of the Board of Directors to redeem
one or more such shares without redeeming all such shares of
Series F Preferred Stock. If a Redemption Notice shall have been
so mailed, at least two Business Days prior to the Redemption
Date the Corporation shall provide for payment of a sum
sufficient to redeem the applicable number of shares of Series F
Preferred Stock subject to redemption either by (i) setting aside
the sum required to be paid as the Redemption Price by the
Corporation, separate and apart from its other funds, in trust
for the account of the holder(s) of the shares of Series F
Preferred Stock to be redeemed or (ii) depositing such sum in a
bank or trust company (either located in the state where the
principal executive office of the Corporation is maintained, such
bank or trust company having a combined surplus of at least
$20,000,000 according to its latest statement of condition, or
such other bank or trust company as may be permitted by the
Articles of Incorporation, or by law) as a trust fund, with
irrevocable instructions and authority to the bank or trust
company to give or complete the notice of redemption and to pay,
on or after the Redemption Date, the applicable Redemption Price
on surrender of certificates evidencing the share(s) of Series F
Preferred Stock so called for redemption and, in either event,
from and after the Redemption Date (a) the share(s) of Series F
Preferred Stock shall be deemed to be redeemed, (b) such setting
aside or deposit shall be deemed to constitute full payment for
such shares(s), (c) such share(s) so redeemed shall no longer be
deemed to be outstanding, (d) the holder(s) thereof shall cease
to be a shareholder of the Corporation with respect to such
share(s), and (e) such holder(s) shall have no rights with
respect thereto except the right to receive the Redemption Price
for the applicable shares. Any interest on the funds so
deposited shall be paid to the

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<PAGE> 12
Corporation. Any and all such redemption deposits shall be
irrevocable except to the following extent: any funds so
deposited which shall not be required for the redemption of any
shares of Series F Preferred Stock because of any prior sale or
purchase by the Corporation other than through the redemption
process, subsequent to the date of deposit but prior to the
Redemption Date, shall be repaid to the Corporation forthwith and
any balance of the funds so deposited and unclaimed by the
holder(s) of any shares of Series F Preferred Stock entitled
thereto at the expiration of one calendar year from the
Redemption Date shall be repaid to the Corporation upon its
request or demand therefor, and after any such repayment of the
holder(s) of the share(s) so called for redemption shall look
only to the Corporation for payment of the Redemption Price
thereof. All shares of Series F Preferred Stock redeemed shall
be canceled and retired and no shares shall be issued in place
thereof, but such shares shall be restored to the status of
authorized but unissued shares of Special Stock.

(D) Holders whose shares of Series F Preferred Stock have been
redeemed hereunder shall surrender the certificate or
certificates representing such shares, duly endorsed or assigned
(unless such endorsement or assignment be waived by the
Corporation), to the Corporation by mail, courier or personal
delivery at the Corporation's principal executive office or other
location so designated in the Redemption Notice, and upon the
Redemption Date the Redemption Price shall be payable to the
order of the person whose name appears on such certificate or
certificates as the owner thereof, and each surrendered
certificate shall be canceled and retired. In the event fewer
than all of the shares represented by such certificates are
redeemed, a new certificate shall be issued representing the
unredeemed shares.

10. Sinking Fund. The Corporation shall not be required to maintain any so-
called "sinking fund" for the retirement on any basis of the Series F
Preferred Stock.

11. Fractional Shares. The Series F Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all
other rights of holders of shares of Series F Preferred Stock.

12. Notice. Any notice or request made to the Corporation in connection
with the Series F Preferred Stock shall be given, and shall conclusively
be deemed to have been given and received three Business Days following
deposit thereof in writing, in the U.S. mails, certified mail, return
receipt requested, duly stamped and addressed to the Corporation, to the
attention of its General Counsel, at its principal executive offices
(which shall be deemed to be the address most recently provided to the
Securities and Exchange Commission ("SEC") as its principal executive
offices for so long as the Corporation is required to file reports with
the SEC).

-12-
<PAGE> 13
IN WITNESS WHEREOF, these Articles of Amendment are executed on behalf
of the Corporation by its President and attested by its Secretary as of the
13th day of August, 1997.

/s/ Karl L. Blaha
---------------------------
Karl L. Blaha
President

Attest:

/s/ Robert A. Waldman
- -----------------------------
Robert A. Waldman
Secretary

-13-

<PAGE> 1
EXHIBIT 5.1

HOLT NEY ZATCOFF & WASSERMAN, LLP
Attorneys at Law
100 Galleria Parkway, Suite 600
Atlanta, Georgia 30339-5911

September 4, 1997

American Realty Trust, Inc.
10670 North Central Expressway
Suite 300
Dallas, Texas 75231

Re: Authorization of 7,500,000 Shares (any or all of said shares herein
referred to as the "Preferred Shares") of Special Stock of American
Realty Trust, Inc., a Georgia corporation ("ART"), Designated Series
F Cumulative Convertible Preferred Stock ("Series F Preferred
Stock"), and Conversion of Preferred Shares into Shares (any or all
of said shares herein referred to as "Common Shares") of ART's $.01
Par Value Common Stock (the "Common Stock")

Ladies and Gentlemen:

We have acted as counsel to ART with respect to the application and
interpretation of the Georgia Business Corporation Code (the "GBCC") to ART's
designation of the Series F Preferred Stock, contemplated issuance of Preferred
Shares and possible conversion of Preferred Shares into Common Shares. We
understand that ART has designated the Series F Preferred Stock in accordance
with the GBCC by filing with the Secretary of State of Georgia Articles of
Amendment of the Articles of Incorporation of ART designating and describing
the number and features of the Series F Preferred Stock (the "Articles of
Amendment"). We also understand that ART anticipated issuing Preferred Shares
from time to time in such amounts as it determines necessary in order to
facilitate various transactions.

In the capacity described above, we have considered such matters of law
and of fact, including the examination of originals or copies, certified or
otherwise identified to our satisfaction, of such records and documents of ART,
certificates of officers and representatives of ART, certificates of public
officials and other documents as we have deemed appropriate as a basis for the
opinions hereinafter set forth.

Based upon the foregoing, as of this date, and subject to the assumptions,
limitations and qualifications set forth after the following lettered
paragraphs, we are of the following opinions.

(1) ART is a corporation existing under the laws of the State of Georgia.

<PAGE> 2

American Realty Trust, Inc.
September 4, 1997
Page 2

(2) The Series F Preferred Stock has been duly authorized, and upon a
Qualified Issuance of Preferred Shares (as defined in the following sentence)
the Preferred Shares so issued will be validly issued, fully paid and
nonassessable, with no personal liability attaching to the ownership thereof.
For purposes of this opinion, an issuance of Preferred Shares is a "Qualified
Issuance of Preferred Shares" if, and only if: (a) the Board of Directors of
ART has authorized issuance of the Preferred Shares being issued for particular
consideration to be received by ART, and (b) such consideration has in fact
been received by ART.

(3) Upon a Qualified Conversion of Preferred Shares (as defined in the
following sentence) the Common Shares issued in connection therewith will be
duly authorized, validly issued, fully paid and nonassessable, with no personal
liability attaching to the ownership thereof. For purposes of this opinion, a
conversion of Preferred Shares into Common Shares is a "Qualified Conversion of
Preferred Shares" if, and only if: (a) it is effected in accordance with the
conversion rights (the "Conversion Rights") described in the Articles of
Amendment, (b) the Common Shares being issued in connection therewith have been
duly authorized, and (c) the Board of Directors of ART has authorized issuance
of such Common Shares to holders of Preferred Shares upon exercise of the
Conversion Rights appertaining to such Preferred Shares.

The opinions expressed herein are subject to the following assumptions,
limitations and qualifications:

A. As to various questions of fact material to this opinion, we have
relied solely upon the statements and certifications of Mr. Robert A.
Waldman, Secretary of ART.

B. Other than as described in paragraph A above and elsewhere herein, we
have made no investigation regarding the accuracy or truthfulness of
any representations, warranties, statements of fact or assumptions of
fact contained in any documents, records, instruments, letters of
other writings examined by us, and we express no opinion herein
regarding the same.

C. Other than resolutions adopted by the Board of Directors of ART that
authorize the designation of the Series F Preferred Stock and address
certain associated matters, all certified as true and correct by Mr.
Waldman, we have not examined the minute book of ART, and we assume
that no resolutions of the Board of Directors modifying the Bylaws of
ART or its procedures for issuing shares are in effect.

D. We did not assist ART in its incorporation and organization, and we
assume that it was duly organized.

E. We expressly note that our opinion in paragraphs (2) and (3) do not
mean that: (a) the authorization of the Series F Preferred Stock, or
any past or future authorization of Common Shares, complied or will
comply with agreements by which ART is bound;

<PAGE> 3
American Realty Trust, Inc.
September 4, 1997
Page 3

(b) any particular issuance of Preferred or Common Shares will be a
Qualified Issuance of Preferred Shares or an issuance of Common
Shares in connection with a Qualified Conversion of Preferred Shares
or will comply with agreements by which ART may now or then be bound;
(c) the authorization of the Series F Preferred Stock, any past or
future authorization of Common Shares, or any particular issuance of
Preferred or Common Shares complied or will comply with the fiduciary
duties of the directors of ART; (d) the authorization of the Series F
Preferred Stock, any past or future authorization of Common Shares,
or any particular issuance of Preferred or Common Shares complied or
will comply with any law other than the GBCC (including but not
limited to federal or state securities laws); (e) ART has reserved or
has available or will reserve or have available sufficient numbers of
authorized Common Shares to effect the conversion of all outstanding
Preferred Shares; (f) the consideration that ART will receive in
connection with any particular issuance of Preferred or Common Shares
will be adequate as a matter of fairness to ART and its shareholders,
or that ART will receive a reasonably equivalent value and fair
equivalent value in good faith; (g) a holder of Preferred or Common
Shares will be immune from other types of liabilities, such as
liability for distributions in violation of Section 640 of the GBCC,
or under the "piercing the corporate veil" theory; or (h) the
authorization of the Series F Preferred Stock, any past or future
authorization of Common Shares, or any particular issuance of
Preferred or Common Shares has not unfairly diluted or will not
unfairly dilute the investment value of existing shareholders of ART.
Our opinions in paragraphs (2) and (3) assume that each of items (a)
through (h) is or will be true.

F. We expressly note that ART may not have a number of authorized,
unissued Common Shares sufficient to satisfy all Conversion Rights
that may exist from time to time, and that ART's Board of Directors
has authorized issuance of Common Shares to holders of Preferred
Shares upon exercise of the Conversion Rights appertaining to such
Preferred Shares only if a certain transaction is consummated and
becomes effective.

G. This Opinion Letter is limited by, and is in accordance with, the
January 1, 1992 edition of the Interpretive Standards (the
"Interpretive Standards") Applicable to Legal Opinions to Third
Parties in Corporate Transactions adopted by the Legal Opinion
Committee of the Corporate and Banking Law Section of the State Bar
of Georgia, which interpretive Standards are incorporated in this
Opinion Letter by this reference; in particular, without limiting the
generality of the foregoing, our opinion in paragraphs (2) and (3) is
subject to the exceptions stated in paragraph 23(i) of the
Interpretive Standards, which makes exception for the effect of
bankruptcy and similar laws as described therein.

<PAGE> 4
American Realty Trust, Inc.
September 4, 1997
Page 4

H. The opinions set forth herein are based solely upon the GBCC. Nothing
herein should be construed to express any opinion as to the
applicability or effect of any other law, be it a law of any
jurisdiction other than Georgia or a law of Georgia other than the
GBCC.

I. The opinions expressed herein are addressed exclusively to the
particular matters described herein, to the state of our knowledge
with respect thereto, to the state of all relevant documents,
including but not limited to ART's Articles of Incorporation and the
Articles of Amendment, and to the state of the law applicable
thereto, all as of the date hereof. We assume no responsibility for
commenting on any other matters, or for updating this letter as of
any subsequent date.

J. This opinion is being provided solely for the benefit of ART, and no
other person, natural or legal, shall be entitled to rely hereon
without the express written consent of this firm. This opinion may
not be quoted from, in w hole or in part, or otherwise be referred to
in any financial statement or other document, nor filed with or
furnished to any person or entity other than ART and Andrews & Kurth,
L.L.P., including but not limited to, any governmental agency,
without the prior written consent of this firm; provided, however,
that we consent to (i) the use and filing of this opinion as Exhibit
5.1 to ART's Registration Statement on Form S-4 in respect of the
Series F Preferred Stock and the Common Stock issuable upon
conversion thereof and (ii) the reference to our firm under the
caption "Legal Matters" in any Prospectus filed as part of such
Registration Statement. In giving such consent, we do not imply or
admit that we are an expert with respect to any part of such
Registration Statement, including this Exhibit, within the meaning of
the Securities Act of 1933, as amended, or the rules and regulations
promulgated thereunder.

Very truly yours,

HOLT NEY ZATCOFF & WASSERMAN, LLP

By: Michael G. Wasserman, P.C.

By: /s/ Michael G. Wasserman
----------------------------
Michael G. Wasserman

<PAGE> 1
EXHIBIT 23.1

Consent of Independent Certified Public Accountants

American Realty Trust, Inc.
Dallas, Texas

We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 26, 1997, relating to the
consolidated financial statements of American Realty Trust, Inc. for the year
ended December 31, 1996.

We also consent to the reference to us under the caption "Experts" in the
Prospectus.

/s/ BDO SEIDMAN, LLP

BDO Seidman, LLP

Dallas, Texas
September 8, 1997

<PAGE> 1
EXHIBIT 23.2

Consent of Independent Certified Public Accountants

American Realty Trust, Inc.
Dallas, Texas

We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated March
21, 1997, relating to the consolidated financial statements and schedules of
Continental Mortgage and Equity Trust appearing in the Trust's Annual Report on
Form 10-K for the year ended December 31, 1996.

/s/ BDO SEIDMAN, LLP

BDO Seidman LLP

Dallas, Texas
September 8, 1997

<PAGE> 1
EXHIBIT 23.3

Consent of Independent Certified Public Accountants

American Realty Trust, Inc.
Dallas, Texas

We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated March 7,
1997, relating to the consolidated financial statements and schedules of Income
Opportunity Realty Investors, Inc. and the financial statements and schedules
of Tri-City Limited Partnership appearing in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.

/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP

Dallas, Texas
September 8, 1997

<PAGE> 1
EXHIBIT 23.4

Consent of Independent Certified Public Accountants

American Realty Trust, Inc.
Dallas, Texas

We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated March 20,
1997, relating to the consolidated financial statements and schedules of
Transcontinental Realty Investors, Inc. appearing in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.

/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP

Dallas, Texas
September 8, 1997

<PAGE> 1
EXHIBIT 23.5

Consent of Independent Certified Public Accountants

American Realty Trust, Inc.
Dallas, Texas

We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated March 14,
1997, relating to the consolidated financial statements and schedules of
National Realty L.P. appearing in the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1996.

/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP

Dallas, Texas
September 8, 1997

<PAGE> 1
EXHIBIT 99.1

PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 8, 1997)

SUBJECT TO COMPLETION, DATED SEPTEMBER 8, 1997

AMERICAN REALTY TRUST, INC.

PROSPECTUS SUPPLEMENT

[___________] SHARES
SERIES ___ [CUMULATIVE][CONVERTIBLE] PREFERRED STOCK

This Prospectus Supplement relates to shares of Series __ [Cumulative]
[Convertible] Preferred Stock having a par value of $[___] per share ("ART
Preferred Shares"), of American Realty Trust, Inc., a Georgia corporation
("ART"), that will be issued to [__________________] pursuant to an Agreement
of Sale and Purchase, dated as of [________](the "Purchase Agreement"), by and
between ART and [___________] (the "Seller"). The Purchase Agreement provides
for the purchase by ART of all right and interest of the Seller in certain
real, personal and other intangible property consisting principally of
[_____________] (all such assets to be acquired by ART, collectively, the
"Assets", and the sale and purchase of the Assets, the "Asset Purchase"). In
consideration for selling the Assets to ART, the Seller will receive
[___________] ART Preferred Shares with a stated liquidation value of $[____]
per share (the "Liquidation Value"), among other consideration. This
Prospectus Supplement is being furnished to the Seller in connection with the
Asset Purchase.

ART has filed a registration statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with the Securities and Exchange Commission (the "Commission") covering
up to 12,500,000 shares of preferred stock of ART, including [__________] ART
Preferred Shares issuable in connection with the Asset Purchase. This
Prospectus Supplement supplements the Prospectus of ART filed as part of the
Registration Statement with respect to the ART Preferred Shares to be issued in
connection with the Asset Purchase.

SEE "RISK FACTORS" ON PAGE ___ FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY THE SELLER IN CONNECTION WITH AN INVESTMENT IN THE ART PREFERRED
SHARES.

_______________________

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

_______________________

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

_________________

The date of this Prospectus Supplement is [___________].

<PAGE> 2

_________________

CERTAIN STATEMENTS UNDER CAPTION "RISK FACTORS" CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 (THE "REFORM ACT"). SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF ART TO BE MATERIALLY DIFFERENT FROM ANY
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD- LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING:
GENERAL ECONOMIC AND BUSINESS CONDITIONS, WHICH WILL, AMONG OTHER THINGS,
AFFECT THE SUPPLY AND DEMAND FOR COMMERCIAL REAL ESTATE, AVAILABILITY AND
CREDIT WORTHINESS OF PROSPECTIVE TENANTS, LEASE RATES AND THE AVAILABILITY OF
FINANCING; ADVERSE CHANGES IN THE REAL ESTATE MARKETS INCLUDING, AMONG OTHER
THINGS, COMPETITION WITH OTHER COMPANIES, RISKS ASSOCIATED WITH REAL ESTATE
ACQUISITIONS; GOVERNMENTAL ACTIONS AND INITIATIVES; ENVIRONMENTAL/SAFETY
REQUIREMENTS; AND OTHER CHANGES AND FACTORS REFERENCED IN THIS PROSPECTUS
SUPPLEMENT AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. WITH RESPECT TO
ART, SUCH FACTORS MAY ALSO INCLUDE: DIFFICULTY OF LOCATING SUITABLE REAL ESTATE
INVESTMENTS; ILLIQUIDITY OF REAL ESTATE INVESTMENTS; RISKS REGARDING THE ASSETS
OR OTHER PROPERTIES OWNED OR CONTROLLED BY ART; LIMITED CONTROL OF ENTITIES IN
WHICH INVESTMENTS ARE MADE; AND RISKS OF INVESTMENTS IN ART PREFERRED SHARES,
INCLUDING THE INABILITY TO ENFORCE REMEDIES. SEE "RISK FACTORS" HEREIN.

_________________

-ii-

<PAGE> 3

AVAILABLE INFORMATION

ART has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the ART Preferred Shares and ART's common stock, par
value $0.01 per share (the "ART Common Shares"), into which the ART Preferred
Shares are convertible. The form of Prospectus filed with such Registration
Statement is attached hereto and should be reviewed in conjunction with this
Prospectus Supplement. The Prospectus contains important information with
respect to ART and this Prospectus Supplement contains important information
with respect to the ART Preferred Shares.

This Prospectus Supplement does not contain all of the information set
forth in the Registration Statement or the Prospectus, certain portions of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to ART, the ART Preferred
Shares and the ART Common Shares, reference is made to the Registration
Statement, the Prospectus and the documents incorporated by reference herein
and in the Prospectus. Statements contained herein concerning the provisions
of certain documents are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or incorporated by reference herein or in the Prospectus
or otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.

No person has been authorized to give any information or make any
representation other than those set forth or incorporated by reference herein
and, if given or made, such information must not be relied upon as having been
authorized by ART or any of its affiliates. This Prospectus Supplement does
not constitute an offer to, or a solicitation of, any person in any
jurisdiction in which such offer or solicitation is unlawful.

-iii-

<PAGE> 4

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -iii-

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -iv-

SUMMARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
ART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
Business of ART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
The Asset Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
New York Stock Exchange Listing of ART Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
Description of ART Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
Market and Trading Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-

RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
Risks Relating to Listing and Trading of ART Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . S-
Risks Relating to ART's Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-

THE ASSET PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-

DESCRIPTION OF ART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-

THE BUSINESS OF ART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-

DESCRIPTION OF THE CAPITAL STOCK OF ART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
ART Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
ART Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-

LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-

EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-
</TABLE>

S-1

<PAGE> 5

SUMMARY OF TERMS

The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the accompanying
Prospectus or in the documents incorporated herein or therein by reference.
Certain capitalized terms used herein may be defined elsewhere in this
Prospectus Supplement and the related Prospectus. Capitalized terms that are
used but not defined herein, will have the meanings assigned to such terms in
the Prospectus.

GENERAL

This Prospectus Supplement relates to the sale of the Assets by the Seller
to ART in consideration for [_________]ART Preferred Shares, among other
consideration. The Asset Purchase will be effected pursuant to the Purchase
Agreement, a copy of which is attached to this Prospectus Supplement as Annex
[__]. See "The Asset Purchase."

ART

ART, a Georgia corporation, is the successor to a District of Columbia
business trust organized pursuant to a declaration of trust dated July 14,
1961. The business trust merged into ART on June 24, 1988. ART elected to be
treated as a real estate investment trust ("REIT") under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), during the
period from June 1, 1989 through December 31, 1990. ART allowed its REIT
status to lapse in 1991.

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

BUSINESS OF ART

ART'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. ART has invested in private and open
market purchases in the equity securities of Continental Mortgage and Equity
Trust ("CMET"), Income Opportunity Realty Investors, Inc. ("IORI"),
Transcontinental Realty Investors, Inc. ("TCI") and National Realty, L.P.
("NRLP"), each, an affiliate of ART.

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

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

S-2

<PAGE> 6

receivable that are in default. For a detailed description of ART's business,
see "The Business of the Company" in the Prospectus.

THE ASSET PURCHASE

The Seller has agreed to sell to ART, and ART has agreed to purchase from
the Seller, the Assets. Among other things, the Assets consist of
[______________________], all as described more fully in the Purchase
Agreement, a copy of which is attached to this Prospectus Supplement as Annex
[__]. Pursuant to the Purchase Agreement, the Seller will receive from ART
[____________] shares of ART Preferred Shares.

This Prospectus Supplement is being furnished to the Seller in connection
with the [____________] ART Preferred Shares payable by ART to the Seller
pursuant to the Purchase Agreement.

[NEW YORK STOCK EXCHANGE LISTING OF ART PREFERRED SHARES

ART has agreed, under the terms and conditions of the Purchase Agreement,
at such time as such listing is permitted on the New York Stock Exchange (the
"NYSE"), to take such actions as are necessary and within its control to obtain
the listing on the NYSE of the ART Preferred Shares issued thereunder and of
the ART Common Shares issuable upon conversion of such ART Preferred Shares.

DESCRIPTION OF ART PREFERRED SHARES

The Board of Directors of ART has designated and authorized the issuance of
[________] ART Preferred Shares with a par value of $[____] per share and a
preference on liquidation of $[____] per share plus payment of accrued and
unpaid dividends (the "Adjusted Liquidation Value"). The ART Preferred Shares
are non-voting except (i) as provided by law and (ii) at any time or times when
all or any portion of the dividends on the ART Preferred Shares for any six
quarterly dividends, whether or not consecutive, shall be in arrears and
unpaid. In the latter event, the number of directors constituting the board of
directors of ART shall be increased by two and the holders of ART Preferred
Shares, voting separately as a class, shall be entitled to elect two directors
to fill such newly created directorships with each holder being entitled to one
vote in such election for each share of ART Preferred Shares held. ART is not
obligated to maintain a sinking fund with respect to the ART Preferred Shares.

The ART Preferred Shares are convertible, at the option of the holder, into
ART Common Shares at any time and from time to time, in whole or in part,
after the earliest to occur of (i) the [______ anniversary of the date of
issuance]; (ii) the first business day, if any, occurring after the fifteenth
day following the end of each calendar quarter, on which an amount equal to or
in excess of [__]% of the Liquidation Value (i.e., $[___] per ART Preferred
Share) is accrued and unpaid, or (iii) when ART becomes obligated to mail a
statement, signed by an officer of ART, to the holders of record of each of the
ART Preferred Shares because of a proposal by ART at any time before all of the
ART Preferred Shares have been redeemed by ART or converted into ART Common
Shares, to merge or consolidate with or into any other corporation (unless ART
is the surviving entity and holders of ART Common Shares continue to hold such
ART Common Shares without modification and without receipt of any additional
consideration), or to sell, lease, or convey all or substantially all its
property or business, or to liquidate, dissolve or wind up. The ART Preferred
Shares are convertible into that number of shares of ART Common Shares obtained
by multiplying the number of ART Preferred Shares being converted by $[___],
then adding all accrued and unpaid dividends, then dividing such sum by (in
most instances) [__]% of the simple average of the daily closing price of the
ART Common Shares for the [__] business days ending on the last business day of
the calendar week immediately preceding the date of conversion on the principal
stock exchange on which such ART Common Shares are then listed (the "Conversion
Price"). Notwithstanding the foregoing, ART may elect to redeem shares of the
ART Preferred Shares sought to be so converted instead of issuing shares of ART
Common Shares by paying to the holder thereof cash in an amount equal to the
Conversion Price for those shares of the ART Preferred Shares so redeemed.

The ART Preferred Shares bear a cumulative, compounded dividend per share
equal to [___]% per annum of the Adjusted Liquidation Value, payable quarterly
on the [____ business day] of the month following the end of the related
calendar quarter, and commencing accrual [_____] months after the date of
issuance whether or not such dividends have

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been declared and whether or not there are profits, surplus or other funds of
ART legally available for the payment of such dividends. Dividends on the ART
Preferred Shares are in preference to and with priority over dividends upon the
ART Common Shares. The ART Preferred Shares rank on a parity as to dividends
and upon liquidation, dissolution or winding up with all other shares of
preferred stock issued by ART. ART currently has outstanding 4,000 shares of
Series B 10% Cumulative Preferred Stock and 16,681 shares of Series C 10%
Cumulative Preferred Stock.

In addition to ART's redemption rights described above upon a conversion of
ART Preferred Shares, ART may redeem any or all of the ART Preferred Shares at
any time and from time to time, at its option, for cash upon no less than
twenty (20) days nor more than thirty (30) days prior notice thereof. The
redemption price of the ART Preferred Shares shall be an amount per share equal
to (i)[___]% of the Adjusted Liquidation Value during the period from the date
of issuance through the [___] anniversary date of the issuance; (ii) [___]% of
the Adjusted Liquidation Value during the period from the day immediately
following the [____] anniversary date of the issuance through the
[_____]anniversary date of the date of issuance; and (iii) [___]% of the
Adjusted Liquidation Value at any time on or after the day immediately
following the [_____]anniversary date of the date of issuance. As of
[___________], there were [_____] ART Preferred Shares issued and outstanding.

RESALE RESTRICTIONS: MARKET AND TRADING INFORMATION

The ART Preferred Shares issued to Seller may not be publicly offered or
sold other than in compliance with Rule 145 promulgated under the Securities
Act.

Because the ART Preferred Shares will be newly issued, there has not been
any public market for the ART Preferred Shares. [While, at such time as listing
is permitted by the NYSE, ART is obligated to take such actions as are
necessary and within its control to obtain the listing of the ART Preferred
Shares on the NYSE, there can be no assurance that the ART Preferred Shares
will be so listed or that, if so listed, an active market for the ART Preferred
Shares will develop or be sustained in the future on such exchange. Listing
will depend upon the satisfaction of the NYSE's listing requirements with
respect to the ART Preferred Shares.] Accordingly, no assurance can be given
as to the liquidity of, or trading for, the ART Preferred Shares. In addition,
there is no assurance that the ART Preferred Shares will have a market value at
or near their Liquidation Value. See "Risk Factors - Risks Associated with the
Listing and Trading of ART Preferred Shares" herein.

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RISK FACTORS

The Seller should consider the following risk factors in connection with
the ART Preferred Shares. These factors are intended to identify the
significant sources of risk affecting an investment in the ART Preferred
Shares.

Resale Restrictions. The ART Preferred Shares issued to HTDC may not
be publicly offered or sold other than in compliance with Rule 145 promulgated
under the Securities Act.

[Risks Associated with the Listing and Trading of ART Preferred Shares.
There has not been any public market for the ART Preferred Shares. While, at
such time as such listing is permitted by the NYSE, ART is obligated to take
such actions as are necessary and within its control to obtain the listing of
the ART Preferred Shares on the NYSE, there can be no assurance that the ART
Preferred Shares will be so listed or, if so listed, that an active market for
the ART Preferred Shares will develop or be sustained in the future on such
exchange. Listing will also depend upon the satisfaction of the NYSE's listing
requirements with respect to the ART Preferred Shares. Although the NYSE has
not established any minimum numerical criteria for the listing of preferred
stock, it has published certain numerical delisting criteria therefor. Pursuant
to such criteria, the NYSE will consider suspending or delisting a series of
preferred stock if the aggregate market value of publicly-held shares of such
preferred stock is less than $2,000,000 and the number of publicly-held shares
of such preferred stock is less than 100,000. Accordingly, no assurance can be
given as to the liquidity of, or trading for, the ART Preferred Shares. In
addition, although the ART Preferred Shares have a stated Liquidation Value of
$[___] per share, there can be no assurance that the ART Preferred Shares will
trade at or near the amount of such Liquidation Value.]

Risks Associated with Dividend Payments. Although dividends will accrue
cumulatively on the ART Preferred Shares from [_______], such dividends will
not be paid unless and until they are declared by ART's board of directors.
Holders of ART Preferred Shares will not have the authority to direct or compel
ART's board of directors to declare dividends with respect to the ART Preferred
Shares.

Risks Associated with Conversion Feature. The ART Preferred Shares are
convertible into ART Common Shares as provided herein. The Articles of
Amendment of ART's Articles of Incorporation that authorize the ART Preferred
Shares provide that a number of authorized ART Common Shares sufficient to
provide for the conversion of the outstanding ART Preferred Shares as described
herein shall at all times be reserved for such conversion. However, if at the
time a holder of ART Preferred Shares seeks to convert such ART Preferred
Shares, ART has failed to reserve a sufficient number of authorized ART Common
Shares to effect such conversion and assuming that ART does not elect to redeem
such ART Preferred Shares as described herein, such holder would be unable to
effect such conversion. In addition to the ART Preferred Shares, ART has
authorized and issued other preferred stock that may be converted from time to
time into ART Common Shares. See "Description of the Capital Stock" in the
Prospectus. In the future, ART expects to authorize and issue additional
preferred stock or other securities that may be converted from time to time
into ART Common Shares. Certain of the preferred stock that has been authorized
by ART (including the ART Preferred Shares) is, and securities that may be
issued by ART in the future may be, convertible into a number of ART Common
Shares calculated by reference to the price of ART Common Shares (i.e., the
lower the price of the ART Common Shares, the higher the number of ART Common
Shares to be received upon conversion of the applicable security). At any given
time, a decrease in the price of ART Common Shares below a certain level could
result in the number of authorized ART Common Shares being insufficient to
provide for the conversion of all of ART's convertible securities, including
the ART Preferred Shares. ART currently intends to seek shareholder approval
for the authorization of additional ART Common Shares, and because management
of ART and affiliates of ART currently own a majority of the ART Common
Shares, management expects the such approval will be obtained. The closing
price of ART's common stock as of 5 p.m. Eastern Time on [ ], as
published in the [ ] edition of The Wall Street Journal, was $[
] per share. Assuming such price was used for purposes of calculating the
number of ART Common Shares issuable on conversion of ART's authorized
convertible preferred stock, ART has sufficient ART Common Shares to convert
all outstanding shares of such preferred stock, but does not have sufficient
ART Common Shares to convert all authorized ART of such preferred stock.
However, the other authorized but unissued ART preferred stock may not ever be
issued, and management expects that such preferred stock would not be issued at
a time when such preferred stock would be immediately convertible into ART
Common Shares. So long as management of ART and affiliates of ART own a
majority of the ART Common Shares, management expects that ART will have the
ability to increase the number of authorized ART Common Shares to a number
sufficient to provide for the conversion of its convertible preferred stock.
However, there can be no assurance that management and affiliates of ART will
continue to own a majority of the ART Common Shares. The actual basis for
calculating the number of ART Common Shares issuable upon conversion of ART's
authorized preferred stock is described in the Prospectus under "Description of
the Capital Stock."

In the event that ART Preferred Shares are converted into ART Common
Shares, there can be no assurance as to the existence of an active trading
market for the ART Common Shares at the time of such conversion.]

Recent Operating History. ART has experienced net losses for each of the
fiscal years ended December 31, 1996, 1995, 1994, 1993 and 1992. During 1996,
ART paid a dividend of .15 cents with respect to each ART Common Share. From
1992 through 1995, ART paid no dividends in respect of the ART Common Shares.
There can be no assurance that ART will be able to pay dividends in respect of
the ART Preferred Shares or the ART Common Shares in the future.

Adverse Consequences of Debt Financing and Preferred Shares. ART is
subject to the risks normally associated with debt or preferred equity
financing, including the risk that ART's cash flow will be insufficient to meet
required payments of principal, interest and dividend distributions, the risk
that existing indebtedness may not be refinanced or that the terms of such
refinancing will not be as favorable as the terms of current indebtedness and
the risk that necessary capital expenditures for such purposes as renovations
and other improvements may not be financed on favorable terms or at all. If
ART were unable to refinance its indebtedness on acceptable terms, or at all,
ART might be forced to dispose of one or more of its properties on
disadvantageous terms, which might result in losses to ART and might adversely
affect the cash available for distributions to its shareholders. If interest
rates or other factors at the time of the refinancing result in higher interest
rates upon refinancing, ART's interest expense would increase, which would
affect ART's ability to make distributions to its shareholders. Furthermore,
if a property is mortgaged to secure payment of indebtedness and ART is unable
to meet mortgage payments, the mortgagee could foreclose upon the property,
appoint a receiver and receive an assignment of rents and leases or pursue
other remedies, all with a consequent loss of income and asset value to ART.
The organizational documents of ART do not contain any limitation on the amount
of indebtedness ART may incur.

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Accordingly, ART could become even more highly leveraged than it currently is,
thus resulting in an increase in debt service that could increase the risk of
default on ART's indebtedness.

Payments of dividends in respect of the ART Preferred Shares will be
subordinate in right of payment to ART's debt obligations which, as of
[____________], is an amount equal to approximately $[___________].

Investments in Real Property. Real property investments are subject to
varying degrees of risk and are relatively illiquid. Income from real property
investments and ART's resulting ability to pay dividends to its shareholders
may be adversely affected by a number of factors, including international and
domestic general economic climate and local real estate conditions (such as
oversupply of or reduced demand for space and changes in market rental rates);
the perceptions of prospective tenants of the safety, convenience and
attractiveness of ART's properties; the ability of ART or the owner of such
properties to provide adequate management, maintenance and insurance; energy
and supply shortages; the ability to collect on a timely basis all rent from
tenants and interest from borrowers; the expense of periodically renovating,
repairing and reletting spaces; and increasing operating costs (including real
estate taxes and utilities) which may not be passed through to tenants. Certain
significant expenditures associated with investments in real estate (such as
mortgage payments, real estate taxes, insurance and maintenance costs) are
generally not reduced when circumstances cause a reduction in rental revenues
from the investment. If a property of ART is mortgaged to secure the payment of
indebtedness and if ART or an entity in which ART invests or to which it lends
is unable to meet its mortgage payments, a loss could be sustained as a result
of foreclosure on the property or the exercise of other remedies by the
mortgagee. In addition, real estate values and income from properties are also
affected by such factors as compliance with laws, including tax laws, interest
rate levels and the availability of financing.

Nature of Investments Made by ART May Involve High Risk; Illiquidity of
Real Estate Investments. ART may make investments in real estate-related
assets and businesses which have experienced severe financial difficulties,
which difficulties may never be overcome. Since ART may only make a limited
number of investments and since many of the investments may involve a high
degree of risk, poor performance by one of the investments could severely
affect the financial condition and results of operations of ART.

The illiquid nature of ART's real estate investments may limit the ability
of ART to modify its portfolio in response to changes in economic or other
conditions. Such illiquidity may result from the absence of an established
market for ART's investments as well as legal or contractual restrictions on
their resale by ART.

Difficulty of Locating Suitable Investments; Competition. Identifying,
completing and realizing on real estate investments has from time to time been
highly competitive, and involves a high degree of uncertainty. ART competes
for investments with many public and private real estate investment vehicles,
including financial institutions (such as mortgage banks, pension funds and
REITs) and other institutional investors, as well as individuals. There can be
no assurance that ART will continue to be able to locate and complete
investments which satisfy ART's objectives or realize upon their value or that
it will be able to fully invest its available capital.

Many of those with whom ART competes for investments and its services are
far larger than ART, may have greater financial resources than ART and may have
management personnel with more experience than the officers of ART.

Risks of Acquisition Activities. From time to time, ART will acquire
existing properties to the extent that they can be acquired on advantageous
terms and meet ART's investment criteria. Acquisitions of properties entail
general investment risks associated with any real estate investment, including
the risk that investments will fail to perform as expected, that estimates of
the cost of improvements to bring an acquired property up to standards
established for the intended market position may prove inaccurate and the
occupancy rates and rents achieved may be less than anticipated.

Dependence on Rental Income from Real Property. The Company's cash flow,
results of operations and value of its assets would be adversely affected if a
significant number of tenants of ART's properties failed to meet their lease
obligations or if ART or the owner of a property in which ART has an interest
were unable to lease a significant amount of space on economically favorable
terms. In the event of a default by a lessee, the owner may experience delays
in enforcing its rights as lessor and may incur substantial costs in protecting
its investment. The bankruptcy or insolvency of

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a major tenant may have an adverse effect on a property. At any time, a tenant
may also seek protection under the bankruptcy laws, which could result in
rejection and termination of such tenant's lease and thereby cause a reduction
in the cash flow of the property. If a tenant rejects its lease, the owner's
claim for breach of the lease would (absent collateral securing the claim) be
treated as a general unsecured claim. Generally, the amount of the claim would
be capped at the amount owed for unpaid pre-petition lease payments unrelated
to the rejection, plus the greater of one year's lease payments or 15% of the
remaining lease payments payable under the lease (but not to exceed the amount
of three years' lease payments). No assurance can be given that the properties
in which ART has an interest will not experience significant tenant defaults in
the future.

Operating Risks. The properties in which ART has an interest are subject
to operating risks common to the particular property type, any and all of which
may adversely affect occupancy or rental rates. Such properties are subject to
increases in operating expenses such as cleaning; electricity; heating,
ventilation and air-conditioning; elevator repair and maintenance; insurance
and administrative costs; and other general costs associated with security,
landscaping, repairs and maintenance. While commercial tenants are often
obligated to pay a portion of these escalating costs, there can be no assurance
that they will agree to pay such costs or that the portion that they agree to
pay will fully cover such costs. If operating expenses increase, the local
rental market may limit the extent to which rents may be increased to meet
increased expenses without decreasing occupancy rates. To the extent rents
cannot be increased or costs controlled, the cash flow of ART and its financial
condition may be adversely affected.

Adverse Consequences of Debt Financing. Some of ART's real estate equity
investments may utilize a leveraged capital structure, in which case a third
party lender would be entitled to cash flow generated by such investments prior
to ART receiving a return. As a result of such leverage, ART would be subject
to the risks normally associated with debt financing, including the risk that
cash flow from operations and investments will be insufficient to meet required
payments of principal and interest, the risk that existing debt (which in most
cases will not have been fully amortized at maturity) will not be able to be
refinanced or that the terms of such refinancings will not be as favorable to
ART and the risk that necessary capital expenditures for such purposes as
renovations and other improvements will not be able to be financed on favorable
terms or at all. While such leverage may increase returns or the funds
available for investment by ART, it also will increase the risk of loss on a
leveraged investment. If ART defaults on secured indebtedness, the lender may
foreclose and ART could lose its entire investment in the security for such
loan. Because ART may engage in portfolio financings where several investments
are cross-collateralized, multiple investments may be subject to the risk of
loss. As a result, ART could lose its interests in performing investments in
the event such investments are cross-collateralized with poorly performing or
nonperforming investments. In addition, recourse debt may subject other assets
of ART to risk of loss. Any such losses will adversely affect ART's ability to
pay dividends in respect of the ART Preferred Shares.

Existing Debt Maturities; Foreclosures. ART anticipates that only a
portion of the principal of its indebtedness outstanding from time to time will
be repaid prior to maturity. However, ART may not have sufficient funds to
repay such indebtedness at maturity; it may therefore be necessary for ART to
refinance debt through additional debt financing or equity offerings. If ART is
unable to refinance this indebtedness on acceptable terms, ART may be forced to
dispose of properties upon disadvantageous terms, which could result in losses
to ART and adversely affect the amount of cash available for further
investment.

Risk of Rising Interest Rates. ART may incur indebtedness in the future
that also bears interest at a variable rate or may be required to refinance its
debt at higher rates. Outstanding advances under ART's credit facilities may
bear interest at a variable rate. Accordingly, increases in variable interest
rates could increase ART's interest expense and adversely effect the financial
condition and results of operations of ART. As of [_________], approximately
__% and ___% of ART's indebtedness was subject to variable interest rates and
fixed interest rates, respectively.

Hedging Policies. In connection with the financing of certain real estate
investments, ART may employ hedging techniques designed to protect ART against
adverse movements in currency and/or interest rates. While such transactions
may reduce certain risks, such transactions themselves may entail certain other
risks. Thus, while ART may benefit from the use of these hedging mechanisms,
unanticipated changes in interest rates, securities prices, or currency
exchange rates may result in a poorer overall performance for ART than if it
had not entered into such hedging transactions. See "The Business of ART"
herein.

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Covenants. Various credit facilities or other debt obligations may require
ART to comply with a number of customary financial and other covenants on an
ongoing basis. Failure to comply with such covenants may limit ART's ability to
borrow funds or may cause a default under its then-existing indebtedness.

Lack of Control and Other Risks of Equity Investments in and with Third
Parties. ART may invest in shares or other equity interests of REITs or other
entities that invest in real estate assets. In such cases, ART will be relying
on the assets, investments and management of the REIT or other entity in which
it is investing. Such entities and their properties will be subject to the
other risks affecting the ownership and operation of real estate set forth
herein.

ART may also co-invest with third parties through partnerships, joint
ventures or other entities, acquiring non- controlling interests in or sharing
responsibility for managing the affairs of a property, partnership, joint
venture or other entity and, therefore, will not be in a position to exercise
sole decision-making authority regarding the property, partnership, joint
venture or other entity.

Investments in partnerships, joint ventures, or other entities may, under
certain circumstances, involve risks not present were a third party not
involved, including the possibility that ART's partners or co-venturers might
become bankrupt or otherwise fail to fund their share of required capital
contributions, that such partners or co-venturers might at any time have
economic or other business interests or goals which are inconsistent with the
business interests or goals of ART, and that such partners or co-venturers may
be in a position to take action contrary to the instructions or the requests of
ART and contrary to ART's policies or objectives. Such investments may also
have the potential risk of impasse on decisions, such as a sale, because
neither ART nor the partner or co-venturer would have full control over the
partnership or joint venture. Consequently, actions by such partner or
co-venturer might result in subjecting properties owned by the partnership or
joint venture to additional risk. In addition, ART may in certain circumstances
be liable for the actions of its third-party partners or co-venturers.

Risks of Investments in Debt Instruments. ART may acquire performing or
nonperforming debt investments. In general, debt instruments carry the risk
that borrowers may not be able to make debt service payments or to pay
principal when due, the risk that the value of any collateral may be less than
the amounts owed, the risk that interest rates payable on the debt instruments
may be lower than ART's cost of funds, and the risk that the collateral may be
mismanaged or otherwise decline in value during periods in which ART is seeking
to obtain control of the underlying real estate. ART is also dependent on the
ability of the borrowers to operate successfully their properties. Such
borrowers and their properties will be subject to the other risks affecting the
ownership and operation of real estate set forth herein. Some of the loans may
be structured so that all or a substantial portion of the principal will not be
paid until maturity, which increases the risk of default at that time.

It is anticipated that a substantial portion of the debt in which ART
invests will not be rated by any nationally- recognized statistical rating
agency. Generally, the value of unrated classes is more subject to fluctuation
due to economic conditions than rated classes. Should rated assets be
downgraded, it may adversely affect their value and may adversely affect the
financial condition and results of operations of ART.

Risks of Investments in Mortgage Loans. To the extent ART invests in
mortgage loans, such mortgage loans may or may not be recourse obligations of
the borrower and generally will not be insured or guaranteed by governmental
agencies or otherwise. In the event of a default under such obligations, ART
may have to foreclose its mortgage or protect its investment by acquiring title
to a property and thereafter making substantial improvements or repairs in
order to maximize the property's investment potential. Borrowers may contest
enforcement of foreclosure or other remedies, seek bankruptcy protection
against such enforcement and/or bring claims for lender liability in response
to actions to enforce mortgage obligations. Relatively high "loan-to-value"
ratios and declines in the value of the mortgaged property may prevent ART from
realizing an amount equal to its mortgage loan upon foreclosure.

ART may participate in loans originated by other financing institutions.
As a participant, ART may not have the sole authority to declare a default
under the mortgage or to control the management or disposition of the related
property or any foreclosure proceedings in respect thereof.

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Any investments in junior mortgage loans which are subordinate to liens of
senior mortgages would involve additional risks, including the lack of control
over the collateral and any related foreclosure proceeding. In the event of a
default on a senior mortgage, ART may make payments to prevent foreclosure on
the senior mortgage without necessarily improving ART's position with respect
to the subject real property. In such event, ART would be entitled to share in
the proceeds only after satisfaction of the amounts due to the holder of the
senior mortgage.

Limitations on Remedies. Although ART will have certain contractual
remedies upon the default by borrowers under certain debt instruments, such as
foreclosing on the underlying real estate or collecting rents generated
therefrom, certain legal requirements (including the risks of lender liability)
may limit the ability of ART to effectively exercise such remedies.

The right of a mortgage lender to convert its loan position into an equity
interest may be limited or prevented by certain common law or statutory
prohibitions.

Third-Party Bankruptcy Risks. Investments made in assets operating in
workout modes or under Chapter 11 of the Bankruptcy Code could be subordinated
or disallowed, and ART could be liable to third parties in such circumstances.
Furthermore, distributions made to ART in respect of such investments could be
recovered if any such distribution is found to be a fraudulent conveyance or
preferential payment. Bankruptcy laws, including the automatic stay imposed
upon the filing of a bankruptcy petition, may delay the ability of ART to
realize on collateral for loan positions held by it or may adversely affect the
priority of such loans through doctrines such as equitable subordination or may
result in a restructure of the debt through principles such as the "cramdown"
provisions of the bankruptcy laws.

Risks of Uninsured Loss. ART carries comprehensive liability, fire,
extended coverage and rental loss insurance with respect to all of the improved
real property that it owns, with policy specifications, insured limits and
deductibles customarily carried for similar properties. There are, however,
certain types of losses (such as losses arising from acts of war or relating to
pollution) that are not generally insured because they are either uninsurable
or not economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, ART could lose its capital invested in a property, as
well as the anticipated future revenue from such property and would continue to
be obligated on any mortgage indebtedness or other obligations related to the
property. Any such loss would adversely affect the financial condition and
results of operations of ART.

With respect to those properties in which ART holds an interest through a
mortgage, as well as those properties owned by entities to whom ART makes
unsecured loans, the borrowers will most likely be obligated to maintain
insurance on such properties and to arrange for ART to be covered as a named
insured on such policies. The face amount and scope of such insurance coverage
may be less comprehensive than ART would carry if it held the fee interest in
such property. Accordingly in such circumstances, or in the event that the
borrowers fail to maintain required coverage, uninsured or underinsured losses
may occur, which could have an adverse impact on ART's cash flow or financial
condition.

Changes in ART's Policies Without Stockholder Approval. The investment,
financing, borrowing and distribution policies of ART and its policies with
respect to all other activities, growth, debt, capitalization and operations,
will be determined by ART's Board of Directors. Although it has no present
intention to do so, ART's Board of Directors may amend or revise these policies
at any time and from time to time at its discretion without a vote of the
stockholders of ART. A change in these policies could adversely affect the
market price of the ART Preferred Shares or the ART Common Shares.

Costs of Compliance with the Americans with Disabilities Act and Similar
Laws. Under the Americans with Disabilities Act of 1980 (the "ADA"), places of
public accommodations and commercial facilities are required to meet certain
federal requirements related to access and use by disabled persons. Compliance
with ADA requirements could require both structural and non-structural changes
to the properties in which ART invests and noncompliance could result in
imposition of fines by the United States government or an award of damages to
private litigants. Although management of ART believes that its properties are
substantially in compliance with present requirements of the ADA, ART may incur
additional costs of compliance in the future. A number of additional Federal,
state and local laws exist which impose further burdens or restrictions on
owners with respect to access by disabled persons and may require modifications
to properties in which ART invests, or restrict certain further renovations
thereof, with respect to access by disabled persons. Final regulations

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under the ADA have not yet been promulgated and the ultimate amount of the cost
of compliance with the ADA or other such laws is not currently ascertainable.
While such costs are not expected to have a material effect on ART, they could
be substantial. If required changes involve greater expense than ART currently
anticipates, ART's financial condition and results of operations could be
adversely affected.

Potential Environmental Liability Affecting ART. Under various Federal,
state and local environmental laws, ordinances and regulations, an owner of
real estate may be liable for the costs of removal or remediation of certain
hazardous or toxic substances on such property. These laws often impose
environmental liability without regard to whether the owner knew of, or was
responsible for, the presence of such hazardous or toxic substances. The
presence of such substances, or the failure properly to remediate such
substances, may adversely affect the owner's ability to sell or rent the
property or to borrow using the property as collateral. Persons who arrange for
the disposal or treatment of hazardous or toxic substances may also be liable
for the costs of removal or remediation of such substances at a disposal or
treatment facility, whether or not such facility is owned or operated by such
person. Certain laws impose liability for release of asbestos- containing
materials ("ACMs") into the air and third parties may seek recovery from owners
or operators of real properties for personal injury associated with ACMs. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, ART may be considered an owner or operator of
such properties or as having arranged for the disposal or treatment of
hazardous or toxic substances and, therefore, potentially liable for removal or
remediation costs, as well as for certain other related costs, including
governmental fines and injuries to persons and property.

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

No assurance can be given that existing environmental assessments with
respect to any of ART's properties or the Center reveal all environmental
liabilities, that any prior owner of a property did not create any material
environmental condition not known to ART, or that a material environmental
condition does not otherwise exist as to the Center or any one or more
properties of ART.

Noncompliance with Other Laws. Real estate properties are also subject to
various Federal, state and local regulatory requirements, such as state and
local fire and life safety requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants. ART believes that its
properties are currently in material compliance with all such regulatory
requirements. However, there can be no assurance that these requirements will
not be changed or that new requirements will not be imposed which would require
significant unanticipated expenditures by ART and could have an adverse effect
on ART's results of operations.

Changes in Laws. Increases in real estate taxes, income taxes and service
or other taxes generally are not passed through to tenants under existing
leases and may adversely affect ART's funds from operations and its ability to
pay dividends to its shareholders. Similarly, changes in laws increasing the
potential liability for environmental conditions existing on properties or
increasing the restrictions on discharges or other conditions may result in
significant unanticipated expenditures, which would adversely affect ART's
funds from operations and its ability to pay dividends to its shareholders.

Dependence on Key Personnel. ART will be dependent on the efforts of its
executive officers. While ART believes that it could find replacements for
these key personnel, the loss of their services may have a temporary adverse
effect on the operations of ART. None of these officers has entered or is
expected to enter into employment agreements with ART.

THE ASSET PURCHASE

The Seller has agreed to sell to ART, and ART has agreed to purchase from
the Seller, the Assets. Among other things, the Assets consist of
[________________], all as described more fully in the Purchase Agreement,
attached hereto as Annex [__]. Pursuant to the Purchase Agreement, the Seller
will receive from ART [________] ART Preferred Shares.

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DESCRIPTION OF ART

ART, a Georgia corporation, is the successor to a District of Columbia
business trust organized pursuant to a declaration of trust dated July 14,
1961. The business trust merged into ART on June 24, 1988. ART invests in
equity interests in real estate (including equity securities of real
estate-related entities), leases, joint venture development projects and
partnerships and finances real estate and real estate activities through
investments in mortgage loans.

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

ART has no employees. Employees of BCM render services to ART.

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

For more detailed information regarding ART, see "The Company" in the
Prospectus.

THE BUSINESS OF ART

ART elected to be treated as a REIT under the Code during the period June
1, 1987 through December 31, 1990. ART allowed its REIT tax status to lapse in
1991.

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

ART's board of directors has broad authority under ART's governing
documents to make all types of real estate investments, including mortgage
loans and equity real estate investments, as well as investments in the
securities of other entities, whether or not such entities are engaged in real
estate related activities. ART's board of directors may devote available
assets to particular investments or types of investments, without restriction
on the amount or percentage of ART'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 ART may acquire. ART's
investment objectives and policies may be changed at any time by ART's board of
directors without the approval of ART's shareholders. By allowing its REIT tax
status to lapse in 1991, ART relieved itself of investment and operational
restrictions imposed on REITs under the Code.

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

For more detailed information regarding the business of ART, see "The
Business of ART" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Prospectus.

DESCRIPTION OF THE CAPITAL STOCK OF ART

GENERAL

ART is authorized by its Articles of Incorporation, as amended, to issue up
to 16,666,667 ART Common Shares and 20,000,000 shares of a special class of
stock, $2.00 par value per share (the "Special Stock"), which may be designated
by ART's board of directors from time to time. The ART Preferred Shares are a
series of the Special Stock. For a more detailed description of the capital
stock of ART, see "Description of the Capital Stock of ART" in the Prospectus.

ART COMMON SHARES

All of the ART Common Shares are entitled to share equally in dividends
from funds legally available therefor, when declared by ART's board of
directors, and upon liquidation or dissolution of ART, whether voluntary or
involuntary (subject to any prior rights of holders of the Special Stock), and
to share equally in the assets of ART available for payment of dividends to
shareholders. Each holder of ART Common Shares is entitled to one vote for
each share held on all matters submitted to the shareholders. There is no
cumulative voting, redemption right, sinking fund provision or right of
conversion with respect to the ART Common Shares. The holders of ART Common
Shares do not have any preemptive rights to acquire additional ART Common
Shares when issued. All outstanding shares of ART are fully paid and
nonassessable. As of [____________], [__________] ART Common Shares were
issued and [____________] ART Common Shares were outstanding. See "Description
of the Capital Stock" in the Prospectus.

ART PREFERRED SHARES

The Board of Directors of ART has designated and authorized the issuance of
a total of [____________]shares of its Series [__] [Cumulative] [Convertible]
Preferred Stock (the "ART Preferred Shares") with a par value of $[___]per
share and a preference on liquidation of $[_____]per share plus payment of
accrued and unpaid dividends. The ART Preferred Shares are non-voting except
(i) as provided by law and (ii) at any time or times when all or any portion of
the dividends on the ART Preferred Shares for any six quarterly dividends,
whether or not consecutive, shall be in arrears and unpaid. In the latter
event, the number of directors constituting the board of directors of ART shall
be increased by two and the holders of ART Preferred Shares, voting separately
as a class, shall be entitled to elect two directors to fill such newly created
directorships with each holder being entitled to one vote in such election for
each share of ART Preferred Shares held. ART is not obligated to maintain a
sinking fund with respect to the ART Preferred Shares.

[The ART Preferred Shares are convertible at any time and from time to time,
in whole or in part, after the earliest to occur of (i) the [_____] anniversary
of the date of issuance; (ii) the first business day, if any, occurring after
the fifteenth day following the end of each calendar quarter, on which an
amount equal to or in excess of [__]% of the $[___] liquidation value (i.e.,
$[___] per ART Preferred Share) is accrued and unpaid, or (iii) when ART
becomes obligated to mail a statement, signed by an officer of ART, to the
holders of record of each of the ART Preferred Shares because of a proposal by
ART at any time before all of the ART Preferred Shares have been redeemed by or
converted into ART Common Shares, to merge or consolidate with or into any
other corporation (unless ART is the surviving entity and holders of ART Common
Shares continue to hold such ART Common Shares without modification and without
receipt of any additional consideration), or to sell, lease, or convey all or
substantially all its property or business, or to liquidate, dissolve or wind
up. The ART Preferred Shares are convertible into that number of shares of ART
Common Shares obtained by multiplying the number of shares being converted by
$[____], then adding all accrued and unpaid dividends, then dividing such sums

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by (in most instances) [__]% of the simple average of the daily closing price
of the ART Common Shares for the [__] business days ending on the last business
day of the calendar week immediately preceding the date of conversion on the
principal stock exchange on which such ART Common Shares are then listed (the
"Conversion Price"). Notwithstanding the foregoing, ART may elect to redeem
shares of the ART Preferred Shares sought to be so converted instead of issuing
shares of ART Common Shares by paying to the holder thereof cash in an amount
equal to the Conversion Price for those shares of the ART Preferred Shares so
redeemed.]

The ART Preferred Shares bear a cumulative, compounded dividend per share
equal to [___]% per annum of the Adjusted Liquidation Value, payable quarterly
on the [___] business day of the month following the end of the related
calendar quarter, and commencing accrual [_____] months after the date of
issuance whether or not such dividends have been declared and whether or not
there are profits, surplus or other funds of ART legally available for the
payment of such dividends. Dividends on the ART Preferred Shares are in
preference to and with priority over dividends upon the ART Common Shares. The
ART Preferred Shares rank on a parity as to dividends and upon liquidation,
dissolution or winding up with all other shares of preferred stock issued by
ART. ART currently has outstanding 4,000 shares of Series B 10% Cumulative
Preferred Stock and 16,681 shares of Series C 10% Cumulative Preferred Stock.

In addition to ART's redemption rights described above upon a conversion of
ART Preferred Shares, ART may redeem any or all of the ART Preferred Shares at
any time and from time to time, at its option, for cash upon no less than
twenty (20) days nor more than thirty (30) days prior notice thereof. The
redemption price of the ART Preferred Shares shall be an amount per share equal
to (i) [___]% of the Adjusted Liquidation Value during the period from the date
of issuance through the [___] anniversary date of the issuance; (ii) [___]% of
the Adjusted Liquidation Value during the period from the day immediately
following the [___]anniversary date of the issuance through the
[____]anniversary date of the date of issuance; and (iii) [___]% of the
Adjusted Liquidation Value at any time on or after the day immediately
following the [____] anniversary date of the date of issuance. Each ART
Preferred Share will be convertible, at the option of the holder, into fully
paid and nonassessable ART Common Shares. As of [_______] there were no issued
and outstanding ART Preferred Shares. See "Risk Factors -- Listing and Trading
of the ART Preferred Shares."

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