AMERICAN REALTY TRUST INC, S-2, 1998-05-14

AMERICAN REALTY TRUST INC
S-2, 1998-05-14
REAL ESTATE OPERATORS (NO DEVELOPERS) & LESSORS

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<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1998
Registration No. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------

FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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AMERICAN REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 54-0697989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ROBERT A. WALDMAN
10670 NORTH CENTRAL EXPRESSWAY, SUITE 300 AMERICAN REALTY TRUST, INC.
DALLAS, TEXAS 75231 10670 NORTH CENTRAL EXPRESSWAY, SUITE 300
(214) 692-4700 DALLAS, TEXAS 75231
(214) 692-4700
(Address, including zip code, and telephone number, (Name, address, including zip code, and telephone
including area code, of Registrant's principal number, including area code, of agent for service)
executive offices)
</TABLE>

The Commission is requested to send copies of all communications to:

THOMAS R. POPPLEWELL ROBERT A. WALDMAN
Andrews & Kurth L.L.P. American Realty Trust, Inc.
1717 Main Street 10670 North Central Expressway
Suite 3700 Suite 300
Dallas, Texas 75201 Dallas, Texas 75231
(214) 659-4480 (214) 692-4700

Approximate date of commencement of proposed sale to the public: FROM TIME
TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT PURSUANT TO
RULE 415.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [x]

If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
REGISTERED
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Stock, $2.00 par value . . . . . . . 800,000 Shares $10.00 $8,000,000 $ 2,360.00

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.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

DATED MAY 14, 1998

800,000 SHARES
AMERICAN REALTY TRUST, INC.

SERIES F CUMULATIVE CONVERTIBLE PREFERRED STOCK
COMMON STOCK

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This Prospectus, as appropriately amended or supplemented, relates to
800,000 shares of Series F Cumulative Convertible Preferred Stock, par value
$2.00 per share and a stated liquidation value ("LIQUIDATION VALUE") of $10.00
per share (the "PREFERRED STOCK"), of American Realty Trust, Inc. ("ART" or the
"COMPANY"). The Preferred Stock is being registered in connection with a
pledge by ART Morgan, Inc. ("ART MORGAN"), a wholly owned subsidiary of ART, of
Preferred Stock with a market value intended to be no less than $8,000,000 as a
portion of the collateral securing a loan made to ART by Mountain Funding Inc.
("MOUNTAIN FUNDING"). Following certain events of default under the applicable
loan documents, Mountain Funding would have the right to resell the Preferred
Stock that has been pledged to it. Mountain Funding is referred to herein as
the "SELLING SHAREHOLDER."

None of the proceeds from the sale of the Preferred Stock by the Selling
Shareholder will be received by ART. Any commissions paid or concessions
allowed to any broker-dealer, and, if any broker-dealer purchases such shares
as principal, any profits received on the resale of such shares, may be deemed
to be underwriting discounts and commissions under the Securities Act of 1933,
as amended (the "SECURITIES ACT"). Printing, certain legal and accounting,
filing and other expenses of this offering will be paid by ART. The Selling
Shareholder will generally bear all other expenses of this offering, including
brokerage fees and any underwriting discounts or commissions. ART has not
agreed to indemnify the Selling Shareholder against liabilities, including
liabilities under the Securities Act. No arrangements have been made to date
for the sale of the Preferred Stock being registered and offered hereby.

This Prospectus also relates to the shares of ART's common stock, par value
$0.01 per share (the "COMMON STOCK") issuable upon conversion of the Preferred
Stock, as described herein.

ART has filed a registration statement on Form S-2 (the "REGISTRATION
STATEMENT") under the Securities Act with the Securities and Exchange
Commission (the "COMMISSION") covering up to 800,000 shares of Preferred Stock
and the Common Stock issuable on conversion thereof. This Prospectus
constitutes the Prospectus of ART filed as part of the Registration Statement
with respect to such Preferred Stock and Common Stock.

SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED CAREFULLY BY PROSPECTIVE INVESTORS IN THE PREFERRED STOCK
OFFERED HEREBY.

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 DATE OF THIS PROSPECTUS IS MAY ___, 1998.
<PAGE> 3
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
PREFERRED STOCK, INCLUDING THE INABILITY TO ENFORCE REMEDIES. SEE "RISK
FACTORS" HEREIN.

AVAILABLE INFORMATION

ART is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT") and, in accordance
therewith, file reports and other information with the Securities and Exchange
Commission (the "COMMISSION"). Reports and proxy and information statements
filed by ART with 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 ART, 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 ART (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 Common Stock is currently listed.

ART has filed the Registration Statement with the Commission under the
Securities Act with respect to the Preferred Stock offered hereby and the
Common Stock into which the Preferred Stock is convertible. 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 ART,
the Preferred Stock offered hereby and the Common Stock, reference is made to
the Registration Statement and to the exhibits thereto and the documents
incorporated by reference herein. 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.

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 does not
constitute an offer to, or a solicitation of, any person in any jurisdiction in
which such offer or solicitation is unlawful.

ii
<PAGE> 4
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

This Prospectus incorporates by reference documents not presented
herein or delivered herewith. ART will provide without charge to each person
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 below (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, telephone number: (214) 692-4700.

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

1. ART's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, as filed with the Commission on March 30, 1998.

2. The Annual Report on Form 10-K for Continental Mortgage and
Equity Trust ("CMET") for the year ended December 31, 1997, as filed with the
Commission on March 20, 1998.

3. The Annual Report on Form 10-K for Income Opportunity Realty
Investors, Inc. ("IORI") for the year ended December 31, 1997, as filed with
the Commission on March 20, 1998.

4. The Annual Report on Form 10-K for Transcontinental Realty
Investors, Inc. ("TCI") for the year ended December 31, 1997, as filed with the
Commission on March 20, 1998.

5. The Annual Report on Form 10-K for National Realty, L.P.
("NRLP") for the year ended December 31, 1997, as filed with the Commission on
March 26, 1998.

6. The description of the Common Stock contained in ART's
Registration Statement under Section 12 of the Exchange Act and all amendments
and reports filed for the purpose of updating that description.

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

iii
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

SUMMARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Description of ART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Business of ART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Description of Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Resale Restrictions; Market and Trading Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risks Relating to Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risks Relating to ART's Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

SELLING SHAREHOLDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

DESCRIPTION OF ART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

THE BUSINESS OF ART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Geographic Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Investments in Real Estate Investment Trusts and Real Estate Partnerships . . . . . . . . . . . . . . . . . 30

SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

DESCRIPTION OF THE CAPITAL STOCK OF ART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Special Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>

iv
<PAGE> 6
SUMMARY OF TERMS

The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein or in the documents
incorporated herein by reference. Certain capitalized terms used herein may be
defined elsewhere in this Prospectus. Capitalized terms that are used but not
defined herein, will have the meanings assigned to such terms in this
Prospectus.

GENERAL

This Prospectus relates to 800,000 shares of Series F Cumulative
Convertible Preferred Stock, par value $2.00 per share and a stated liquidation
value of $10.00 per share (the "PREFERRED STOCK"), pledged by ART Morgan, Inc.
("ART MORGAN"), a wholly-owned subsidiary of ART, to the Selling Shareholder as
a portion of the collateral securing a loan made to ART by the Selling
Shareholder. This Prospectus also related to the shares of ART's common stock,
par value $0.01 per share (the "COMMON STOCK") issuable upon conversion of the
Preferred Stock, as described herein.

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 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 July 1, 1987 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 "Description of ART."

BUSINESS OF ART

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

ART's board of directors (the "ART BOARD") 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, regardless of whether such
entities are engaged in real estate related activities.

Although the ART Board 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"), an affiliate of
ART. BCM is a contractual advisor under the supervision of the ART Board. 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 the ART Board.

ART's businesses are not seasonal. With regard to real estate, ART is
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

1
<PAGE> 7
income producing real estate such as apartment complexes and commercial
properties 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 receivable that are in default. For a detailed description of ART's
business, see "The Business of ART."

DESCRIPTION OF PREFERRED STOCK

The ART Board has designated and authorized the issuance of 7,500,000
shares of Preferred Stock with a par value of $2.00 per share and a preference
on liquidation equal to the Liquidation Value ($10.00 per share) plus the
amount of any accrued and unpaid dividends. The Liquidation Value plus such
amount is referred to as the "ADJUSTED LIQUIDATION VALUE." The 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 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 ART
Board shall be increased by two and the holders of 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 Preferred Stock held. ART is not obligated to
maintain a sinking fund with respect to the Preferred Stock.

The Preferred Stock is convertible, at the option of the holder, into
fully paid and nonassessable Common Stock 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
(as defined below) on which dividends equal to or in excess of 5% of the
Liquidation Value (i.e., $0.50 per share of Preferred Stock) are accrued and
unpaid, or (iii) ART becomes obligated to mail a statement, signed by an
officer of ART, to the holders of record of Preferred Stock because of a
proposal by ART, to merge or consolidate with or into any other corporation
(unless ART 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. The
Preferred Stock is convertible into that number of shares of Common Stock
obtained by multiplying the number of shares of Preferred Stock being converted
by $10.00, then adding all accrued and unpaid dividends, then dividing such sum
by (in most instances) 90% of the simple average of the daily closing price of
the 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, ART, at its option, may elect to
redeem any Preferred Stock sought to be so converted by paying the holder of
such Preferred Stock cash in an amount equal to the Conversion Price.

The Preferred Stock bears a cumulative, compounded dividend per share
equal to 10% per annum of the Adjusted Liquidation Value, payable quarterly on
the 15th day of the month following the end of each calendar quarter (each, a
"QUARTERLY DIVIDEND PAYMENT DATE"), and commencing accrual on August 16, 1998
to and including the date on which the redemption price 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 ART legally available for the payment of
such dividends. Dividends on the Preferred Stock are in preference to and with
priority over dividends on the Common Stock. Except as described in the
following sentence, the Preferred Stock ranks on a parity as to dividends and
upon liquidation, dissolution or winding up with all other Special Stock (as
defined herein under "Description of Capital Stock of ART") issued by ART.
ART will not issue any shares of Special Stock of any series which are superior
to the Preferred Stock as to dividends or rights upon liquidation, dissolution
or winding up of the Corporation as long as any Preferred Stock is issued and
outstanding, without the prior written consent of the holders of at least 66
2/3% of such Preferred Stock then outstanding voting separately as a class. As
of May 1, 1998, ART had outstanding 2,800,000 shares of Preferred Stock, 4,000
shares of Series B 10% Cumulative Preferred Stock and 16,681 shares of Series C
10% Cumulative Preferred Stock.

ART may redeem any or all of the Preferred Stock at any time and from
time to time, at its option, for cash upon no less than 20 days nor more than
30 days prior notice thereof. The redemption price of Preferred Stock to be
redeemed shall be an amount per share equal to (i) 105% of the Adjusted
Liquidation Value of such shares during the period from August 15, 1997 to
August 15, 1998; (ii) 104% of the Adjusted Liquidation Value of such shares
during

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<PAGE> 8
the period from August 16, 1998 through August 15, 1999; and (iii) 103% of the
Adjusted Liquidation Value of such shares at any time on or after August 16,
1999.

There is no established trading market for the Preferred Stock. There
can be no assurance that an active market for the Preferred Stock will develop
or be sustained in the future on any stock exchange or otherwise. There is no
assurance that the Preferred Stock will have a market value at or near their
Adjusted Liquidation Value. See "Risk Factors -- Risks Relating to Preferred
Stock."

RESALE RESTRICTIONS; MARKET AND TRADING INFORMATION

There can be no assurance that an active market for the Preferred
Stock will develop or be sustained in the future on any stock exchange or
otherwise. No assurance can be given as to the liquidity of, or trading for,
the Preferred Stock. In addition, there is no assurance that the Preferred
Stock will have a market value at or near their Liquidation Value. See "Risk
Factors -- Risks Relating to Preferred Stock -- Risks Associated with the
Trading of Preferred Stock".

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<PAGE> 9
RISK FACTORS

Potential purchasers of the Preferred Stock should consider the
following risk factors in connection with a determination of whether or not to
purchase the Preferred Stock. These factors are intended to identify the
significant sources of risk affecting an investment in the Preferred Stock.

RISKS RELATING TO PREFERRED STOCK

RISKS ASSOCIATED WITH THE TRADING OF PREFERRED STOCK. There are
currently 2,800,000 shares of Preferred Stock outstanding; however, there is
currently no established public market for the Preferred Stock. There can be
no assurance that an active market for the Preferred Stock will develop or be
sustained in the future on any stock exchange or otherwise. In addition, no
assurance can be given as to the liquidity of, or trading for, the Preferred
Stock. The trading price of the Preferred Stock is likely to be below its
Liquidation Value and there is no assurance as to the price at which the
Preferred Stock will actually trade.

RELIANCE ON THE ART BOARD TO DECLARE DIVIDENDS ON THE PREFERRED STOCK.
Although dividends will accrue cumulatively on the Preferred Stock from August
16, 1998, such dividends will not be paid unless and until they are declared by
the ART Board. Holders of Preferred Stock will not have the authority to
direct or compel the ART Board to declare dividends with respect to the
Preferred Stock. The 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 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 ART Board shall be increased by two and the
holders of 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 Preferred Stock
held.

POSSIBILITY ART WILL NOT HAVE A SUFFICIENT SHARES OF COMMON STOCK TO
SATISFY THE CONVERSION OF THE PREFERRED STOCK. The Preferred Stock is
convertible into Common Stock as described herein under "Summary of Terms --
Description of Preferred Stock" and "Description of the Capital Stock of ART
- --Preferred Stock." The Articles of Amendment of ART's Articles of
Incorporation that authorize the Preferred Stock provide that a number of
authorized shares of Common Stock sufficient to provide for the conversion of
the outstanding Preferred Stock as described herein shall at all times be
reserved for such conversion. However, the number of shares of Common Stock
into which a share of Preferred Stock is convertible is dependent upon the
then-current market price of the Common Stock. Therefore, if at the time a
holder of Preferred Stock seeks to convert such Preferred Stock, ART has failed
to reserve a sufficient number of authorized shares of Common Stock to effect
such conversion and assuming that ART does not elect to redeem such Preferred
Stock as described herein, such holder would be unable to effect such
conversion. In addition to the Preferred Stock, ART has authorized and issued
other preferred stock that may be converted from time to time into Common
Stock. See "Description of the Capital Stock of ART." In the future, ART
expects to authorize and issue additional preferred stock or other securities
that may be converted from time to time into Common Stock. Certain of the
preferred stock that has been authorized by ART (including the Preferred Stock)
is, and securities that may be issued by ART in the future may be, convertible
into a number of shares of Common Stock calculated by reference to the price of
the Common Stock (i.e., the lower the price of the Common Stock, the higher the
number of shares of Common Stock to be received upon conversion of the
applicable security). At any given time, a decrease in the price of Common
Stock below a certain level could result in the number of authorized shares of
Common Stock being insufficient to provide for the conversion of all of ART's
convertible securities, including the Preferred Stock. The closing price of
the Common Stock as of 5 p.m. Eastern Standard Time on May 12, 1998, as
published in the May 13, 1998 edition of The Wall Street Journal, was $14.62
per share. Assuming such price was used for purposes of calculating the number
of shares of Common Stock issuable on conversion of ART's authorized
convertible preferred stock (which currently constitutes the only securities
authorized by ART that is convertible into Common Stock), ART has sufficient
Common Stock to convert all outstanding shares of such preferred stock. The
actual basis for calculating the number of shares of Common Stock issuable upon
conversion of ART's authorized preferred stock is described under "Description
of the Capital Stock of ART."

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<PAGE> 10
In the event that the Preferred Stock offered hereby is converted
into Common Stock, there can be no assurance as to the existence of an active
trading market for the Common Stock at the time of such conversion or that the
trading price of the Common Stock will not decline substantially after such
conversion.

RISKS RELATING TO ART'S BUSINESS

The value of the Preferred Stock at any given time will be
substantially dependent upon the success of ART's business. Set forth below is
a summary of potential risks relating to ART's business.

RECENT OPERATING HISTORY. ART has experienced net losses of
$2,428,000, $5,554,000, $2,836,000, $2,426,000, and $4,427,000, respectively,
for each of the fiscal years ended December 31, 1997, 1996, 1995, 1994 and
1993. During 1997, ART paid a cumulative dividend of $0.20 with respect to
each share of Common Stock, and during 1996, ART paid a cumulative dividend of
$0.15 with respect to each share of Common Stock. From 1993 through 1995, ART
paid no dividends in respect of the Common Stock. There can be no assurance
that ART will be able to pay dividends in respect of the Preferred Stock or the
Common Stock in the future.

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 the ART Board. Although it has no present
intention to do so, the ART Board 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 Preferred Stock or the Common Stock. See "The Business of ART -- General."

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
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. 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 such investments may involve a
high degree of risk, poor performance by any such 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 real estate investment trusts) 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.

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<PAGE> 11
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.

THE GENERAL INVESTMENT 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. ART'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 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 OF ART'S PROPERTIES. 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.

POSSIBLE INABILITY TO MEET PAYMENTS ON DEBT FINANCING. ART's cash
flow might be insufficient to meet required payments of principal, interest and
dividend distributions. If a property is mortgaged to secure payment of
indebtedness and ART in 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. 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
make distributions in respect of the Preferred Stock. Distributions in respect
of the Preferred Stock will be subordinate in right of payment to ART's debt
obligations which, as of December 31, 1997, have an aggregate outstanding
principal balance of approximately $315.4 million. Substantially all of ART's
mortgage notes receivable, real estate, equity security holdings in CMET, IORI,
TCI and NRLP and its trading portfolio of equity securities has been pledged to
secure ART's outstanding indebtedness. Such borrowings increase ART's risk of
loss because they represent a prior claim on ART's assets and require fixed
payments regardless of profitability. If ART defaults on such secured
indebtedness, the lender may foreclose on ART's assets securing such
indebtedness, and ART could lose its investment in the pledged assets.

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<PAGE> 12
POSSIBLE INABILITY TO REFINANCE ON DEBT FINANCING. ART may not be
able to refinance existing indebtedness or the terms of such refinancing may
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. 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, in addition to
the risks described above, ART would be subject to 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. The organizational documents of ART do not contain
any limitation on the amount of indebtedness ART may incur. 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.

EXISTING DEBT MATURITIES. As of December 31, 1997, approximately
$89.0 million of ART's outstanding indebtedness becomes due within the next
twelve months. ART has the option of extending the maturity dates to April and
June 1999 of $18.3 million of that amount. The lender on an additional $19.5
million has agreed to extend the maturity date of February 2000. In January
and February 1998, ART has paid off $8.7 million of such maturing debt. ART
anticipates that only a portion of the principal of its indebtedness
outstanding from time to time will be repaid prior to maturity. 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, to make payments on its outstanding
indebtedness or to make distributions in respect of the Preferred Stock.

RISK OF RISING INTEREST RATES ON VARIABLE RATE DEBT. As of December
31, 1997, approximately 18% and 82% of ART's indebtedness is subject to
variable interest rates and fixed interest rates, respectively. 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. Accordingly, increases in
variable interest rates could increase ART's interest expense and adversely
effect the financial condition and results of operations of ART. In the event
that ART's financial condition and results of operations are adversely
affected, the value of the Preferred Stock will likely decline.

COVENANTS. Various 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. Various ART debt
obligations contain specific covenants, which provide that if ART should be
declared in default of any of its debt obligations, and such default is not
cured in the time allowed, then the debt obligations containing such covenant
would also be declared in default, making all such debt, among other things,
due and payable.

LACK OF CONTROL AND OTHER RISKS OF EQUITY INVESTMENTS IN AND WITH
THIRD PARTIES. ART may invest in shares or other equity interests of real
estate investment trusts or other entities that invest in real estate assets.
In such cases, ART will be relying on the assets, investments and management of
the real estate investment trust 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.

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<PAGE> 13
Investments in partnerships, joint ventures, or other entities may,
under certain circumstances, involve risks which would not be 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.

MORTGAGE LOANS WHICH MAY NOT BE RECOURSE OBLIGATIONS OF THE BORROWER.
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.

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.

POSSIBILITY OF UNINSURED LOSS ON UNINSURABLE OR ECONOMICALLY
UNINSURABLE PROPERTIES. 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 could 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

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<PAGE> 14
coverage, uninsured or underinsured losses may occur, which could have an
adverse impact on ART's cash flow or financial condition.

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. 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.

ART's management is not aware of any environmental matters affecting
its properties or investments 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 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 with respect to any one or more of ART's properties.

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 cash flow from operations and
its ability to make distributions to 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 thus its ability to make payments on its
outstanding indebtedness and to make distributions to its shareholders.

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<PAGE> 15
DEPENDENCE ON KEY PERSONNEL. ART will be dependent on the efforts of
its executive officers and the executive officers of BCM. While ART believes
that it and BCM could find replacements for these key personnel, the loss of
their services may have a temporary adverse effect on the operations of ART.
Only Randall M. Paulson, the President of BCM, has an employment agreement with
BCM. None of the other officers has entered or is expected to enter into
employment agreements with ART or BCM.

RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND

The following table summarizes the ratio of ART's earnings to combined
fixed charges and preferred stock dividends for each of the five fiscal years
of ART ended December 31, 1997:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<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 and preferred stock dividends
by $8,474,000, $4,819,000, $189,000, $1,390,000 and $4,923,000 in 1997, 1996,
1995, 1994 and 1993, respectively.

USE OF PROCEEDS

ART will not receive any of the proceeds from the sale of the
Preferred Stock by the Selling Shareholder.

SELLING SHAREHOLDER

Mountain Funding is the "SELLING SHAREHOLDER". The registration
statement of which this Prospectus forms a part is not being filed as a result
of any present intention by the Selling Shareholder to sell any of the
Preferred Stock or the Common Stock but, rather, to facilitate the pledge of
the Preferred Stock held by ART Morgan, as collateral for a loan made by the
Selling Shareholder to ART.

A total of 800,000 shares of Preferred Stock were issued by ART to ART
Morgan to facilitate the pledge of such Preferred Stock to the Selling
Shareholder under the terms of that certain Escrow Agreement and Put Option
(the "ESCROW AGREEMENT") made as of March 31, 1998, among ART, the Selling
Shareholder, BCM and ART Morgan. ART Morgan agreed to pledge Preferred Stock
with a market value intended to be no less than $8 million to the Selling
Shareholder as part of the collateral securing repayment by ART to the Selling
Shareholder f indebtedness evidenced by a promissory note dated March 31, 1998,
executed by ART and payable to the Selling Shareholder in the original
principal amount of $20,700,000. ART is registering 800,000 shares of
Preferred Stock to attempt to provide that at all times Preferred Stock with a
market value of $8 million are registered for resale by the Selling
Shareholder. Although there can be no assurances that the market price will
continue at such level, the aggregate value of such 800,000 shares of Preferred
Stock (based on the liquidation value of $10.00 per share) is $8,000,000.

Because the Preferred Stock, the offering and sale of which are
registered hereby, and the Common Stock into which the Preferred Stock is
convertible, is being registered to facilitate the pledge made to the Selling
Shareholder pursuant to the Escrow Agreement and because this offering is not
being underwritten on a firm commitment basis, no estimate can be given as to
the number or percentage of shares of Preferred Stock which will be held by the
Selling Shareholder upon termination of this offering. See "Plan of
Distribution."

The Selling Shareholder has not had any position, office, or other
material relationship with ART, ART's predecessors or ART's affiliates within
the three years preceding this Prospectus.

10
<PAGE> 16
PLAN OF DISTRIBUTION

The registration statement of which this Prospectus forms a part has
not been filed because of any present intention of the Selling Shareholder to
sell any of Preferred Stock. Rather, ART Morgan pledged the Preferred Stock to
the Selling Shareholder as collateral for a loan made by the Selling
Shareholder to ART. In the event of default under the loan made by the Selling
Shareholder, the Selling Shareholder may elect to sell the pledged Preferred
Stock pursuant to the registration statement of which this Prospectus forms a
part. Such Preferred Stock may be sold from time to time to purchasers
directly by the Selling Shareholder. Alternatively, the Selling Shareholder
may from time to time offer Preferred Stock through underwriters, dealers or
agents who may receive compensation in the form of underwriting discounts,
concessions or commissions from the Selling Shareholder and/or the purchasers
of Preferred Stock for whom they may act as agent. The Selling Shareholder and
any such underwriters, dealers or agents who participate in the distribution of
the Preferred Stock may be deemed to be underwriters, and any profits on the
sale of the Preferred Stock by them and any discounts, commissions or
concessions received by any such underwriters, dealers or agents might be
deemed to be underwriting discounts and commissions under the Securities Act.
To the extent the Selling Shareholder may be deemed to be an underwriter, the
Selling Shareholder may be subject to certain statutory liabilities of the
Securities Act, including but not limited to, Sections 11, 12, and 17 of the
Securities Act and Rule 10b-5 under the Exchange Act. At any time a particular
offer of the Preferred Stock is made pursuant to this Prospectus, if required,
a prospectus supplement will be distributed that will set forth the aggregate
amount of Preferred Stock being offered and the terms of the offering,
including the name or names of any underwriters, dealers or agents, any
discounts, commissions and other items constituting compensation from the
Selling Shareholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers. Such prospectus supplement and, if necessary, a
post-effective amendment to the registration statement of which this Prospectus
is a part will be filed with the Commission to reflect the disclosure of
additional information with respect to the distribution of the Preferred Stock.

The Selling Shareholder may sell Preferred Stock from time to time in
negotiated transactions or otherwise, at market prices prevailing at the time
of the sale (if the Preferred Stock is then traded on a stock exchange) or at
negotiated prices. Such prices will be determined by the Selling Shareholder
or by agreement between the Selling Shareholder and underwriters or dealers.
Preferred Stock may be sold in transactions in which this Prospectus is
delivered or, if the Selling Shareholder is not an underwriter or an affiliate
of ART, in which this Prospectus is not delivered. The Selling Shareholder and
any other person participating in such distribution may be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, certain of which provisions may limit the timing or purchases and
sales of Preferred Stock by the Selling Shareholder and any other such person.
All of the foregoing may affect the marketability of the Preferred Stock and
the ability of any person or entity to engage in market making activities with
respect to Preferred Stock.

The Escrow Agreement to which ART, ART Morgan and the Selling
Shareholder are parties provides that ART will register (or cause the
registration of) the Preferred Stock pledged to the Selling Shareholder and
maintain an effective registration statement as long as such Preferred Stock is
so pledged. The Preferred Stock registered hereunder is being registered
pursuant to the Escrow Agreement. Pursuant to the Escrow Agreement, ART agreed
to pay all of the expenses incident to the registration. The Escrow Agreement
does not provide for indemnification of ART by the Selling Shareholder against
any civil liabilities, including liabilities under the Securities Act.

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. ART has invested in private and open market
purchases in the equity securities of CMET, IORI, TCI and NRLP.

The ART Board 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.

11
<PAGE> 17
Although the ART Board 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, an affiliate of ART. BCM is a
contractual advisor under the supervision of the ART Board. 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 the ART Board.

BCM, an affiliate of ART, 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 ART until November 16, 1992. Gene E. Phillips served as a director
of BCM until December 22, 1989 and as Chief Executive Officer of BCM until
September 1, 1992. Gene E. Phillips currently serves as a representative of
the trust that owns BCM for the benefit of his children, and in such capacity,
Gene E. Phillips has substantial contact with the management of BCM and input
with respect to BCM's performance of advisory services to ART. Ryan T.
Phillips, the son of Gene E. Phillips and a Director of ART until June 4, 1996,
is also a director of BCM and a trustee of the trust that owns BCM for the
benefit of the children of Gene E. Phillips. As of May 1, 1998, BCM owned
5,280,324 shares of Common Stock, representing approximately 49.4% of the
Common Stock then outstanding. BCM has been providing advisory services to ART
since February 6, 1989. BCM also serves as advisor to CMET, IORI and TCI. Karl
L. Blaha, Randall M. Paulson, Bruce A. Endendyk and Thomas A. Holland,
executive officers of ART, are also executive officers of CMET, IORI and TCI.
Karl L. Blaha also serves as a Director of ART. Oscar W. Cashwell, a Director
of ART, served as Executive Vice President of BCM until January 10, 1997.
Randall M. Paulson, Executive Vice President of ART, 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. Gene
E. 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.

Gene E. Phillips is the former chairman of Southmark Corporation
("Southmark"), a real estate syndicator and parent of San Jacinto Savings
Association ("San Jacinto"). As a result of a deadlock on Southmark's Board of
Directors, Mr. Phillips, among others, reached an agreement whereby he resigned
his positions with Southmark and certain of Southmark's subsidiaries and
affiliates in January 1989. Southmark filed a voluntary petition in bankruptcy
under Chapter 11 of the United States Bankruptcy Code in July 1989. In
November 1990, San Jacinto was placed under conservatorship of the RTC by
federal banking authorities. In December 1990, San Jacinto was converted into
a Federal Association and placed in receivership. Mr. Phillips has been named
as a defendant in a number of lawsuits brought by the RTC and private
plaintiffs in which the allegations made against Mr. Phillips included breach
of fiduciary duty and other misconduct, which allegations were denied by Mr.
Phillips. These actions have been dismissed or settled.

Since February 1, 1990, affiliates of BCM have provided property
management services to ART. 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 ART at various rates. The general partner of Carmel, Ltd. is BCM. The
limited partners of Carmel, Ltd. are (i) First Equity Properties, Inc. ("FIRST
EQUITY") which is 50% owned by BCM, (ii) Gene E. Phillips, and (iii) a trust
for the benefit of the children of Gene E. Phillips. Carmel, Ltd. subcontracts
the property-level management of ART's hotels, shopping centers, office
buildings and the Denver Merchandise Mart to Carmel Realty, Inc. ("CARMEL
REALTY") which is a company owned by First Equity. Carmel Realty is entitled
to receive property and construction management fees and leasing commissions in
accordance with the terms of its property-level management agreement with
Carmel, Ltd.

Affiliates of BCM are also entitled to receive real estate brokerage
commissions in accordance with the terms of an advisory agreement between ART
and BCM.

ART has no employees itself, but PWSI, a wholly-owned food service
subsidiary of ART, has approximately 840 employees as of April 1, 1998.
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.

12
<PAGE> 18
THE BUSINESS OF ART

GENERAL

ART, a Georgia corporation, is the successor to a District of Columbia
business trust. ART elected to be treated as a REIT under Sections 856 through
860 of the Code, during the period July 1, 1987 through December 31, 1990. ART
allowed its REIT tax status to lapse in 1991.

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. The ART Board 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 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. ART's
governing documents do not contain any limitation on the amount or percentage
of indebtedness ART may incur.
ART, through PWSI, also operates and franchises pizza parlors
featuring pizza delivery, carry-out and dine-in under the trademark "Me-N-Ed's"
in California and Texas. The first Me-N-Ed's pizza parlor opened in 1962. At
December 31, 1997, there were 54 Me-N-Ed's pizza parlors in operation,
consisting of 48 owned and 6 franchised pizza parlors, 6 of the owned pizza
parlors were in Texas and the remainder in California.

ART's businesses are not seasonal. With regard to real estate
investments, ART is 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 income producing real estate such as apartment
complexes and commercial properties 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
developed, partially developed and undeveloped land where it can obtain
financing of substantially all of a property's purchase price. ART 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. ART intends to continue to service and hold for investment its
mortgage notes. ART also intends to pursue its rights vigorously with respect
to mortgage notes receivable that are in default.

ART 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. ART 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 ART's equity
interest.

ART may repurchase or otherwise reacquire shares of Common Stock,
Special Stock (as defined under "Description of the Capital Stock of ART --
General") or other securities and may also invest in securities of other
entities engaged in real estate activities or securities of other issuers. ART
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). ART
may in the future acquire all or substantially all of the securities or assets
of real estate investment trusts, management companies or similar entities
where such investments would be consistent with its investment policies. ART
may also invest in securities of other issuers from time to time for the
purpose of exercising control. It is not intended that ART'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 ART would
divest securities before any such registration would be required.

The ART Board 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 the ART Board without the approval of ART's

13
<PAGE> 19
shareholders. See "Risk Factors -- Risks Relating to ART's Business -- Changes
in ART's Policies Without Stockholder Approval."

To the extent that the ART Board determines to seek additional
capital, ART may raise such capital through additional equity offerings, debt
financing or retention of cash flow, or a combination of these methods. If the
ART Board 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 shares of Common
Stock and may include additional series of Special Stock (which may be
convertible into Common Stock). Existing stockholders of ART will have no
preemptive right to purchase shares in any subsequent offering of securities by
ART, and any such offering could cause a dilution of a stockholder's investment
in ART.

To the extent that the ART Board determines to obtain additional debt
financing, ART intends to do so generally through mortgages on properties.
Such mortgages may be recourse, non-recourse or cross-collateralized. ART 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. ART 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 ART or any
existing or new property-owning entity in which ART holds an interest and may
have full or limited recourse to all or any portion of the assets of ART, or
any such existing or new property-owning entity.

ART 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. ART also may
determine to finance acquisitions through the exchange of properties or
issuance of additional Preferred Stock, Common Stock, Special Stock or other
securities.

ART has made and may in the future make loans to joint ventures or
other entities in which it participates. ART does not intend to engage in (i)
trading, underwriting or agency distribution or sale of securities of other
issuers and (ii) the active trade of loans and investments, other than in
connection with acquisitions of additional interests in CMET, IORI, TCI and
NRLP.

Except as required under the Exchange Act and the rules and
regulations of the New York Stock Exchange, ART is not required to make annual
or other reports to its securityholders. In addition, the NYSE requires that
ART publish at least once a year and submit to securityholders an annual report
containing financial statements of ART and its subsidiaries prepared in
conformity with generally accepted accounting principles.

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

GEOGRAPHIC REGIONS

For purposes of its investments, ART 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.
As of December 31, 1997, ART had no properties in this region.

14
<PAGE> 20
Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia.
As of December 31, 1997, ART had two hotels in this region.

Southwest region comprised of the states of Arizona, Arkansas,
Louisiana, New Mexico, Oklahoma and Texas. As of December 31, 1997,
ART had two commercial properties in this region.

Midwest region comprised of the states of Illinois, Indiana, Iowa,
Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North
Dakota, Ohio, South Dakota, West Virginia and Wisconsin. As of
December 31, 1997, ART had one commercial property and one hotel in
this region.

Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. As of December 31, 1997, ART had two
commercial properties and one hotel in this region.

Pacific region comprised of the states of California, Oregon and
Washington. As of December 31, 1997, ART had four hotels in this
region.

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

REAL ESTATE

At December 31, 1997, approximately 80% of ART's assets were invested
in real estate and the equity securities of real estate entities. ART has
invested in real estate located throughout the continental United States,
either on a leveraged or nonleveraged basis. ART'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. ART'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. ART may acquire properties subject to or assume existing
debt and may mortgage, pledge or otherwise obtain financing for its properties.
The ART Board may alter the types of and criteria for selecting new real estate
investments and for obtaining financing without a vote of ART's stockholders.

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

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

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

The following table sets forth the percentages, by property type and
geographic region, of ART's owned real estate (excluding the 42 parcels of
developed, partially developed and undeveloped land, and a single family
residence, described below) at December 31, 1997.

15
<PAGE> 21
<TABLE>
<CAPTION>
Region Commercial Properties Hotels
------ --------------------- ------
<S> <C> <C>
Midwest 9% 14%
Mountain 82 11
Pacific -- 46
Southwest 9 --
Southeast -- 29
--- ---
100% 100%
</TABLE>

The foregoing table is based solely on the commercial square footage and
hotel rooms owned by ART, and does not reflect the value of ART's investment in
each region. Excluded from the above table are a single family residence in
Dallas, Texas and 42 parcels of developed, partially developed and undeveloped
land consisting of: one developed residential lot in a residential subdivision
in Fort Worth, Texas, two parcels of partially developed land in Las Colinas,
Texas, totaling 59.2 acres; 3.5 acres of undeveloped land in downtown Atlanta,
Georgia; 410.7 acres of partially developed land in Denver, Colorado; 2 parcels
of partially developed land in Dallas County, Texas, totaling 290.4 acres; 78.4
acres of partially developed land in Lewisville, Texas; 2 parcels of partially
developed land in Irving, Texas, totaling 335.2 acres; 420.0 acres of
undeveloped land in Duchense, Utah; 82.4 acres of undeveloped land in
Oceanside, California; 3 parcels of undeveloped land in Tarrant County, Texas,
totaling 1,373.6 acres; 130.6 acres of undeveloped land in Harris County,
Texas; 9 parcels of undeveloped land in Collin County, Texas, totaling 638.2
acres; 6 parcels of undeveloped land in Farmers Branch, Texas, totaling 88.6
acres; 2 parcels of undeveloped land in Plano, Texas, totaling 352.2 acres;
1,448 acres of undeveloped land in Austin, Texas; 315.2 acres of undeveloped
land in Palm Desert, California; 20.6 acres of undeveloped land in Santa
Clarita, California; and 7 additional parcels of land totaling approximately
114.5 acres.

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

<TABLE>
<S> <C>
Owned properties in real estate portfolio at January 1, 1997 26*
Properties purchased . . . . . . . . . . . . . . . . . . . 32
Property obtained through foreclosure . . . . . . . . . . . 1
Properties sold . . . . . . . . . . . . . . . . . . . . . . (3)
--

Owned properties in real estate portfolio at
December 31, 1997 . . . . . . . . . . . . . . . . . . . . 56*
==
</TABLE>

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

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

PROPERTIES HELD FOR INVESTMENT. Set forth below are ART's properties
held for investment and the average annual rental rate per square foot for
commercial properties and the average daily room rate for hotels and occupancy
at December 31, 1997, 1996, 1995, 1994 and 1993 for commercial properties and
average occupancy during such periods for hotels:

16
<PAGE> 22
<TABLE>
<CAPTION>
Average Annual Rental Per Square Foot
or Average Room Rate
------------------------------------------------
Square
Property Location Footage/Rooms 1997 1996 1995 1994 1993
-------- -------- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Office Building:
---------------
Rosedale Towers Minneapolis, MN 84,798 Sq. Ft. $15.03 $14.88 $13.16 $14.46 $14.00

Shopping Centers:
----------------
Collection Denver, CO 267,812 Sq. Ft. 9.46 * * * *
Oak Tree Village Lubbock, TX 45,623 Sq. Ft. 8.17 7.98 7.34 * *
Preston Square Dallas, TX 35,508 Sq. Ft. 15.26 * * * *

Merchandise Mart:
----------------
Denver Mart Denver, CO 509,008 Sq. Ft. 14.75 15.33 14.53 14.18 *

Hotels:
------
Best Western Virginia Beach, VA 110 Rooms 90.44 41.11 * * *
Oceanside
Inn at the Mart Denver, CO 161 Rooms 53.15 46.66 44.69 42.38 *
Kansas City
Holiday Inn Kansas City, MO 196 Rooms 70.73 66.46 61.66 52.47 *
Piccadilly Airport Fresno, CA 185 Rooms 62.98 * * * *
Piccadilly Chateau Fresno, CA 78 Rooms 50.86 * * * *
Piccadilly Shaw Fresno, CA 194 Rooms 64.07 * * * *
Piccadilly University Fresno, CA 190 Rooms 62.22 * * * *
Williamsburg
Hospitality House Williamsburg, VA 296 Rooms 81.87 * * * *
</TABLE>

* Property was acquired in 1995, 1996 or 1997.

17
<PAGE> 23
<TABLE>
<CAPTION>
Occupancy
---------------------------------

Property 1997 1996 1995 1994 1993
-------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Office Building:
---------------
Rosedale Towers 93% 91% 90% 94% 92%

Shopping Centers:
----------------
Collection 82% * * * *
Oak Tree Village 90% 89% 91% * *
Preston Square 92% * * * *

Merchandise Mart:
----------------
Denver Mart 93% 95% 96% 97% *

Hotels:
------
Best Western 60% 42% * * *
Oceanside
Inn at the Mart 53% 36% 40% 42% *
Kansas City
Holiday Inn 77% 79% 75% 75% *
Piccadilly Airport 50% * * * *
Piccadilly Chateau 49% * * * *
Piccadilly Shaw 62% * * * *
Piccadilly University 49% * * * *
Williamsburg
Hospitality House 60% * * * *
</TABLE>

* Property was acquired in 1995, 1996 or 1997.

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

As of December 31, 1997, none of ART's properties had a book value
which exceeded 10% of ART's total assets. For the year ended December 31,
1997, the revenues of the Denver Merchandise Mart and the Kansas City Holiday
Inn exceeded 10% of ART's total revenues.

18
<PAGE> 24
Denver Merchandise Mart. The Denver Merchandise Mart is a wholesale
trade mart located in Denver, Colorado. No tenant occupies 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 following table shows lease expiration information for the tenants
of the Denver Merchandise Mart at December 31, 1997:

<TABLE>
<CAPTION>
Gross 1998 % of Aggregate
Number of Leased Minimum 1998 Minimum
Leases Area Annual Annual
Year Expiring (a) (Sq. Ft.) Rent Rent
---- ------------ --------- ------------ --------
<S> <C> <C> <C> <C>
Month to Month 17 10,840 $125,772 2.5%
1998 227 130,821 2,031,948 40.8%
1999 91 61,956 1,049,532 21.1%
2000 132 105,924 1,772,508 35.6%

2001 -- -- -- --%
2002 -- -- -- --%
2003 -- -- -- --%
2004 -- -- -- --%
2005 -- -- -- --%
2006 and thereafter 1 2,278 -- --%
--- ------- ---------- -----

TOTAL 468 311,819 $4,979,760 100.0%
=== ======= ========== =====

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

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

In October 1997, ART refinanced the mortgage debt secured by the
Denver Merchandise Mart for $25.0 million. The new loan is secured by a
mortgage against the Denver Merchandise Mart. ART received net refinancing
proceeds of $10.2 million after the payoff of $14.8 million in existing
mortgage debt that was scheduled to mature in October 1997. The new loan bears
interest at 8.3% per annum, requires monthly principal and interest payments of
$198,000 and matures in October, 2012. The current principal balance of the
mortgage debt as of April 1, 1998 was $24.9 million. ART substantially
completed a renovation and expansion of the Denver Merchandise Mart in December
1997.

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

Real estate taxes are levied against the Denver Merchandise Mart for
county and township, and school tax purposes. Denver Merchandise Mart paid
$305,746 in real estate taxes in 1997. The 1997 millage rate was 8.4042/100.
ART estimates that Denver Merchandise Mart will owe approximately $312,175 in
real estate taxes in 1998. Real estate taxes are substantially reimbursed by
the tenants through real estate tax recovery billings.

19
<PAGE> 25
As of December 31, 1997, for Federal income tax purposes, ART
depreciates the Denver Merchandise Mart under the Modified Accelerated Cost
Recovery System ("MACRS") as follows:

<TABLE>
<S> <C>
Buildings:
Gross Federal Income Tax Basis $ 17,382,481
Accumulated Depreciation $ 8,762,335
Depreciation Method MACRS - Straight Line ("SL")
Depreciable Life Various

Land Improvements:
Gross Federal Income Tax Basis $ 226,112
Accumulated Depreciation $ 13,743
Depreciation Method MACRS- 150% Declining Balance ("DB")
Depreciable Life 15 years

Personal Property:
Gross Federal Income Tax Basis $ 862,309
Accumulated Depreciation $ 612,465
Depreciation Method MACRS - 200% DB
Depreciable Life Various
</TABLE>

Kansas City Holiday Inn. The Kansas City Holiday Inn is a 196 room
hotel located in Kansas City, Missouri. The first lien mortgage bears interest
at 9.45% per annum, requires monthly principal and interest payments of $45,000
and matures in November 2005. The current principal balance of the first lien
mortgage as of April 1, 1998 is $5.8 million. A second lien 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
mortgage as of April 1, 1998 is $3.2 million. ART 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
$95,981 in real estate taxes in 1997. The 1997 millage rate was 6.82/100. ART
estimates that the Kansas City Holiday Inn will owe approximately $97,900 in
real estate taxes in 1998.

As of December 31, 1997, for Federal income tax purposes, ART
depreciates the Kansas City Holiday Inn under the MACRS as follows:

<TABLE>
<S> <C>
Buildings:
Gross Federal Income Tax Basis $5,905,794
Accumulated Depreciation $ 584,428
Depreciation Method MACRS - SL
Depreciable Life 40 years

Land Improvements:
Gross Federal Income Tax Basis $ 2,330,552
Accumulated Depreciation $ 117,264
Depreciation Method MACRS- SL
Depreciable Life 40 years

Personal Property:
Not applicable
</TABLE>

In September 1997, ART foreclosed on its $8.9 million junior mortgage
note receivable secured by the Williamsburg Hospitality House, a 297 room hotel
in Williamsburg, Virginia. ART acquired the property at foreclosure subject to
a first lien mortgage of $12.0 million.

In September 1997, ART purchased The Collection, a 267,812 square foot
retail and commercial center in Denver, Colorado, for $19.5 million. ART paid
$791,000 in cash and assumed existing mortgages totaling $14.7

20
<PAGE> 26
million, and issued 400,000 shares of Preferred Stock having a liquidation
value of $10.00 per share or a total of $4.0 million. A first lien mortgage in
the amount of $14.2 million bears interest at 8.64% per annum, requires monthly
principal and interest payments of $116,000 and matures in May 2017. A second
lien mortgage in the amount of $580,000 bears interest at 7% per annum until
April 2001, 7.5% per annum from May 2001 to April 2006, and 8% per annum from
May 2006 to May 2010, requires monthly principal and interest payments of
$3,000 and matures in May 2010.

In October 1997, ART purchased, in a single transaction, four hotels
in Fresno, California, for $33.0 million, consisting of (i) Piccadilly Inn Shaw
(194 rooms), (ii) Piccadilly Inn University (190 rooms), (iii) Piccadilly Inn
Airport (185 rooms) and (iv) Chateau Inn (78 rooms). ART issued 1.6 million
shares of its Preferred Stock having a liquidation value of $10.00 per share or
a total of $16.0 million and obtained new mortgage financing of $19.8 million.
ART received net financing proceeds of $2.2 million after the payment of
various closing costs associated with the financing. The mortgage bears
interest at 8.4% per annum, requires monthly principal and interest payments of
$158,000 and matures in October 2013.

Also in October 1997, ART refinanced the Oaktree Village Shopping
Center in Lubbock, Texas, for $1.5 million. ART received no net financing
proceeds after the payoff of $1.4 million in existing mortgage debt and the
payment of various closing costs associated with the financing. The mortgage
bears interest of 8.48% per annum, requires monthly payments of principal and
interest of $18,000 and matures in November 2007.

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

Also in December 1997, ART refinanced the Inn at the Mart in Denver,
Colorado, for $4.0 million. ART received net financing proceeds of $1.4
million, after the payoff of $2.0 million in existing mortgage debt and the
payment of various closing costs associated with the financing. The mortgage
bears interest at 7.85% per annum, requires monthly payments of principal and
interest of $30,000 and matures in January 2013.

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

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<PAGE> 27
PROPERTIES HELD FOR SALE. Set forth below are ART's properties held
for sale, primarily undeveloped, partially developed and undeveloped land:

<TABLE>
<CAPTION>
Property Location Acres/Lots
- ----------------- -------------- ---------------
<S> <C> <C>
Atlanta Atlanta, GA 3.5 Acres
Bad Lands Duchense, Utah 420.0 Acres
BP Las Colinas Las Colinas, TX 10.6 Acres
Chase Oaks Plano, TX 60.5 Acres
Dalho Farmers Branch, TX 3.4 Acres
Dowdy Collin County, TX 165.0 Acres
Hollywood Casino Farmers Branch, TX 51.7 Acres

Jeffries Ranch Oceanside, CA 82.4 Acres
Kamperman Collin County, TX 29.9 Acres
Katy Road Harris County, TX 130.6 Acres
Keller Tarrant County, TX 811.8 Acres
Lacy Longhorn Farmers Branch, TX 17.1 Acres
Las Colinas I Las Colinas, TX 48.6 Acres
LBJ Dallas County, TX 10.4 Acres
Lewisville Lewisville, TX 78.5 Acres
McKinney Corners I Collin County, TX 30.4 Acres
McKinney Corners II Collin County, TX 173.9 Acres
McKinney Corners III Collin County, TX 15.5 Acres
McKinney Corners IV Collin County, TX 31.3 Acres
McKinney Corners V Collin County, TX 9.7 Acres
Palm Desert Palm Desert, CA 315.2 Acres
Pantex Collin County, TX 182.5 Acres
Parkfield Denver, CO 410.7 Acres
Pioneer Crossings Austin, TX 1,448.0 Acres
Rasor Plano, TX 291.7 Acres
Santa Clarita Santa Clarita, CA 20.6 Acres
Scout Tarrant County, TX 546.0 Acres
Stagliano Farmers Branch, TX 3.2 Acres
Thompson Farmers Branch, TX 4.0 Acres
Tomlin Farmers Branch, TX 9.2 Acres
Valley Ranch Irving, TX 335.2 Acres
Valley Ranch III Irving, TX 12.5 Acres
Valwood Dallas, TX 280.0 Acres
Vineyards Grapevine, TX 15.8 Acres
Other (8 properties) Various 114.5 Acres
</TABLE>

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

Also in January 1997, ART purchased the Scout land, a 546 acre parcel
of undeveloped land in Tarrant County, Texas, for $2.2 million. ART paid
$725,000 in cash and obtained new mortgage financing for the remaining $1.5
million of the purchase price. The mortgage bears interest at 16% per annum,
requires quarterly payments of interest only and matures in January 2000.

In February 1996, ART entered into a contract to sell a 72.5 acre
tract of the 92.6 acre parcel of BP Las Colinas land in Las Colinas, Texas, for
$12.9 million. The contract called for the sale to close in two phases. In
July 1996, ART completed the first sale. In February 1997, ART completed the
second sale of 40.2 acres for $8.0 million, of which $7.2 million was paid in
cash. Of the net cash proceeds of $6.9 million, $1.5 million was used to pay
the debt secured by the BP Las Colinas land parcel, pay a $500,000 maturity fee
to the lender, make a $1.5 million principal pay down on the loan with the same
lender, secured by the Parkfield land in Denver, Colorado, and $1.0 million was
applied as a principal pay down on the term loan secured by the Las Colinas I
land. In conjunction with the sale ART provided

22
<PAGE> 28
$800,000 in purchase money financing in the form of a six month unsecured loan.
The loan bore interest at 12% per annum, with all accrued but unpaid interest
and principal due at maturity in August 1997. ART recognized a gain of $3.4
million on such sale, deferring an additional $800,000 of gain until the
unsecured loan was paid in full. The loan was collected in full in August 1997
and the additional $800,000 gain was recognized.

In March 1997, ART purchased the Katy Road land, a 130.6 acre parcel
of undeveloped land in Harris County, Texas, for $5.6 million. ART 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 payments of interest only and matures in March 2000.

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

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

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

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

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

Further in May 1997, ART purchased the Chase Oaks land, a 60.5 acre
parcel of undeveloped land in Plano, Texas, for $4.2 million. ART paid
$200,000 in cash and obtained seller financing of the remaining $4.0 million of
the purchase price. The related mortgage note bears interest at 18% per annum,
requires monthly payments of interest only and matures in May 2000.

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

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

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

In June 1997, ART purchased the Kamperman land, a 129.6 acre parcel of
undeveloped land in Collin County, Texas, for $5.0 million in cash. ART
simultaneously sold a 99.7 acre tract for $4.5 million in cash. ART recognized
a gain of $215,000 on the sale.

Also in June 1997, ART purchased the Keller land, an 811.8 acre parcel
of undeveloped land in Tarrant County, Texas, for $6.3 million. ART paid $2.3
million in cash and obtained new mortgage financing of $4.0 million.

23
<PAGE> 29
The related mortgage note bears interest at 12.95% per annum, requires monthly
payments of interest only and matures in June 1998.

Further in June 1997, ART purchased the McKinney Corners IV land, a
31.3 acre parcel of undeveloped land in Collin County, Texas, for $2.4 million.
ART paid $400,000 in cash and obtained new mortgage financing of $2.0 million,
as an advance under the term loan from the Las Colinas I lender. The McKinney
Corners IV land was added as additional collateral on the term loan.

In June 1997, ART purchased the Pantex land, a 182.5 acre parcel of
undeveloped land in Collin County, Texas, for $5.4 million. ART paid $900,000
in cash and obtained seller financing of the remaining $4.5 million of the
purchase price. The related mortgage note bears interest at 10.5% per annum,
requires semiannual payments of interest only and matures in December 2000.

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

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

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

Also in July 1997, ART purchased the Dowdy and McKinney Corners V
land, a total of 174.7 acres of undeveloped land in Collin County, Texas, for
$2.9 million. ART obtained new mortgage financing of $3.3 million as an
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.

Further in July 1997, ART purchased the Perkins land, a 645.4 acre
parcel of undeveloped land in Collin County, Texas, for $5.8 million. ART paid
$3.3 million in cash and assumed the existing mortgage of $2.5 million. The
related mortgage note bears interest at 8.5% per annum, requires quarterly
payments of interest only and matures in March 2002.

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

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

In September 1997, ART sold the Mopac Building in St. Louis, Missouri,
for $1.0 million in cash. In accordance with the provisions of the Las Colinas
I term loan, ART applied $350,000 of the sales proceeds to pay down the term
loan in exchange for the lender's release of its collateral interest in such
property. ART recognized a gain of $481,000 on the sale.

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

24
<PAGE> 30
Further in September 1997, ART sold three tracts of Valley Ranch land
totaling 24.0 acres for $1.6 million in cash. The net cash proceeds of $1.2
million were deposited in a certificate of deposit for the benefit of the
lender, in accordance with the term loan secured by such land. The
certificate of deposit was released to the lender in December 1997, in
conjunction with the payoff of the loan. ART recognized a gain of $567,000 on
the sale.

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

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

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

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

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

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

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

In October 1997, a newly formed partnership, of which ART is the 1%
general partner and Class B limited partner, purchased the Vineyards land, a
15.8 acre parcel of undeveloped land in Tarrant County, Texas, for $4.5
million. The partnership paid $800,000 in cash, assumed $2.5 million of
existing mortgage debt and issued to the seller 1.1 million Class A limited
partner units with an agreed value of $1.00 per unit. The Class A limited
partner is entitled to a fixed annual preferred return of 10% per annum paid
quarterly. The Class A units may be exchanged for either shares of ART's
Series G Cumulative Convertible Preferred Stock ("SERIES G PREFERRED STOCK") on
or after the second anniversary of the closing date at a rate of one share of
Series G Preferred Stock for each 100 Class A units exchanged or Common Stock
only on or after the third anniversary of the closing date. The Class A units
are exchangeable for Common Stock at a rate of $1.00 per unit plus any
outstanding preferred return divided by 0.9 times the simple average of the
daily closing price of the Common Stock for the 20 business days preceding the
date of conversion. The assumed mortgage bears interest at 12.95% per annum,
requires quarterly payments of interest only and matures in June 1998.

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

25
<PAGE> 31
Further in October 1997, ART sold an 11.6 acre tract of Valley Ranch
land for $1.2 million in cash. The net cash proceeds of $990,000, after the
payment of various closing costs associated with the sale, were deposited in a
certificate of deposit for the benefit of the lender, in accordance with the
term loan secured by such land. The certificate of deposit was released to
lender in December 1997, in conjunction with the payoff of the loan. ART
recognized a gain of $629,000 on the sale.

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

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

Further in November 1997, ART obtained mortgage financing of $5.4
million secured by 33.9 acres of previously unencumbered Valwood land, Lacy
Longhorn land, Thompson land, and Tomlin land. ART received net financing
proceeds of $4.8 million after the payment of various closing costs associated
with the financing. The mortgage bears interest at 13.5% per annum, requires
monthly payments of principal and interest and matures in November 2007.

In December 1997, ART sold a 5.1 acre tract of the Valley Ranch land,
for $430,000 in cash. The net cash proceeds of $353,000, after the payment of
various closing costs associated with the sale, were deposited in a certificate
of deposit for the benefit of the lender, in accordance with the term loan
secured by such land. The certificate of deposit was released to lender in
December 1997, in conjunction with the payoff of the loan. ART recognized a
gain of $203,000 on the sale.

Also in December 1997, ART purchased the Valley Ranch III land, a 12.5
acre parcel of undeveloped land in Irving, Texas, for $2.1 million. ART paid
$527,000 in cash and obtained seller financing of the remaining $1.6 million of
the purchase price. The financing bears interest at 10.0% per annum, requires
the payment of principal and interest at maturity and matures in December 1998.

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

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

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

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

26
<PAGE> 32
In December 1997, ART sold the Pin Oak land, a 567.6 acre parcel of
undeveloped land in Houston, Texas, for $11.4 million. ART received net cash
proceeds of $3.5 million, and provided an additional $6.9 million in short term
purchase money financing that was paid in full in January 1998. On the payoff
of the purchase money financing ART received net cash of $1.5 million after the
payoff of $5.2 million in underlying mortgage debt and the payment of various
closing costs associated with the sale. ART recognized a gain of $3.7 million
on the sale.

In 1991, ART 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, nine
additional lots were sold for an aggregate gain of $17,000. At December 31,
1997, one lot remained to be sold.

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

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

Also in January 1998, ART purchased the Valley Ranch IV land, a 12.3
acre parcel of undeveloped land in Irving, Texas, for $2.0 million. ART paid
$500,000 in cash and obtained seller financing of the remaining $1.5 million of
the purchase price. The financing bears interest at 10% per annum, requires
quarterly payments of interest only and matures in December 2000.

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

In February 1998, ART purchased the Scoggins land, a 314.5 acre parcel
of undeveloped land in Tarrant County, Texas, for $3.0 million. ART paid $1.5
million in cash and obtained new mortgage financing of $1.5 million. The
mortgage bears interest at 14% per annum, requires quarterly payments of
interest only, requires a principal pay down of $300,000 in May 1998, and
matures in February 1999.

Also in February 1998, ART purchased the Bonneau land, an 8.4 acre
parcel of undeveloped land in Dallas County, Texas, for $1.0 million. ART
obtained new mortgage financing of $1.0 million. The mortgage bears interest
at 18.5% per annum with principal and interest due at the maturity in February
1999. ART's JHL Connell land is pledged as additional collateral for this
loan.

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

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

Also in February 1998, ART financed its unencumbered Valley Ranch land
for $4.3 million. ART received net financing proceeds of $4.1 million after
the payment of various closing costs associated with the financing. The
mortgage bears interest at 9.0% per annum, requires monthly payments of
interest only and matures in February 2000.

In March 1998, ART financed its unencumbered Stagliano and Dalho land
for $800,000 with the lender on the Bonneau land, described above. The
mortgage bears interest at 18.5% per annum with principal and interest due at
maturity in February 1999. ART's JHL Connell land is also pledged as
additional collateral for this loan.

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<PAGE> 33
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. 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.

MORTGAGE LOANS

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

TYPES OF MORTGAGE ACTIVITY. In addition to originating its own
mortgage loans, ART 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, an affiliate of the Company,
services ART's mortgage notes receivable.

TYPES OF PROPERTIES SUBJECT TO MORTGAGES. The types of properties
securing ART's mortgage notes receivable portfolio at December 31, 1997
consisted of office buildings, apartment complexes, shopping centers,
single-family residences, hotels and developed land. The ART Board may alter
the types of properties subject to mortgages in which ART invests without a
vote of ART's stockholders.

At December 31, 1997, the obligors on $1.3 million or 4% of ART's
mortgage notes receivable portfolio were affiliates of ART. Also at that date,
$23.2 million or 71% of ART's mortgage notes receivable portfolio was in
default.

The following table sets forth the percentages (based on the
outstanding mortgage note balance at December 31, 1997), by both property type
and geographic region, of the properties that serve as collateral for ART's
mortgage notes receivable at December 31, 1997.

<TABLE>
<CAPTION>
Commercial
Region Apartments Properties Total
------ ---------- ---------- -----
<S> <C> <C> <C>
Mountain . . . . . . . . . -- 71.3% 71.3%
Southeast . . . . . . . . . .2% .3 .5
Southwest . . . . . . . . . 4.3 23.9 28.2
--------- --------- ---------
4.5% 95.5% 100.0%
========= ========= =========
</TABLE>

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

<TABLE>
<S> <C>
Loans in mortgage notes receivable portfolio
at January 1, 1997 . . . . . . . 13*
Loans funded . . . . . . . . . . . . 4
Loans paid in full . . . . . . . . . (3)
Loans sold . . . . . . . . . . . . . (2)
Loan foreclosed . . . . . . . . . . (1)

---
Loans in mortgage notes receivable portfolio
at December 31, 1997 . . . . . . 11*
</TABLE>

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

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

During 1997, ART collected $2.6 million in interest and $4.5 million
in principal on its mortgage notes receivable and sold two mortgage notes
receivable for a total of $17.0 million. ART plans, for the foreseeable
future,

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<PAGE> 34
to hold, to the extent its liquidity permits, rather than to sell in the
secondary market, the remainder of the mortgage notes in its portfolio.

First Mortgage Loans. ART 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
ART's general policy to require that the borrower provide a mortgagee's title
policy or an acceptable legal opinion of title as to the validity and the
priority of the mortgage lien over all other obligations, except liens arising
from unpaid property taxes and other exceptions normally allowed by first
mortgage lenders in the relevant area. ART may grant to other lenders
participations in first mortgage loans originated by ART.

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

The borrower on a $1.7 million mortgage note receivable secured by
land in Osceola, Florida, failed to pay the note on its November 1, 1993
maturity. ART instituted foreclosure proceedings and was awarded summary
judgment in January 1994. During 1994 and 1995, the borrower paid ART 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
ART to proceed with foreclosure. The note had a principal balance of $1.6
million at December 31, 1996. On February 21, 1997, ART sold its note for $1.8
million in cash. ART recognized a gain of approximately $171,000 on the sale.

WRAPAROUND MORTGAGE LOANS. ART 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. ART'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 1997.

In August 1990, ART obtained the Continental Hotel and Casino in Las
Vegas, Nevada, through foreclosure, subject to first and second lien mortgages
totaling $10.0 million. In June 1992, ART sold the hotel and casino for, among
other consideration, a $22.0 million wraparound mortgage note receivable. In
March 1997, the wraparound note was modified and extended in exchange for,
among other things, the borrower's commitment to invest $2.0 million in
improvements to the hotel and casino within four months of the March 1997
modification and an additional $2.0 million prior to December 1997. The
borrower has not made the required mortgage payments since April 1997, nor the
required improvements . In December 1997, the borrower filed for bankruptcy
protection. In February 1998, a hearing was held to allow ART to foreclose on
the hotel and casino. At the hearing, the court allowed the borrower 90 days
to submit a reorganization plan and beginning March 2, 1998 required the
borrower to make monthly payments of $175,000 to ART. ART received the first
such payment on March 2, 1998. The borrower failed to make the April payment
so ART foreclosed. ART incurred no loss on foreclosure as the fair market
value of the property exceeded the carrying value of ART's note receivable.

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

JUNIOR MORTGAGE LOANS. ART 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.

29
<PAGE> 35
The following discussion briefly describes the junior mortgage loans
funded in 1997 and the events that affected previously funded junior mortgage
notes during 1997.

At December 31, 1996, ART held 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. In September 1997, ART
foreclosed on its $8.9 million junior mortgage note receivable. ART obtained
the property at foreclosure subject to a first lien mortgage of $12.0 million.
ART incurred no loss on foreclosure as the fair value of the property exceeded
the carrying value of its mortgage note receivable and assumed mortgage debt.

In May 1997, the $3.7 million mortgage note receivable secured by an
apartment complex in Merrillville, Indiana, owned by a subsidiary of Davister
Corp., a general partner in a partnership that owns approximately 15.6% of
ART's outstanding shares of Common Stock was paid in full.

INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS AND REAL ESTATE PARTNERSHIPS

ART's investment in real estate entities includes (i) equity
securities of three publicly traded real estate investment trusts (collectively
the "AFFILIATED 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 ART until November 16, 1992,
served until May 15, 1996 as a director and Chief Executive Officer of SAMI, a
company owned by BCM, an affiliate of ART, that serves as SAMLP's managing
general partner. Randall M. Paulson, Executive Vice President of ART, serves
as the sole director and as President of SAMI. Gene E. Phillips is also a
general partner of SAMLP. BCM, ART's advisor, serves as advisor to the
Affiliated 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 Affiliated REITs and NRLP in 1989, ART has made additional investments in
the equity securities of these entities through private and open market
purchases. ART's cost with respect to shares of the Affiliated REITs at
December 31, 1997 totaled $21.6 million, and its cost with respect to units of
limited partner interest in NRLP totaled $23.3 million. The aggregate carrying
value (cost plus or minus equity in income or losses and less distributions
received) of such equity securities of the Affiliated REITs and NRLP was $38.3
million at December 31, 1997 and the aggregate market value of such equity
securities was $134.6 million. The aggregate investee book value of the equity
securities of the Affiliated REITs based upon the December 31, 1997 financial
statements of each such entity was $69.8 million and ART's share of NRLP's
revaluation equity at December 31, 1997 was $198.9 million.

The ART Board has authorized the expenditure by ART of up to an
aggregate of $35.0 million to acquire, in open market purchases, units of NRLP
and shares of the Affiliated REITs, excluding private purchase transactions
which were separately authorized. As of December 31, 1997, ART had expended
$4.0 million to acquire units of NRLP and an aggregate of $5.6 million to
acquire shares of the Affiliated REITs, in open market purchases, in accordance
with these authorizations. ART expects to make additional investments in the
equity securities of the Affiliated REITs and NRLP.

At December 31, 1997, SAMLP, the general partner of NRLP and NOLP,
owned 26,475 shares of TCI. ART owns a 96% limited partnership interest in
SAMLP which ART consolidates for financial statement purposes.

The purchases of the equity securities of the Affiliated REITs and
NRLP were made for the purpose of investment and were based principally on the
opinion of ART's management that the equity securities of each were and are
currently undervalued. The determination by ART to purchase additional equity
securities of the Affiliated 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 ART's management regarding the relative attractiveness of
alternative investment opportunities. Substantially all of the equity
securities of the Affiliated REITs and NRLP owned by ART are pledged as
collateral for borrowings. Pertinent information regarding ART's investment in
the equity securities of the Affiliated REITs and NRLP, at December 31, 1997,
is summarized below (dollars in thousands):

30
<PAGE> 36
<TABLE>
<CAPTION>
Percentage of ART's Carrying Value of Equivalent Investee Market Value of
Ownership at Investment at Book Value at Investment at
Investee December 31, 1997 December 31, 1997 December 31, 1997 December 31, 1997
-------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
NRLP . . . . . . 54.4% $ 11,479 $ * $ 83,018
CMET . . . . . . 40.6 14,939 35,745 25,733
IORI . . . . . . 29.7 3,511 7,439 5,176
TCI . . . . . . . 30.6 8,378 26,652 20,664
---------- ----------
Total . . . . . . $ 38,307 $134,591
======== ========
</TABLE>
- ---------------
* At December 31, 1997, NRLP reported a deficit partners' capital.
ART's share of NRLP's revaluation equity at December 31, 1997,
however, was $198.9 million. Revaluation equity is defined as the
difference between the appraised value of the partnership's real
estate, adjusted to reflect the partnership's estimate of disposition
costs, and the amount of the mortgage notes payable and accrued
interest encumbering such property as reported in NRLP's Annual Report
on Form 10-K for the year ended December 31, 1997.

Each of the Affiliated 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. ART's reported income or loss
attributable to these entities will differ materially from its cash flow
attributable to them. ART does not have a controlling equity interest in any
of the Affiliated REITs and therefore it cannot, acting by itself, determine
either the individual investments or the overall investment policies of such
investees. However, due to ART's equity investments in, and the existence of
common officers with, each of the Affiliated REITs, and that the Affiliated
REITs have the same advisor as ART and that Mr. Randall M. Paulson, an
Executive Vice President of ART, is also the President of each of the
Affiliated REITs and BCM, ART's advisor, and is the President and sole director
of SAMI, a company owned by BCM, that is the managing general partner of SAMLP,
ART may be considered to have the ability to exercise significant influence
over the operating and investing policies of these entities. ART accounts for
its investment in these entities using the equity method. Under the equity
method, ART 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. ART 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
ART's investment in these entities, as set forth in the table above, is the
original cost of each such investment adjusted for ART'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
Affiliated REITs, based upon information publicly reported by such entities.

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

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

ART is a limited partner in SAMLP, holding a 96% limited partner
interest therein, which ART consolidates for financial statement purposes.

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

31
<PAGE> 37
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, 1997, the aggregate loan-to-value ratio of the
Partnership's real estate portfolio was 43.4% computed on the basis of the
ratio of total property-related debt to aggregate appraised values. As of
December 31, 1997 NRLP owned 79 properties located in 22 states. These
properties consisted of 66 apartment complexes comprising 16,538 units, five
office buildings with an aggregate 367,271 square feet and eight shopping
centers with an aggregate of 1.1 million square feet.

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

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

The Partnership, SAMLP and Gene E. Phillips, were among the defendants
in a class action lawsuit arising out of the formation of the Partnership. An
agreement settling such lawsuit as to the above named defendants, (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 the Partnership (the "NRLP OVERSIGHT COMMITTEE"); the
establishment of specified annually increasing targets for a five-year period
relating to the price of NRLP units of limited partner interest; 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; and the
contribution by certain co-defendants of cash and notes payable to the
Partnership aggregating $5.5 million including a $2.5 million contributed by
SAMLP. The Partnership also agreed to pay certain settlement costs, including
plaintiffs' attorneys' fees in the amount of $3.4 million. The settlement plan
remains in effect until the withdrawal of SAMLP as general partner of NRLP and
NOLP.

The Moorman Settlement Agreement provides for the resignation and
replacement of SAMLP as general partner if the 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 to meet the unit price targets for two
successive years and that it expected 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 $49.6 million at December 31, 1997 before
reduction for the principal balance ($4.2 million at December 31, 1997) and
accrued interest ($7.2 million at December 31, 1997) on the note receivable
from SAMLP for its original capital contribution to the Partnership.

In January 1995, NRLP, SAMLP, William H. Elliott and the NRLP
Oversight Committee executed an Implementation Agreement which provided for the
nomination of an entity controlled by Mr. Elliott as successor general partner
and for the resolution of all related matters under the Moorman Settlement
Agreement. In February 1996, the parties to the Implementation Agreement
executed an 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. In
April 1997, the Supervising Judge entered an order setting a hearing on the
Amended and Restated Implementation Agreement for June 1997. A notice was sent
to all class members and NRLP unitholders in April 1997 and the hearing was
held in June 1997. On September 8, 1997, the Supervising Judge rendered a
Statement of Decision in which he declined to approve the Amended and

32
<PAGE> 38
Restated Implementation Agreement. As a result of the Statement of Decision,
the Moorman Settlement Agreement remains in full force and effect and all of
the provisions of the Amended and Restated Implementation Agreement have been
voided.

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

The Resolution Agreement was submitted to the Supervising Judge and on
February 11, 1998, the Supervising Judge entered an order granting preliminary
approval of the Resolution Agreement and scheduled a hearing to be held on June
8, 1998, for consideration of preliminary approval of a business plan for the
operation of the entity which will receive the cash and properties and to
consider a form of notice to be distributed to the plaintiff class members
describing the Resolution Agreement and the business plan.

Upon final approval by the Supervising Judge, the proposal to elect
the successor general partner will be submitted to the NRLP unitholders for a
vote.

Upon approval by the NRLP unitholders, SAMLP shall withdraw as general
partner and the successor general partner shall take office. If the required
approvals are obtained, it is anticipated that the successor general partner
will be elected and take office during the third quarter of 1998.

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

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

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

In September 1997, one of the original class action defendants, Robert
A. McNeil filed motions to (i) be installed as receiver for the Partnership,
and (ii) disband the NRLP Oversight Committee. A hearing on the motions has
been set for June 8, 1998.

CMET. CMET is a California business trust which was organized on
August 27, 1980 and commenced operations on December 3, 1980. CMET's primary
business is investing in real estate through direct equity investments and
partnerships and financing real estate and real estate related activities
through investments in mortgage notes. CMET holds equity investments in
apartment complexes and commercial properties (office buildings, industrial
warehouses and shopping centers) throughout the continental United States.
CMET's apartment complexes and commercial properties are concentrated in the
Southeast, Southwest and Midwest regions of the continental United States. At
December 31, 1997, CMET owned 57 income producing properties located in 14
states consisting of 34 apartment complexes comprising of 6,173 units, ten
office buildings with an aggregate of 1.2 million square feet, 11 industrial
warehouses with an aggregate of 1.6 million square feet and two shopping
centers with an aggregate of 247,196 square feet. CMET also holds mortgage
notes receivable secured by real estate located in the Southeast, Southwest and
Midwest regions of the continental United States, with a concentration in the
Southeast and Southwest regions.

For the year ended December 31, 1997, CMET reported net income of $4.2
million as compared with net income of $8.7 million for the year ended December
31, 1996. CMET's 1997 net income includes gains on the sale of real estate of
$8.2 million, whereas its 1996 net income included gains on the sale of real
estate and marketable equity securities of $10.1 million and an extraordinary
gain of $812,000. CMET's cash flow from property operations

33
<PAGE> 39
improved from $19.3 million in 1996 to $23.7 million in 1997. At December 31,
1997, CMET had total assets of $299.4 million, which consisted of $250.1
million of real estate held for investment, $11.6 million of real estate held
for sale, $3.6 million of notes and interest receivable, $31.0 million of
investments in partnerships and other assets and $3.1 million in cash and cash
equivalents.

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

IORI. IORI is a Nevada corporation which was originally organized on
December 14, 1984 as a California business trust and commenced operations on
April 10, 1985. Like CMET, IORI's primary business is investing in real estate
through direct equity investments and partnerships and financing real estate
and real estate related activities through investments in mortgage notes. IORI
holds equity investments in apartment complexes and commercial properties
(office buildings) in the Pacific, Southeast, Southwest, and Midwest regions of
the continental United States. IORI holds one mortgage note receivable which is
secured by a shopping center in the Midwest region. At December 31, 1997, IORI
owned 14 income producing properties located in five states. These properties
consisted of four apartment complexes comprising 654 units and ten office
buildings with an aggregate of 611,009 square feet.

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

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

TCI. TCI is a Nevada corporation which was originally organized on
September 6, 1983, as a California business trust, and commenced operations on
January 31, 1984. TCI also has investment policies similar to those of CMET and
IORI. TCI holds equity investments in a hotel, apartment complexes and
commercial properties (office buildings, industrial warehouses and shopping
centers) throughout the continental United States with a concentration in the
Northeast, Southeast and Southwest regions. At December 31, 1997, TCI owned 56
income producing properties located in 14 states. These properties consisted
of 28 apartment complexes comprising 5,174 units, 14 office buildings with an
aggregate of 1.3 million square feet, 7 industrial warehouses with an aggregate
of 1.7 million square feet, 6 shopping centers with an aggregate of 857,750
square feet and one hotel with 60 rooms. TCI also holds mortgage notes
receivable secured by real estate located in the Northeast, Midwest, Southeast
and Southwest regions of the continental United States, with a concentration in
the Northeast and Southeast regions.

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

TCI has paid quarterly dividends since the fourth quarter of 1995. ART
received $333,000 in dividends from TCI in 1997.

SAMLP. As discussed in more detail under "Real Estate" above, ART
owns a 96% limited partner interest in SAMLP. ART consolidates SAMLP for
financial statement purposes. As a limited partner, ART has no role in the
management of the business affairs of SAMLP. Rather, SAMI, the managing general
partner of SAMLP, has full and complete authority to manage SAMLP.

34
<PAGE> 40
RIVER TRAILS II. In January 1992, ART entered into a partnership
agreement with an entity affiliated with a limited partner in a partnership
that owns approximately 15.6% of ART's outstanding shares of Common Stock, to
acquire 287 developed residential lots adjacent to ART's other residential lots
in Fort Worth, Texas. The partnership agreement designates ART as managing
general partner. The partnership agreement also provides each of the partners
with a guaranteed 10% return on their respective investments. Through December
31, 1996, 197 residential lots had been sold. In 1997, an additional 17 lots
were sold and at December 31, 1997, 73 lots remained to be sold. During 1997,
each partner received $21,000 in return of capital distributions from the
partnership and $12,000 in profit distributions.

R. G. BOND, LTD. In June 1995, ART 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, ART 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 and matures April
2000. In January 1997, ART 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 and matures in April 2000. In
addition, in July 1997, ART exercised its option to purchase an additional 9%
general partner interest in Campbell Center Associates, Ltd. for $868,000 in
cash.

HIGHWAY 380/PRESTON PARTNERS, LTD. In June 1996, a newly formed
limited partnership, of which ART is 1% general partner, purchased 580 acres of
undeveloped land in Collin County, Texas for $5.7 million in cash. ART
contributed $100,000 in cash to the partnership with the remaining $5.6 million
being contributed by the limited partner. The partnership agreement designates
ART 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 bore interest at a
variable rate, required monthly payments of interest only and matured 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 a
35.0 acre tract for $1.3 million in cash. The net sales proceeds of $1.2
million were distributed to the limited partner in accordance with the
partnership agreement. The partnership recognized a gain of $884,000 on the
sale. In July 1997, the partnership sold a 24.6 acre tract for $800,000 in
cash. In accordance with the terms of the term loan secured by such property,
$197,000 of the net sales proceeds were used to pay down such term loan. The
remaining $545,000 was distributed to the limited partner in accordance with
the partnership agreement. The partnership recognized a gain of approximately
$497,000 on the sale. In September 1997, the partnership sold a 77.2 acre
tract for $1.5 million in cash. In accordance with the terms of the term loan
secured by such property, the net sales proceeds were used to pay down such
loan. The partnership recognized a gain of $704,000 on the sale. In October
1997, the partnership sold a 96.5 acre tract for $1.7 million in cash. In
accordance with the terms of the term loan secured by such property $548,000 of
the net sales proceeds were used to payoff such loan. The remaining $1.1
million was distributed to the limited partner in accordance with the
partnership agreement. The partnership recognized a gain of $691,000 on the
sale. In December 1997, the partnership sold a 94.4 acre tract for $2.5
million in cash. Of the net sales proceeds, $1.8 million was distributed to
the limited partner and $572,000 was distributed to ART as general partner in
accordance with the partnership agreement. The partnership recognized a gain
of $1.4 million on the sale. In January 1998, the partnership sold a 155.4
acre tract for $2.9 million. The partnership received $721,000 in cash and
provided purchase money financing of an additional $2.2 million. Of the net
sales proceeds, $300,000 was distributed to the limited partner and $300,000
was distributed to ART as general partner in accordance with the partnership
agreement. The purchase money financing bears interest at 12% per annum,
requires monthly payments of interest only and matures in July 1998. The
partnership recognized a gain of $1.2 million on the sale.

ELM FORK BRANCH PARTNERS, LTD. In September 1997, a newly formed
limited partnership of which ART is a 1% general partner and 21.5% limited
partner, purchased a 422.4 acre parcel of undeveloped land in Denton County,
Texas, for $16.0 million in cash. ART contributed $3.6 million in cash to the
partnership with the remaining $12.4 million being contributed by the other
limited partners. The partnership agreement designates ART as the managing
general partner. In September 1997, the partnership obtained financing of $6.5
million secured by the 422.4 acres of land. The loan bears interest at 10% per
annum, requires monthly payments of interest only and matures in September

35
<PAGE> 41
2001. The net financing proceeds were distributed to the partners, ART
receiving repayment of $2.9 million of its initial investment. The partnership
agreement also provides that the limited partners receive a 12% preferred
cumulative return on their investment before any sharing of partnership profits
occurs. One of the limited partners in the partnership is also a limited
partner in a partnership that, owns approximately 15.6% of ART's outstanding
shares of Common Stock.

[Remainder of Page Intentionally Left Blank]

36
<PAGE> 42
SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ -----------

(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Revenue . . . . . . . . . . . . . $ 49,971 $ 26,979 $ 22,952 $ 23,070 $ 13,427
Expense . . . . . . . . . . . . . 83,355 38,577 28,314 26,490 18,128
------------ ------------ ------------ ------------ -----------
(Loss) from operations . . . . . (33,384) (11,598) (5,362) (3,420) (4,701)
Equity in income (losses)
of investees . . . . . . . . 10,660 2,004 (851) 292 (4,014)
Gain on sale of real estate . . . 20,296 3,659 2,594 379 481
------------ ------------ ------------ ------------ -----------
(Loss) before extraordinary
gain . . . . . . . . . . . . (2,428) (5,935) (3,619) (2,749) (8,234)
Extraordinary gain . . . . . . . - 381 783 323 3,807
------------ ------------ ------------ ------------ -----------
Net (loss) . . . . . . . . . . . (2,428) (5,554) (2,836) (2,426) (4,427)
Preferred Dividend
Requirement . . . . . . . . (206) (113) -- -- --
Redeemable Common Stock,
accretion of discount . . . -- -- -- -- (129)
------------ ------------ ------------ ------------ ------------
(Loss) applicable to
Common Shares . . . . . . . $ (2,634) $ (5,667) $ (2,836) $ (2,426) $ (4,556)
============ ============= ============ ============ ===========
PER SHARE DATA
(Loss) before extraordinary
gain . . . . . . . . . . . . $ (.22) $ (.46) $ (.31) $ (.23) $ (.68)
Extraordinary Gain . . . . . . . -- .03 .07 .03 .31
------------ ------------ ------------ ------------ -----------
Net (loss) (.22) (.43) (.24) (.20) (.37)
Redeemable Common Stock,
accretion of discount . . . -- -- -- -- (.01)
------------ ------------ ------------ ------------ -----------
(Loss) applicable to
Common shares . . . . . . . $ (.22) $ (.43) $ (.24) $ (.20) $ (.38)
============= ============= ============ ============ ===========
Dividends per share . . . . . . . $ .20 $ .15 $ -- $ -- $ --
Weighted average shares
outstanding . . . . . . . . 11,710,013 12,765,082 11,716,656 12,208,876 12,101,100
</TABLE>

<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- ---------- --------- ----------

(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Notes and interest
receivable, net . . . . . . $ 25,526 $ 48,485 $ 49,741 $ 45,664 $ 51,769
Real estate, net . . . . . . . 302,453 119,035 59,424 47,526 52,437
Total assets . . . . . . . . . 433,799 235,037 162,033 137,362 139,861
Notes and interest
payable . . . . . . . . . . 261,986 127,863 61,163 45,695 53,693
Margin borrowings . . . . . . . 53,376 40,044 34,017 26,391 16,147
Stockholders'
equity . . . . . . . . . . 63,453 47,786 53,058 55,894 56,120
Book value per
share . . . . . . . . . . . . . $ 3.53 $ 3.74 $ 4.53 $ 4.77 $ 5.56
</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.

37
<PAGE> 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

INTRODUCTION

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

LIQUIDITY AND CAPITAL RESOURCES

GENERAL. Cash and cash equivalents at December 31, 1997 aggregated
$5.3 million, compared with $1.3 million at December 31, 1996. Although the
Company anticipates that during 1998 it will generate excess cash from
operations, as discussed below, such excess cash is not sufficient to discharge
all of the Company's debt obligations as they mature. The Company will
therefore again rely on externally generated funds, including borrowings
against its investments in various real estate entities, mortgage notes
receivable, the sale or refinancing of properties and, to the extent available
and necessary, borrowings from its advisor to meet its debt service
obligations, pay taxes, interest and other non-property related expenses.

Notes payable totaling $89.0 million are scheduled to mature during
1998. The Company has the option of extending the maturity dates to April and
June 1999 of $18.3 million of that amount. The lender on an additional $19.5
million has agreed to extend the maturity date to February 2000. In January
and February 1998, the Company has also paid off $8.7 million of such maturing
debt.

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

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

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

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

The Company expects that it will be necessary for it to sell $72.6
million, $27.5 million, and $14.3 million of its land holdings during each of
the next three years, respectively, to satisfy the debt on such land as it
matures. If the Company is unable to sell at least the minimum amount of land
to satisfy the debt obligations on such land as it matures, the Company, if it
was not able to extend such debt, would either sell other of its assets to pay
such debt or return the property to the lender.

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<PAGE> 44
NOTES RECEIVABLE. Scheduled principal maturities of $31.2 million are
due in 1998 of which $23.2 million is due on nonperforming notes receivable. In
February 1997, the Company sold a nonperforming note receivable with a
principal balance at December 31, 1996 of $1.6 million for $1.8 million in
cash. In September 1997, the Company sold its $16.3 million wraparound mortgage
note receivable secured by the Las Vegas Plaza Shopping Center in Las Vegas,
Nevada, for $15.0 million. The Company received net cash of $5.5 million after
the payoff of $9.2 million in underlying debt. The Company incurred no loss on
the sale in excess of the reserve previously established. The balance of the
Company's mortgage notes receivable are due over the next one to fifteen years
and provide for "balloon" principal payments. It may be necessary for the
Company to consider extending certain notes if the borrowers do not have the
resources to repay the loans, are unable to sell the property securing such
loans, or are unable to refinance the debt owed.

In August 1990, the Company obtained the Continental Hotel and Casino
in Las Vegas, Nevada, through foreclosure subject to first and second lien
mortgages totaling $10.0 million. In June 1992, the Company sold the hotel and
casino for, among other consideration, a $22.0 million wraparound mortgage note
receivable. In March 1997, the wraparound note was modified and extended in
exchange for, among other things, the borrower's commitment to invest $2.0
million in improvements to the hotel and casino within four months of the March
1997 modification and an additional $2.0 million prior to December 1997. The
borrower has not made the required note payments since April 1997, nor the
required improvements. In December 1997, the borrower filed for bankruptcy
protection. In February 1998, a hearing was held to allow the Company to
foreclose on the hotel and casino. At the hearing, the court ruled that the
borrower had 90 days to submit a reorganization plan and beginning March 2,
1998, required the borrower to make monthly payments of $175,000 to the
Company. The Company received the first such payment on March 2, 1998. The
borrower failed to make the April payment so ART foreclosed. ART incurred no
loss as the fair value of the property exceeded the carrying value of the
Company's note receivable.

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

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

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

LOANS PAYABLE. The Company has margin arrangements with various
brokerage firms which provide for borrowings of up to 50% of the market value
of marketable equity securities. The borrowings under such margin arrangements
are secured by such equity securities and bear interest rates ranging from 7.0%
to 11.0%. Margin borrowings totaled $53.4 million (approximately 39.7% of
market value) at December 31, 1997, compared to $40.0 million at December 31,
1996.

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

In June 1997, the Company obtained a second lien mortgage of $3.0
million secured by the Lewisville land. Also in June 1997, the Company
refinanced the Valwood land for $15.8 million. The Company received net cash
of $4.9 million, after the payoff of $6.2 million in existing mortgage debt
secured by the property, an additional $3.0 million being applied to payoff the
Jeffries land loan and $1.4 million being applied to pay down the Las Colinas I
land term loan.

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

39
<PAGE> 45
In September 1997, the Company refinanced the Las Colinas I land
Double O tract for $7.3 million. The Company received net cash of $2.1
million, after the payoff of $5.0 million in existing mortgage debt.

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

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

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

In August 1996, the Company consolidated its existing National Realty,
L.P. ("NRLP") margin debt held by the various brokerage firms into a single
loan of $20.3 million. The loan is secured by the Company's NRLP units with a
market value of at least 50% of the principal balance of the loan. As of
December 31, 1997, 3,349,535 NRLP units with a market value of $80.0 million
were pledged as security for such loan. In July 1997, the lender advanced an
additional $3.7 million, increasing the loan balance to $24.0 million.

Also in August 1996, the Company obtained a $2.0 million loan from a
financial institution secured by a pledge of equity securities of the
Affiliated REITs owned by the Company and the Common Stock of the Company owned
by BCM, 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. The
loan was paid in full in December 1997, from the proceeds of a $4.0 million
loan from another financial institution also secured by a pledge of equity
securities of the Affiliated REITs owned by the Company and Common Stock of the
Company owned by BCM, with a market value of $10.4 million. The Company
received $2.0 million in net cash after the payoff of the $2.0 million loan.
In January 1998, the lender made a second loan to the Company of $2.0 million.
This second loan is secured by a pledge of Common Stock of the Company owned by
the Company's advisor with a market value of $4.7 million. The Company
received $2.0 million in net cash.

EQUITY INVESTMENTS. During the fourth quarter of 1988, the Company
began purchasing shares of the Affiliated 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 Affiliated REITs will be
acquired in the future through open-market and negotiated transactions to the
extent the Company's liquidity permits.

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

The Company's cash flow from these investments is dependent on the
ability of each of the entities to make distributions. In 1997, the Company
received total distributions from the Affiliated REITs of $1.4 million and $1.4
million from NRLP and an additional $6.7 million, which was accrued at December
31, 1997, was received in January 1998. The Company anticipates receiving
distributions totaling $2.3 million from the Affiliated REITs and $11.1 million
from NRLP in 1998, including amounts accrued at December 31, 1997.

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

The Company's management reviews the carrying values of the Company's
properties and mortgage notes receivable at least annually and whenever events
or a change in circumstances indicate that impairment may exist. Impairment is
considered to exist if, in the case of a property, the future cash flow from
the property (undiscounted and without interest) is less than the carrying
amount of the property. For notes receivable impairment is considered to exist

40
<PAGE> 46
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

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

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

Net rental income (rents less property operating expenses) increased
from $4.8 million in 1996 to $4.9 million in 1997. This increase is primarily
attributable to increased rents at the Denver Merchandise Mart and increased
room rates and occupancy at the Kansas City Holiday Inn. Net rental income is
expected to increase in 1998 from a full years operation of The Collection
Office and Retail Center, Preston Square Shopping Center, Williamsburg
Hospitality House and the four Piccadilly hotels all of which were acquired in
1997.

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

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

Interest expense increased from $16.5 million in 1996 to $30.2 million
in 1997. Of this increase, $10.8 million is due to the debt secured by the Best
Western Oceanside Hotel acquired in 1996 and the Williamsburg Hospitality
House, Piccadilly Hotels, Pin Oak land, Scout land, Katy land, McKinney land,
Lacy Longhorn land, Santa Clarita land, Chase Oaks land, Pioneer Crossing land,
Pantex land, Keller land, Perkins land, Rasor land, Dowdy land, Palm Desert
land and LBJ land acquired in 1997, $2.0 million is due to additional
borrowings and a full years interest on the loan secured by NRLP units and $1.1
million is due to refinancing the debt secured by the Kansas City Holiday Inn
and Denver Merchandise Mart. Interest expense for 1998 is expected to increase
from the continued acquisition of properties on a leveraged basis.

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

General and administrative expenses, increased from $2.7 million in
1996 to $7.0 million in 1997. The increase is attributable to a $1.1 million
increase in legal fees and travel expenses in 1997 relating to potential
acquisitions, financings and refinancings, a $1.1 million increase in advisor
cost reimbursements and $2.1 million attributable to the general and
administrative expenses of PWSI.

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

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

41
<PAGE> 47
Equity in income of investees improved from $2.0 million in 1996 to
$10.7 million in 1997. The increase in equity income is primarily attributable
to an increase of $32.1 million in gains on sale of real estate in IORI, NRLP
and TCI offset by a decrease of $1.9 million in CMET. The Company's equity
share of such gains was $13.5 million. The increase is also attributable to an
improvement in income from property operations for the Affiliated REITs and
NRLP, from increased rental rates and operating expense control.

Gains on the sale of real estate increased from $3.7 million in 1996
to $20.3 million in 1997. In 1996, the Company recognized a $2.0 million gain
on the sale of a 32.3 acre tract of BP Las Colinas land in Las Colinas, Texas,
and a $1.1 million gain on the sale of a 4.6 acre tract of Las Colinas I land
also in Las Colinas, Texas. In 1997, the Company recognized gains of $5.9
million on the sale of a 49.7 acre tract of BP Las Colinas land in Las Colinas,
Texas; $3.5 million on the sale of tracts totaling 116.8 acres of Valley Ranch
land in Irving, Texas; $2.7 million on the sale of a 12.5 acre tract of Las
Colinas I land in Las Colinas, Texas; $3.6 million on the sale of Pin Oak land
in Houston, Texas; $216,000 on the sale of a 99.7 acre tract of Kamperman land
in Collin County, Texas; $371,000 on the sale of a 32.0 acre tract of Parkfield
land in Denver, Colorado; $211,000 on the sale of a 86.5 acre tract of Rasor
land in Plano, Texas; $106,000 on the sale of Park Plaza Shopping Center in
Manitowoc, Wisconsin; $480,000 on the sale of the Mopac Building in St. Louis,
Missouri; and $172,000 on the sale of a mortgage note receivable. The Company
also recognized a previously deferred gain of $3.0 million on the sale of
Porticos Apartments.

The Company reported $381,000 in extraordinary gains in 1996 compared
to no extraordinary gains in 1997. The 1996 extraordinary gain is the Company's
share of TCI's extraordinary gain from the early payoff of debt and CMET's
extraordinary gain from an insurance settlement.

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

Net rental income (rents less property operating expenses) increased
from $4.6 million in 1995 to $4.8 million in 1996. This increase is primarily
attributable to increased rents at the Denver Merchandise Mart and increased
room rates and occupancy at the Kansas City Holiday Inn. 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.

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

Interest expense increased from $8.9 million in 1995 to $16.5 million
in 1996. The increase is primarily attributable to debt refinancings and the
debt incurred related to the purchase of six parcels of land in 1995 and 1996
and the Oaktree Shopping Center obtained in November 1995. Offsetting the
increase was a $161,000 decrease in interest expense due to the sale of an
apartment complex in February 1995.

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

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

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

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<PAGE> 48
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.

CONTINGENCIES

The Company owns a 96% limited partner interest in Syntek Asset
Management, L.P. ("SAMLP"). SAMLP is the general partner of NRLP and National
Operating, L.P. ("NOLP"), the operating partnership of NRLP. Gene E. Phillips,
a Director and Chairman of the Board of the Company until November 16, 1992, is
also a general partner of SAMLP. At December 31, 1997, the Company owned
approximately 54% of the outstanding limited partner units of NRLP.

NRLP, SAMLP and Mr. Phillips were among the defendants in a class
action lawsuit arising from the formation of NRLP. An agreement settling such
lawsuit (the "Settlement Agreement") for the above mentioned defendants became
effective on July 5, 1990. The Settlement Agreement provided for, among other
things, the appointment of an NRLP oversight committee and the establishment of
specified annually increasing targets for five years relating to the price of
NRLP's units of limited partner interest.

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

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

The Resolution Agreement was submitted to the Judge appointed to
supervise the class action settlement (the "Supervising Judge") and on February
11, 1998, the Supervising Judge entered an order granting preliminary approval
of the Resolution Agreement and scheduled a hearing to be held on June 8, 1998,
for consideration of preliminary approval of a business plan for the operation
of the entity which will receive the cash and properties and to consider a form
of notice to be distributed to the plaintiff class members describing the
Resolution Agreement and the business plan.

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<PAGE> 49
Upon the election and taking office of the successor general partner
and the transfer of the cash and properties to the fund established for the
benefit of the plaintiff class members, the Settlement Agreement and the NRLP
oversight committee shall be terminated.

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.

YEAR 2000

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

DESCRIPTION OF THE CAPITAL STOCK OF ART

GENERAL

ART is authorized by its Articles of Incorporation, as amended, to
issue up to 100,000,000 shares of Common Stock 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 ART Board from time to time. The Preferred Stock is a
series of the Special Stock.

PREFERRED STOCK

On August 13, 1997, the ART Board designated and authorized the
issuance of a total of 7,500,000 shares of 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 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 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 ART Board shall be
increased by two and the holders of 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 Preferred Stock held. ART is not obligated to maintain a sinking
fund with respect to the Preferred Stock.

The Preferred Stock is convertible, at the option of the holder, into
Common Stock 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 (as defined below), on which
an amount equal to or in excess of 5% of the $10.00 liquidation value (i.e.,
$.50 per share of Preferred Stock) is accrued and unpaid, or (iii) when ART
becomes obligated to mail a statement to the holders of record of Preferred
Stock because of a proposal by ART at any time before all of the Preferred
Stock has been redeemed by or converted into Common Stock, to merge or
consolidate with or into any other corporation (unless ART is the surviving
entity and holders of Common Stock continue to hold such

44
<PAGE> 50
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. The 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 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, ART, at its option, may elect to redeem any
Preferred Stock sought to be so converted, instead of issuing shares of Common
Stock, by paying to the holder of such Preferred Stock cash in an amount equal
to the Conversion Price for those shares of Preferred Stock so redeemed.

The Preferred Stock bears a cumulative, compounded dividend per share
equal to 10% per annum of the Adjusted Liquidation Value, payable quarterly on
the 15th day of the month following the end of each calendar quarter (each, a
"QUARTERLY DIVIDEND PAYMENT DATE"), and commencing accrual on August 16, 1998
to and including the date on which the redemption price 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 ART legally available for the payment of
such dividends. Dividends on the Preferred Stock are in preference to and with
priority over dividends upon the Common Stock. Except as provided in the
following sentence, the Preferred Stock ranks on a parity as to dividends and
upon liquidation, dissolution or winding up with all other Special Stock issued
by ART. ART will not issue any shares of Special Stock of any series which are
superior to the Preferred Stock as to dividends or rights upon liquidation,
dissolution or winding up of the Corporation as long as any Preferred Stock is
issued and outstanding, without the prior written consent of the holders of at
least 66 2/3% of such shares of the Preferred Stock then outstanding voting
separately as a class.

In addition to ART's redemption rights described above upon a
conversion of Preferred Stock, ART may redeem any or all of the Preferred Stock
at any time and from time to time, at its option, for cash upon no less than 20
days nor more than 30 days prior notice thereof. The redemption price of the
Preferred Stock 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.

As of May 1, 1998, 2,800,000 shares of the Preferred Stock were issued
and outstanding. There can be no assurance that an active market for the
Preferred Stock will develop or be sustained in the future. See "Risk Factors
- -- Risks Relating to ART Preferred Shares -- Risks Associated with Trading of
Preferred Stock."

COMMON STOCK

All shares of the Common Stock are entitled to share equally in
dividends from funds legally available therefor, when declared by the ART
Board, 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 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 Common Stock when issued.
All outstanding Common Stock is fully paid and nonassessable. As of May 12,
1998, 10,718,216 shares of Common Stock were outstanding.

SPECIAL STOCK

The following is a description of certain general terms and provisions
of the Special Stock, including the Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series E
Preferred Stock and the Series G Preferred Stock.

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

Article 5 of the Articles of Incorporation of ART, 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 ART Board
determines. In particular, the ART Board may fix and determine, among other
things, the dividend payable with respect to such

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<PAGE> 51
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 ART Board 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 ART.

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

SERIES A PREFERRED STOCK; TERMINATED RIGHTS PLAN. On April 11, 1990,
the ART Board 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 Common Stock (the "RIGHTS"). The rights plan provided
that one Right would be distributed to all shareholders of ART for each share
of Common Stock owned of record by them as of April 23, 1990. In addition, the
rights plan required that ART 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 receive fair and equal treatment in the event of any attempt to
acquire ART 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 ART, and ART has remained unaware of any such effort. On June 12,
1996, the ART Board 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 ART Board was
based on a determination that the rights plan was no longer necessary to
protect ART and its shareholders from coercive tender offers.

On February 27, 1997, the ART Board 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 ART Board 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 by law, and ART 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 Common Stock
obtained by multiplying the number of shares of Series B Preferred Stock 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 Common Stock is 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 ART.

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, including the Preferred Stock.

ART 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 ART while there is any arrearage in payment
of dividends except that at the time of such repurchase or redemption ART must
pay all accrued and unpaid dividends on the shares being redeemed. As of May
1, 1998, 4,000 shares of the Series B Preferred Stock were issued and
outstanding.

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<PAGE> 52
SERIES C PREFERRED STOCK. On May 23, 1996, the ART Board designated
16,681 shares of Series C 10% Cumulative Preferred Stock (the "SERIES C
PREFERRED STOCK") 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, and ART 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 of Series C Preferred
Stock 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, including the Preferred Stock. The dividends
for the first twelve months were paid in additional shares of Series C
Preferred Stock.

ART 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 ART while there is any arrearage in payment
of dividends except that at the time of such repurchase or redemption ART must
pay all accrued and unpaid dividends on the shares being redeemed. As of May
1, 1998, 16,681 shares of the Series C Preferred Stock were issued and
outstanding.

SERIES D PREFERRED STOCK. The ART Board designated 91,000 shares of
Series D 9.50% 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. ART is not required to maintain a sinking fund for such stock.

The Series D Preferred Stock has a cumulative dividend per share of
9.50% 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.

ART 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 ART while there is
any arrearage in payment of dividends except that at the time of such
repurchase or redemption ART must pay all accrued and unpaid dividends on the
shares being redeemed. As of May 1, 1998, no shares of the Series D Preferred
Stock were issued or 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 ART Board
designated 80,000 shares of Series E 10% 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. ART is not required to maintain a sinking fund for such
stock.

The Series E Preferred Stock is convertible into that number of shares
of 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 ART. 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.

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<PAGE> 53
The Series E Preferred Stock bears a cumulative dividend per share
equal to $10.00 per annum, payable quarterly in equal installments of $2.50 for
the period from date of issuance to November 4, 1999, and $11.00 per annum
($2.75 per quarter) thereafter. Dividends on the Series E Preferred Stock are
in preference to and with priority over dividends upon the Common Stock. The
Series E Preferred Stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of Special Stock.

ART may redeem any or all of the shares of Series E Preferred Stock
from time to time upon payment of $100 per share plus all accrued and unpaid
dividends. There is no restriction on the repurchase or redemption of the
Series E Preferred Stock by ART while there is any arrearage in payment of
dividends except that at the time of such repurchase or redemption ART must pay
all accrued and unpaid dividends on the shares being redeemed. As of May 1,
1998, no shares of the Series E Preferred Stock were issued or 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 G PREFERRED STOCK. On September 18, 1997, the ART Board
designated 11,000 shares of Series G Cumulative Convertible Preferred Stock
(the "SERIES G PREFERRED STOCK") 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 G Preferred Stock is non-voting except as required by
law, and ART is not required to maintain a sinking fund for such stock.

Each share of Series G Preferred Stock is convertible, but only after
October 6, 2000, into that number of shares of Common Stock obtained by
multiplying the number of shares of Series G Preferred Stock 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 20 trading days
ending on the last trading day of the calendar week immediately preceding the
conversion on the market where the Common Stock is then regularly traded. The
right of conversion shall terminate upon receipt of the notice of redemption
from ART and on the earlier of (i) the commencement of any liquidation,
dissolution or winding up of ART or (ii) the adoption of any resolution
authorizing the commencement thereof. ART may elect to redeem the shares of
Series G Preferred Stock sought to be converted instead of issuing shares of
Common Stock.

The Series G Preferred Stock bears a cumulative dividend per share
equal to $10.00 per annum, payable in arrears in quarterly equal installments
of $2.50 on each Quarterly Dividend Payment Date, and commencing accrual on the
date of issuance to and including the date on which the redemption price of
such shares is paid. Dividends on the Series G Preferred Stock are in
preference to and with priority over dividends upon the Common Stock. The
Series G Preferred Stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of Special Stock.

ART may redeem any or all of the shares of the Series G 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 shares of the Series G Preferred Stock shall be an
amount per share equal to the $100 liquidation value plus all accrued and
unpaid dividends on such shares through the redemption date. The right of ART
to redeem shares of Series G Preferred Stock remains effective notwithstanding
prior receipt by ART of notice by any holder of Series G Preferred Stock of
such holder's intent to convert shares of Series G Preferred Stock. As of May
1, 1998, no shares of the Series G Preferred Stock were issued or outstanding.

The Series G Preferred Stock is reserved for issuance upon the
conversion of Class A units held by the limited partners in Grapevine American,
Ltd.

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

LEGAL MATTERS

Certain legal matters with respect to the Preferred Stock offered
hereby and the Common Stock into which it is convertible have been passed upon
for ART by Holt Ney Zatcoff & Wasserman, LLP, Atlanta, Georgia.

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EXPERTS

The financial statements and schedules 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
incorporated by reference herein and in the registration statement, and such
reports are incorporated by reference herein in reliance upon the authority of
said firm as experts in auditing and accounting.

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INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS OF AMERICAN REALTY TRUST, INC.:
- ---------------------------------------------------

Report of Independent Certified Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Consolidated Balance Sheets -
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Statements of Operations -
Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated Statements of Cash Flows -
Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

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

</TABLE>

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

F-1
<PAGE> 56
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors of
American Realty Trust, Inc.

We have audited the accompanying consolidated balance sheets of American Realty
Trust, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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 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, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

BDO Seidman, LLP

Dallas, Texas
March 25, 1998

F-2
<PAGE> 57
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
--------- ---------
(dollars in thousands, except per share)
<S> <C> <C>
Assets
Notes and interest receivable
Performing (including $1,307 in 1997 and $13,563 in 1996 from affiliate) ............... $ 9,300 $ 50,784
Nonperforming, nonaccruing ............................................................. 18,624 1,627
--------- ---------
27,924 52,411

Less - allowance for estimated losses .................................................... (2,398) (3,926)
--------- ---------
25,526 48,485

Real estate held for sale, net of accumulated depreciation ($5,098 in 1996) ............. 178,938 77,688

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

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

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

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

Minority interest ........................................................................ 20,542 10,911

Commitments and contingencies

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

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

F-3
<PAGE> 58

AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Income
Sales ................................................................... $ 17,926 $ -- $ --
Rents ................................................................... 29,075 20,658 17,869
Interest (including $230 in 1997, $539 in 1996 and $506 in 1995 from
affiliates) .......................................................... 2,835 4,724 4,929
Other ................................................................... 135 1,597 154
------------ ------------ ------------
49,971 26,979 22,952

Expenses
Cost of sales ........................................................... 14,492 -- --
Property operations (including $865 in 1997, $892 in 1996 and $1,200
in 1995 to affiliates) ............................................... 24,195 15,874 13,260
Interest (including $433 in 1997, $418 in 1996 and $437 in 1995 to
affiliates) .......................................................... 30,231 16,450 8,941
Advisory and servicing fees to affiliate ................................ 2,657 1,539 1,195
General and administrative (including $1,809 in 1997, $691 in 1996
and $516 in 1995 to affiliate) ....................................... 6,997 2,712 2,554
Depreciation and amortization ........................................... 3,338 2,002 1,691
Minority interest ....................................................... 1,445 -- 671
------------ ------------ ------------
83,355 38,577 28,312
------------ ------------ ------------

(Loss) from operations .................................................... (33,384) (11,598) (5,360)

Equity in income (loss) of investees ...................................... 10,660 2,004 (851)
Gain on sale of real estate ............................................... 20,296 3,659 2,594
------------ ------------ ------------

(Loss) before income taxes ................................................ (2,428) (5,935) (3,617)
Income tax expense ........................................................ -- -- 2
------------ ------------ ------------
(Loss) before extraordinary gain .......................................... (2,428) (5,935) (3,619)
Extraordinary gain ........................................................ -- 381 783
------------ ------------ ------------

Net (loss) ................................................................ (2,428) (5,554) (2,836)
Preferred dividend requirement ............................................ (206) (113) --
------------ ------------ ------------

Net (loss) applicable to Common shares .................................... $ (2,634) $ (5,667) $ (2,836)
============ ============ ============

Earnings per share
(Loss) before extraordinary gain .......................................... $ (.22) $ (.46) $ (.31)
Extraordinary gain ........................................................ -- .03 .07
------------ ------------ ------------

Net (loss) applicable to Common shares .................................... $ (.22) $ (.43) $ (.24)
============ ============ ============

Weighted average Common shares used in computing earnings per share ....... 11,710,013 12,765,082 11,716,656
============ ============ ============
</TABLE>

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

F-4
<PAGE> 59

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

<TABLE>
<CAPTION>
Series B Series C
Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Capital (Deficit) Equity
--------- --------- -------- -------- -------- ----------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 ..................... $ -- $ -- $ 117 $ -- $ 66,661 $(10,884) $ 55,894

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

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

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

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

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

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

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

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

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

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

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

Balance, December 31, 1996 ................... $ 8 $ 32 $ 135 $ (6) $ 68,595 $(20,978) $ 47,786
</TABLE>

F-5
<PAGE> 60
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Series B Series C Series F
Preferred Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Stock Capital (Deficit) Equity
--------- --------- --------- -------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ............. $ 8 $ 32 $ -- $ 135 $ (6) $ 68,595 $(20,978) $ 47,786

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

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

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

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

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

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

Net (loss) ........................... -- -- -- -- -- -- (2,428) (2,428)
-------- -------- -------- -------- -------- -------- -------- --------

Balance, December 31, 1997 ........... $ 8 $ 33 $ 4,000 $ 135 $ (28) $ 84,943 $(25,638) $ 63,453
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>

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

F-6
<PAGE> 61

AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
For The Years Ended December 31,
-----------------------------------
1997 1996 1995
--------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Pizza parlor sales collected ...................................... $ 17,790 $ -- $ --
Rents collected ................................................... 28,199 19,013 18,473
Interest collected ($262 in 1997, $385 in 1996 and $399 in 1995
from affiliates) ............................................... 2,592 4,304 4,845
Distributions from equity investees' operating activities ......... 5,689 9,054 1,464
Interest paid ($19 in 1995 to affiliate) .......................... (19,092) (9,601) (8,296)
Payments for property operations (including $865 in 1997, $892
in 1996 and $1,200 in 1995 to affiliate) ....................... (22,821) (15,034) (13,442)
Payments for pizza parlor operations .............................. (12,580) -- --
Advisory fee paid to affiliate .................................... (2,657) (1,539) (1,195)
Distributions to minority interest holders ........................ (1,445) -- --
Purchase of marketable equity securities .......................... (15,147) (22,613) (19,394)
Proceeds from sale of marketable equity securities ................ 10,588 23,557 18,374
General and administrative expenses paid (including $1,809 in
1997, $691 in 1996 and $516 in 1995 to affiliate) .............. (6,982) (3,095) (2,448)
Litigation settlement ............................................. -- -- (100)
Other ............................................................. (781) (1,661) 1,016
--------- -------- --------

Net cash provided by (used in) operating activities ........... (16,647) 2,385 (703)

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

Net cash (used in) investing activities ........................ (83,588) (50,429) (20,580)

Cash Flows From Financing Activities
Proceeds from notes payable ....................................... 161,103 86,490 36,211
Margin borrowings, net ............................................ 8,914 2,981 7,626
Proceeds from issuance of Preferred Stock ......................... -- 400 --
Payments on notes payable (including $990 in 1995 to affiliate) ... (81,639) (30,003) (22,268)
Deferred borrowing costs .......................................... (5,174) (5,028) (2,475)
Net advances (payments) to/from affiliates ........................ 23,274 (4,979) 3,050
Dividends ......................................................... (2,150) (1,617) --
--------- -------- --------

Net cash provided by financing activities ...................... 104,328 48,244 22,144
--------- -------- --------
</TABLE>

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

F-7
<PAGE> 62
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
For The Years Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Net increase in cash and cash equivalents .............................. $ 4,093 $ 200 $ 861
Cash and cash equivalents, beginning of year ........................... 1,254 1,054 193
-------- -------- --------

Cash and cash equivalents, end of year ................................. $ 5,347 $ 1,254 $ 1,054
======== ======== ========

Reconciliation of net (loss) to net cash provided by (used in)
operating activities
Net (loss) ............................................................. $ (2,428) $ (5,554) $ (2,836)
Adjustments to reconcile net (loss) to net cash provided by (used in)
operating activities
Extraordinary gain ............................................... -- (381) (783)
Gain on sale of real estate ...................................... (20,296) (3,659) (2,594)
Depreciation and amortization .................................... 3,338 2,002 1,691
Amortization of deferred borrowing costs ......................... 4,042 2,692 326
Equity in (income) losses of investees ........................... (10,660) (2,004) 851
Distributions from equity investees' operating activities ........ 5,689 9,054 1,464
(Increase) decrease in marketable equity securities .............. (4,559) 944 (1,020)
(Increase) decrease in accrued interest receivable ............... 66 (117) 79
(Increase) decrease in other assets .............................. 2,403 (2,817) 1,629
Increase (decrease) in accrued interest payable .................. 1,019 1,417 (5)
Increase in accounts payable and other liabilities ............... 4,978 733 495
Other ............................................................ (239) 75 --
-------- -------- --------

Net cash provided by (used in) operating activities ........... $(16,647) $ 2,385 $ (703)
======== ======== ========
</TABLE>

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

F-8
<PAGE> 63
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
For The Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Schedule of noncash investing and financing activities

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

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

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

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

Note receivable put to basis ....................................... 2,737 -- --

Note payable assumed on property obtained through foreclosure ...... 11,867 -- --

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

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

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

Carrying value of intangible .................................... 15,641 -- --
Carrying value of pizza parlor equipment ........................ 3,998 -- --
Carrying value of note receivable retired ....................... 13,387 -- --
Carrying value of accounts payable and other liabilities ........ 1,314 -- --

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

Settlement with insurance company

Carrying value of real estate received .......................... -- -- 1,619
Carrying value of note receivable
participation received ....................................... -- -- 1,500
Carrying value of notes receivable returned ..................... -- -- (32)
Carrying value of real estate returned .......................... -- -- (2,183)
</TABLE>

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

F-9
<PAGE> 64
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Basis of consolidation. The Consolidated Financial Statements include the
accounts of ART, and all majority-owned subsidiaries and partnerships other
than National Realty, L.P. ("NRLP") and during the period April 1996 to April
1997 for Pizza World Supreme, Inc. ("PWSI"). The Company uses the equity
method to account for its investment in NRLP as control is considered to be
temporary. The Company used the equity method to account for its investment in
PWSI from April 1996 to April 1997 as control was considered to be temporary.
See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P." and NOTE 7. "ACQUISITION OF PIZZA
WORLD SUPREME, INC." All significant intercompany transactions and balances
have been eliminated.

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

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

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

Real Estate Held for Investment and Depreciation. Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
121 ("SFAS No. 121") requires that a property be considered impaired, if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the property. If impairment
exists, an impairment loss is recognized by a charge against earnings, equal to
the amount by which the carrying amount of the property exceeds the fair value
of the property. If impairment of a property is recognized, the carrying
amount of the property is reduced by the amount of the impairment, and a new
cost for the property is established. Such new cost is depreciated over the
property's remaining useful life. Depreciation is provided by the
straight-line method over estimated useful lives, which range from 10 to 40
years. Real Estate Held for Sale. Foreclosed real estate is initially
recorded at new cost, defined as the lower of original cost or fair value minus
estimated costs of sale. SFAS No. 121 also requires that properties held for
sale be reported at the lower of carrying amount or fair value less costs of
sale. If a reduction in a held for sale property's carrying amount to fair
value less costs of sale is required, a provision for loss shall be recognized
by a charge against earnings. Subsequent revisions, either upward or downward,
to a held for sale property's estimated fair value less costs of sale is
recorded as an adjustment to the property's carrying amount, but not in excess
of the property's carrying amount when originally classified as held for sale.
A corresponding charge against or credit to earnings is recognized. Properties
held for sale are not to be depreciated.

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

F-10
<PAGE> 65
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, the financing or other method, whichever is
appropriate.

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

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

Earnings per share. Loss per share is presented in accordance with the
provision of the Statement of Financial Accounting Standards No. 128, "Earnings
Per Share". Loss per share is computed based upon the weighted average number
of shares of Common Stock outstanding during each year, adjusted for the two
for one forward Common Stock splits effected February 17, 1997 and January 2,
1996.

NOTE 2. SYNTEK ASSET MANAGEMENT, L.P.

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

NRLP, SAMLP and Mr. Phillips were among the defendants in a class action
lawsuit arising from the formation of NRLP. An agreement settling such lawsuit
(the "Settlement Agreement") for the above mentioned defendants became
effective on July 5, 1990. The Settlement Agreement provided for, among other
things, the appointment of an NRLP oversight committee and the establishment of
specified annually increasing targets for five years relating to the price of
NRLP's units of limited partner interest.

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

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

F-11
<PAGE> 66
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

1998, for consideration of preliminary approval of a business plan for the
operation of the entity which will receive the cash and properties and to
consider a form of notice to be distributed to the plaintiff class members
describing the Resolution Agreement and the business plan.

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

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

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

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

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

In August 1990, the Company obtained the Continental Hotel and Casino in Las
Vegas, Nevada, through foreclosure subject to first and second lien mortgages
totaling $10.0 million. In June 1992, the Company sold the hotel and casino
accepting, among other consideration, a $22.0 million wraparound mortgage note
receivable. The Company recorded a deferred gain of $4.6 million in connection
with the sale of the hotel and casino resulting from a disputed third lien
mortgage being subordinated to the Company's wraparound mortgage note
receivable. In March 1997, the wraparound note was modified and extended. In
exchange for the extension, the borrower was required to invest $2.0 million in
improvements to the hotel and casino within four months of the March 1997
modification and an additional $2.0 million prior to December 1997. The
borrower also pledged 1,500,000 shares of common stock in Crowne Ventures,
Inc., as additional collateral. The Company's wraparound mortgage note
receivable had a principal balance of $13.3 million at December 31, 1997. The
Company recognizes interest income on this wraparound mortgage note only to the
extent interest is collected. The borrower has not made the required note
payments since April 1997, nor the required improvements. In December 1997,
the borrower filed for bankruptcy protection. In February 1998, a hearing was
held to allow the Company to foreclose on the hotel and casino. At the
hearing, the court allowed the borrower 90 days to submit a reorganization plan
and beginning March 2, 1998, required the borrower to make monthly payments of
$175,000 to the Company. The Company received the first such payment on March
2, 1998. If the Company is allowed to foreclose on the property it does not
expect to incur a loss as the fair value of the property exceeds the carrying
value of the Company's note receivable.

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

F-12
<PAGE> 67
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

the property until April 24, 1995. On April 21, 1995, the borrower filed for
bankruptcy protection. On August 24, 1996, the bankruptcy court's stay was
lifted allowing the Company to proceed with foreclosure. In February 1997, the
Company sold its mortgage note receivable for $1.8 million in cash. The
Company recognized a gain of $171,000 on the sale.

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

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

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

NOTE 4. REAL ESTATE

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

Also in January 1997, the Company purchased Scout land, a 546 acre parcel of
undeveloped land in Tarrant County, Texas, for $2.2 million. The Company paid
$725,000 in cash and obtained new mortgage financing of $1.5 million. The
mortgage bears interest at 16% per annum, requires quarterly payments of
interest only and matures in January 2000.

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

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

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

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

F-13
<PAGE> 68
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

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

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

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

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

In June 1997, the Company purchased Kamperman land, a 129.6 acre parcel of
undeveloped land in Collin County, Texas, for $5.0 million in cash. The
Company simultaneously sold a 99.7 acre tract for $4.5 million in cash. The
Company recognized a gain of $215,000 on the sale.

Also in June 1997, the Company purchased Keller land, a 811.8 acre parcel of
undeveloped land in Tarrant County, Texas, for $6.3 million. The Company paid
$2.3 million in cash and obtained new mortgage financing of $4.0 million. The
mortgage bears interest at 12.95% per annum, requires monthly payments of
interest only and matures in June 1998.

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

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

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

Also in July 1997, the Company purchased Dowdy and McKinney Corners V land, a
total of 174.7 acres of undeveloped land in Collin County, Texas, for $2.9
million. The Company obtained new mortgage financing of $3.3 million as an
advance under the term loan from the Las Colinas I lender. The Dowdy, McKinney
Corners V and McKinney Corners III land were added as additional collateral on
the term loan.

Further in July 1997, the Company purchased Perkins land, a 645.4 acre parcel
of undeveloped land in Collin County, Texas, for $5.8 million. The Company
paid $3.3 million in cash and assumed the existing mortgage of $2.5 million.
The mortgage bears interest at 8.5% per annum, requires quarterly payments of
interest only and matures in March 2002.

F-14
<PAGE> 69
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

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

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

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

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

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

Also in October 1997, the Company contributed the Denver Merchandise Mart in
Denver, Colorado, to a limited partnership in exchange for $6.0 million in
cash, a 1% managing general partner interest in the partnership, all of the
Class B limited partner units in the partnership and the partnership's
assumption of the $23.0 million in mortgage debt secured by such property. The
existing general and limited partners converted their general and limited
partner interests into Class A limited partner units in the partnership. The
Class A units have an agreed value of $1.00 per unit and are entitled to a
fixed preferred return of 10% per annum, paid quarterly. The Class A units may
be converted into a total of 529,000 shares of the Company's Series F
Cumulative Convertible Preferred Stock at any time after the first but not
later than the sixth anniversary of the closing, on the basis of one share of
Series F Preferred Stock for each ten Class A units. See NOTE 13. "PREFERRED
STOCK."

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

F-15
<PAGE> 70
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

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

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

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

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

Further in October 1997, a newly formed partnership, of which the Company is
the general partner and Class B limited partner, purchased the Vineyards land,
a 15.8 acre parcel of undeveloped land in Tarrant County, Texas, for $4.5
million. The partnership paid $800,000 in cash, assumed the existing mortgage
of $2.5 million and issued the seller 1.1 million Class A limited partner units
in the partnership as additional consideration. The Class A units have an
agreed value of $1.00 per unit and are entitled to a fixed preferred return of
10% per annum, paid quarterly. The Class A units may be exchanged for either
shares of the Company's Series G Preferred Stock on or after the second
anniversary of the closing at the rate of one share of Series G Preferred Stock
for each 100 Class A units exchanged, or on or after the third anniversary of
the closing, the Class A units are also exchangeable for shares of the
Company's Common Stock. The Class A units are exchangeable for shares of the
Company's Common Stock at the rate of $1.00 per unit plus any outstanding
preferred return divided by .9 times the simple average of the daily closing
price of the Company's Common Stock for the 20 days preceding the date of
conversion. The assumed mortgage bears interest at 12.95% per annum requires
quarterly payments of interest only and matures in June 1998. See NOTE 13.
"PREFERRED STOCK."

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

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

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

F-16
<PAGE> 71
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

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

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

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

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

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

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

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

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

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

F-17
<PAGE> 72
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

In 1991, the Company purchased all of the capital stock of a corporation which
owned 198 developed residential lots in Fort Worth, Texas. Through December
31, 1996, 188 of the residential lots had been sold. During 1997, 9 additional
lots were sold for an aggregate gain of $17,000. At December 31, 1997, one lot
remained to be sold.

In 1996, the Company sold a total of 39.1 acres of land in Las Colinas, Texas
in four separate transactions for a total of $6.8 million. The Company applied
the $6.5 million net cash proceeds to paydown the term loans secured by such
land. The Company recognized gains totaling $3.7 million from such sales.

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

NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES

Activity in the allowance for estimated losses was as follows:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance January 1, . . . . . . . . . . . $ 3,926 $ 7,254 $ 8,201
Amounts charged off. . . . . . . . . . . (1,528) - (947)
Writedown of propert . . . . . . . . . . - (3,328) -
--------- ---------- ---------

Balance December 31, . . . . . . . . . . $ 2,398 $ 3,926 $ 7,254
========= ========== =========
</TABLE>

NOTE 6. INVESTMENTS IN EQUITY INVESTEES

The Company's investment in equity investees at December 31, 1997, includes (i)
equity securities of three publicly traded real estate investment trusts,
Continental Mortgage and Equity Trust ("CMET"), IORI and Transcontinental
Realty Investors, Inc. ("TCI") (collectively the "REITs"), (ii) units of
limited partner interest of NRLP, (iii) a general partner interest in NRLP and
NOLP, the operating partnership of NRLP, through its 96% limited partner
interest in SAMLP and (iv) interests in real estate joint venture partnerships.
Gene E. Phillips, the Chairman of the Board and a Director of the Company until
November 16, 1992, is a general partner of SAMLP, the general partner of NRLP
and NOLP and was a director and Chief Executive Officer of SAMI until May 15,
1996. Randall M. Paulson, an Executive Vice President of the Company, serves
as the sole director of SAMI and as President of the REITs, SAMI and Basic
Capital Management, Inc. ("BCM"), the Company's advisor. In addition, BCM
serves as advisor to the REITs, and performs certain administrative and
management functions for NRLP and NOLP on behalf of SAMLP.

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

Substantially all of the Company's equity securities of the REITs and NRLP are
pledged as collateral for borrowings. See NOTE 10. "MARGIN BORROWINGS."

F-18
<PAGE> 73

AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company's investment in entity investees accounted for using the equity
method, at December 31, 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 December 31, 1997 December 31, 1997 December 31, 1997 December 31, 1997
- --------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
NRLP 54.4% $ 11,479 $ * $ 83,018
CMET 40.6 14,939 35,745 25,733
IORI 29.7 3,511 7,439 5,176
TCI 30.6 8,378 26,652 20,664
---------- ---------
38,307 $ 134,591
=========
General partner
interest in NRLP and NOLP 6,230
Other 1,314
----------
$ 45,851
==========

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

* At December 31, 1997, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity, however, was $198.9 million.
Revaluation equity is defined as the difference between the estimated
current value of the partnership's real estate, adjusted to reflect the
partnership's estimate of disposition costs, and the amount of the mortgage
notes payable and accrued interest encumbering such property as reported in
NRLP's Annual Report on Form 10-K for the year ended December 31, 1997.

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

<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, 1997 December 31, 1997 December 31, 1997 December 31, 1997
- --------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
NRLP 54.4% $ 14,421 $ - * $ 44,997
CMET 40.6 14,141 32,148 18,789
IORI 29.6 2,719 6,625 4,838
TCI 30.5 6,318 24,204 13,131
--------- --------
37,599 $ 81,755
========
General partner
interest in NRLP and NOLP 6,607
Other (2,234)
---------
$ 41,972
=========

</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.

The Company's management continues to believe that the market value of each of
the REITs and NRLP undervalues their assets and the Company has, therefore,
continued to increase its ownership in these entities in 1997, as its liquidity
has permitted.

In April 1996, the Company purchased a 28% general partner interest in Campbell
Center Associates, Ltd. ("Campbell, Ltd."), which in turn has a 56.25% interest
in Campbell Centre Joint Venture, which owns a 413,175 square foot office
building in

F-19
<PAGE> 74
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Dallas, Texas. The purchase price of the general partner interest was $550,000
in cash and a $500,000 note, which bears interest at 8% per annum, requires
monthly payments of interest only and matures April 2000. In January 1997, the
Company exercised its option to purchase an additional 28% general partner
interest in Campbell, Ltd. The purchase price was $300,000 in cash and a
$750,000 note, which bears interest at 8% per annum, requires monthly payments
of interest only and matures in April 2000. In July 1997, the Company
purchased an additional 9% general partner interest in Campbell, Ltd. for
$868,000 in cash.

In June 1996, a newly formed limited partnership, of which the Company is the
general partner, purchased 580 acres of undeveloped land in Collin County,
Texas for $5.7 million in cash. The Company contributed $100,000 in cash to
the partnership with the remaining $5.6 million being contributed by the
limited partner. The partnership agreement designates the Company as the
managing general partner. In September 1996, the partnership obtained financing
of $2.8 million secured by the 580 acres of land and personal guarantee of the
limited partner. The Partnership agreement also provides that the limited
partner receive a 12% preferred cumulative return on his investment before any
sharing of partnership profits occurs. In April 1997, the partnership sold a
35.0 acre tract for $1.3 million in cash. The net sales proceeds of $1.2
million were distributed to the limited partner in accordance with the
partnership agreement. The partnership recognized a gain of $884,000 on the
sale. In July 1997, the Partnership sold a 24.6 acre tract for $800,000 in
cash. In accordance with the terms of the term loan secured by such property,
$197,000 of the net sales proceeds were used to paydown such term loan. The
remaining $545,000 was distributed to the limited partner in accordance with
the partnership agreement. The partnership recognized a gain of $497,000 on
the sale. In September 1997, the partnership sold a 77.2 acre tract for $1.5
million in cash. In accordance with the terms of the term loan secured by such
property, the net sales proceeds were used to paydown such term loan. The
partnership recognized a gain of $704,000 on the sale. In October 1997, the
partnership sold a 96.5 acre tract for $1.7 million in cash. In accordance
with the terms of the term loan secured by such property, $548,000 of the net
sales proceeds were used to paydown such term loan and the remaining $1.1
million being distributed to the limited partner in accordance with the
partnership agreement. The partnership recognized a gain of $691,000 on the
sale. In December 1997, the partnership sold a 94.4 acre tract for $2.5
million in cash. Of the net sales proceeds, $1.8 million was distributed to
the limited partner and $572,000 was distributed to the Company as general
partner in accordance with the partnership agreement. The partnership
recognized a gain of $1.4 million on the sale. In January 1998, the
partnership sold a 155.4 acre tract for $2.9 million. The partnership received
$721,000 in cash and provided purchase money financing of an additional $2.2
million. Of the net sales proceeds, $300,000 was distributed to the limited
partner and $300,000 was distributed to the Company as general partner in
accordance with the partnership agreement. The purchase money financing bears
interest at 12% per annum, requires monthly payments of interest only and
matures in July 1998. The partnership recognized a gain of $1.2 million on the
sale.

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

In January 1992, the Company entered into a partnership agreement with an
entity affiliated with a limited partner in a partnership that owns
approximately 15.6% of the Company's outstanding shares of Common Stock, that
acquired 287 developed residential lots adjacent to the Company's other
residential lots in Fort Worth, Texas. The partnership agreement designates
the Company as managing general partner. The partnership agreement also
provides each of the partners with a guaranteed 10% return on their respective
investments. Through December 31, 1996, 197 of the residential lots had been
sold. During 1997, an additional 17 lots were sold with 73 lots remaining to
be sold at December 31, 1997. During 1997, each partner received $21,000 in
return of capital distributions and $12,000 in profit distributions.

F-20
<PAGE> 75
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Property and notes receivable, net . . . . . $ 236,367 $ 240,552
Other assets . . . . . . . . . . . . . . . . 43,213 59,409
Notes payable . . . . . . . . . . . . . . . (339,102) (352,441)
Other liabilities . . . . . . . . . . . . . (17,311) (19,294)
---------
Equity . . . . . . . . . . . . . . . . . . . $ (76,833) $ (71,774)
========= ==========
</TABLE>

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 124,521 $ 124,044 $ 110,892
Depreciation . . . . . . . . . . . . . . . . (10,418) (11,148) (10,268)
Interest . . . . . . . . . . . . . . . . . . (34,481) (34,640) (34,956)
Operating expenses . . . . . . . . . . . . . (79,463) (78,043) (69,572)
--------- ---------

Income (loss) before gains on sale of real
estate and extraordinary gains . . . . . . 159 213 (3,904)

Gains on sale of real estate . . . . . . . . 8,356 61 7,701
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 8,515 $ 274 $ 3,797
========= ========= =========
</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>
<S> <C> <C> <C>
Income (loss) before gains on sale of
real estate . . . . . . . . . . . . . . . $ 817 $ 270 $ (1,767)
Gains on sale of real estate . . . . . . . . 3,022 - 1,884
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 3,839 $ 270 $ 117
========= ========= =========
</TABLE>

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

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Property and notes receivable, net . . . . . $ 631,825 $ 501,097
Other assets . . . . . . . . . . . . . . . . 80,789 57,877
Notes payable . . . . . . . . . . . . . . . (483,064) (358,203)
Other liabilities . . . . . . . . . . . . . (28,326) (19,849)
--------- ---------
Equity . . . . . . . . . . . . . . . . . . . $ 201,224 $ 180,922
=========
</TABLE>

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 129,531 $ 101,246 $ 94,730
Depreciation . . . . . . . . . . . . . . . . (17,429) (14,408) (13,950)
Provision for losses . . . . . . . . . . . . (1,337) 844 (541)
Interest . . . . . . . . . . . . . . . . . . (38,537) (30,401) (28,102)
Operating expenses . . . . . . . . . . . . . (85,387) (69,698) (65,471)
--------- --------- ---------
(Loss) before gains on sale of real estate and
extraordinary gains . . . . . . . . . . . (13,159) (12,417) (13,334)
Gains on sale of real estate . . . . . . . . 34,297 11,701 5,822
Extraordinary gains . . . . . . . . . . . . - 1,068 1,437
--------- --------- ---------
Net income (loss) . . . . . . . . . . . . . $ 21,138 $ 352 $ (6,075)
========= ========= =========
</TABLE>

F-21
<PAGE> 76
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company's equity share of:

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
(Loss) before gains on sale of real estate and
extraordinary gains . . . . . . . . . . . $ (3,703) $ (2,911) $ (3,356)
Gains on sale of real estate . . . . . . . . 4,645 2,463
Extraordinary gains . . . . . . . . . . . . 10,524 381 783
--------- --------- ---------
Net income (loss) . . . . . . . . . . . . . $ 6,821 $ 2,115 $ (110)
========= ========= =========
</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
quarterly distributions since the first quarter of 1993, NRLP since the fourth
quarter of 1993 and TCI since the fourth quarter of 1995. In 1997, the Company
received distributions totaling $1.4 million from the REITs and $1.4 million
from NRLP and accrued an additional $6.7 million in NRLP and TCI distributions
that were not received until January 1998. In 1996, the Company received total
distributions from the REITs of $2.1 million and $6.9 million from NRLP. At
December 31, 1995, the Company accrued $3.3 million in NRLP distributions which
were received January 2, 1996.

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

NOTE 7. ACQUISITION OF PIZZA WORLD SUPREME, INC.

In April 1996, a newly formed subsidiary of the Company purchased, for $10.7
million in cash, 80% of the common stock of Pizza World Supreme, Inc. ("PWSI"),
which in turn had acquired 26 operating pizza parlors in various communities in
California's San Joaquin Valley. Concurrent with the purchase, the Company
granted to an individual an option to purchase 36.25% of the Company's
subsidiary at any time for the Company's net investment in such subsidiary.
Additionally, the Company held negotiations with underwriters to take such
subsidiary public. The Company believed that such option would be exercised
and further, that the subsidiary would become publicly held approximately one
year from its date of acquisition. Accordingly, the Company believed its
control of such subsidiary was temporary and therefore accounted for such
subsidiary under the equity method through April 1997. In May 1997, the
Company acquired the remaining 20% of PWSI for $5.0 million and discontinued
equity accounting. The sellers provided purchase money financing in the form
of two $2.5 million term loans. The term loans bear interest at 8% per annum,
require quarterly payments of interest only and mature in May 2007.

NOTE 8. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO

In 1994, the Company began purchasing equity securities of entities other than
those of the REITs and NRLP to diversify and increase the liquidity of its
margin accounts. In 1997, the Company purchased $15.1 million and sold $10.6
million of such securities. These equity securities are considered a trading
portfolio and are carried at market value. At December 31, 1997, the Company
recognized an unrealized decline in the market value of the equity securities
in its trading portfolio of $850,000. In 1997, the Company realized a net gain
of $154,000 from the sale of trading portfolio securities and received $107,000
in dividends. At December 31, 1996, the Company recognized an unrealized
decline in the market value of the equity securities in its trading portfolio
of $486,000. In 1996, the Company realized a net gain of $29,000 from the
sale of trading portfolio securities and received $163,000 in dividends. At
December 31, 1995, the Company recognized an unrealized decline in the market
value of the equity securities in its trading portfolio of $998,000. In 1995,
the Company realized a net gain of $349,000 from the sale of trading portfolio
securities and received $852,000 in dividends and $238,000 in return of capital
distributions on such securities. Unrealized and realized gains and losses in
the trading portfolio are included in other income in the accompanying
Consolidated Statements of Operations.

F-22
<PAGE> 77
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 9. NOTES AND INTEREST PAYABLE

Notes and interest payable consisted of the following:

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

Scheduled principal payments on notes payable are due as follows:

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

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

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

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

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

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

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

F-23
<PAGE> 78
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

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

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

In November 1997, the Company obtained mortgage financing of $5.4 million
secured by 33.9 acres of previously unencumbered Valwood land, Lacy Longhorn
land, Thompson land, and Tomlin land. The Company received net financing
proceeds of $4.8 million after the payment of various closing costs associated
with the financing. The mortgage bears interest at 13.5% per annum, requires
monthly payments of interest only and matures in November 1998.

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

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

Also in 1996, the Company refinanced the mortgage debt secured by a wraparound
mortgage note receivable, the Denver Merchandise Mart and an office building
and obtained mortgage financing for two previously unencumbered hotels, in the
total amount of $39.8 million. The Company received net cash of $23.0 million
after the payoff of $10.4 million in existing mortgage debt and the payment of
various costs associated with the financings. The mortgages bore interest
rates from 9.5% to 16.5% per annum, required monthly payments of principal and
interest totaling $404,500 and matured October 1997 to September 2001.

Notes payable to affiliates at December 31, 1997 and 1996 include a $4.2
million note due to NRLP as payment for SAMLP's general partner interest in
NRLP. The note bears interest at 10% per annum compounded semi-annually and is
due at the earlier of September 2007, the liquidation of NRLP or the withdrawal
of SAMLP as general partner of NRLP. See NOTE 2. "SYNTEK ASSET MANAGEMENT,
L.P."

NOTE 10. MARGIN BORROWINGS

The Company has margin arrangements with various brokerage firms which provide
for borrowings of up to 50% of the market value of the Company's marketable
equity securities. The borrowings under such margin arrangements are secured
by equity securities of the REITs, NRLP and the Company's trading portfolio and
bear interest rates ranging from 7.0% to 11.0%. Margin borrowings were $53.3
million at December 31, 1997, and $40.0 million at December 31, 1996, 39.7% and
34.5%, respectively, of the market values of such equity securities at such
dates.

In August 1996, the Company consolidated its existing NRLP margin debt held by
various brokerage firms into a single loan of $20.3 million. In July 1997,
the lender advanced an additional $3.7 million, increasing the loan balance to
$24.0 million. The loan is secured by the Company's NRLP units with a market
value of at least 50% of the principal balance of the loan. As of December 31,
1997, 3,349,169 NRLP units with a market value of $80.8 million were pledged as
security for such loan.

F-24
<PAGE> 79
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

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

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

NOTE 12. DIVIDENDS

In June 1996, the Company's Board of Directors resumed the payment of dividends
on the Company's Common Stock. The Company paid common dividends totaling $2.0
million or $.20 per share in 1997 and dividends totaling $1.5 million or $.15
per share in 1996. The Company reported to the Internal Revenue Service that
100% of the dividends paid in 1997 represented ordinary income and 100% of the
dividends paid in 1996 represented a return of capital.

NOTE 13. PREFERRED STOCK

The Company's Series B 10% Cumulative Convertible Preferred Stock consists of a
maximum of 4,000 shares with a par value of $2.00 per share and a liquidation
preference of $100.00 per share. Dividends are payable at the rate of $10.00
per year or $2.50 per quarter to stockholders of record on the 15th day of each
March, June, September and December when and as declared by the Company's Board
of Directors. The Series B Preferred Stock is convertible between May 8, 1998
and June 8, 1998, into Common Stock of the Company at 90% of the average
closing price of the Company's Common Stock on the prior 30 trading days. At
December 31, 1997, 4,000 shares of Series B Preferred Stock were issued and
outstanding.

The Company's Series C 10% Cumulative Convertible Preferred Stock consists of a
maximum of 16,681 shares with a par value of $2.00 per share and a liquidation
preference of $100.00 per share. Dividends are payable at the rate of $10.00
per year or $2.50 per quarter to stockholders of record on the 15th day of each
March, June, September and December when and as declared by the Company's Board
of Directors. The Series C Preferred Stock is convertible between November 25,
1998 and February 23, 1999, into Common Stock of the Company at 90% of the
average closing price of the Company's Common Stock on the prior 30 trading
days. At December 31, 1997, 16,681 shares of Series C Preferred Stock were
issued and outstanding.

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

F-25
<PAGE> 80
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

A units held may be exchanged prior to May 31, 2001. Between June 1, 2001 and
May 31, 2006 all unexchanged Class A units are exchangeable. At December 31,
1997, none of the Series D Preferred Stock was issued.

The Company's Series E 10% Cumulative Convertible Preferred Stock consists of a
maximum of 80,000 shares with a par value of $2.00 per share and a liquidation
preference of $100.00 per share. Dividends are payable at the rate of 10.00
per year or $2.50 per quarter to stockholders of record on the 15th day of each
March, June, September and December when and as declared by the Company's Board
of Directors for periods prior to November 4, 1999 and $11.00 per year, $2.75
per quarter thereafter. The Series E Preferred Stock is reserved for the
conversion of the Class A limited partner units of Valley Ranch, L.P. Such
Class A units may be exchanged for Series E Preferred Stock at the rate of 100
Class A units for each share of Series E Preferred Stock. Beginning November
4, 1998, the Series E Preferred Stock may be converted into Common Stock of the
Company at 80% of the average closing price of the Company's Common Stock on
the prior 20 trading days. Up to 37.50% of the Series E Preferred Stock may be
converted between November 4, 1998 and November 3, 1999. Between November 4,
1999 and November 3, 2001 an additional 12.50% of the original Series E
Preferred Stock may be converted, and the remainder may be converted on or
after November 4, 2001. At December 31, 1997, none of the Series E Preferred
Stock was issued.

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

The Company's Series G 10% Cumulative Convertible Preferred Stock consists of a
maximum of 11,000 shares with a par value of $2.00 per share, and a liquidation
preference of $100.00 per share. Dividends are payable at the rate of $10.00
per year or $2.50 per quarter to stockholders of record on the 15th day of each
March, June, September and December when and as declared by the Company's Board
of Directors. The Series G Preferred Stock is reserved for the conversion of
the Class A limited partner units of Grapevine American, L.P. The Class A
units may be exchanged for Series G Preferred Stock at the rate of 100 Class A
units for each share of Series G Preferred Stock, on or after October 6, 1999.
The Series G Preferred Stock may be converted, after October 6, 2000, into
Common Stock of the Company at 90% of the market value of the Company's Common
Stock for the twenty trading days prior to conversion. At December 31, 1997,
none of the Series G Preferred Stock was issued.

NOTE 14. ADVISORY AGREEMENT

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

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

The Advisory Agreement provides that BCM shall receive base compensation at the
rate of 0.125% per month (1.5% on an annualized basis) of the Company's Average
Invested Assets. On October 23, 1991, based on the recommendation of BCM, the

F-26
<PAGE> 81
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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.

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

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

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

NOTE 15. PROPERTY MANAGEMENT

Since February 1, 1990, affiliates of BCM have provided property management
services to the Company. Currently, Carmel Realty Services, Ltd. ("Carmel,
Ltd.") provides property management services for a fee of 5% or less of the
monthly gross rents collected on the properties under its management. Carmel,
Ltd. subcontracts with other entities for the property-level management
services to the Company at various rates. The general partner of Carmel, Ltd.
is BCM. The limited partners of Carmel, Ltd. are (i) First Equity Properties,
Inc. ("First Equity"), which is 50% owned by BCM, (ii) Gene E. Phillips and
(iii) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd.
subcontracts the property-level management of the Company's hotels, shopping
centers, its office building and the Denver Merchandise Mart to Carmel Realty,
Inc. ("Carmel Realty"), which is a company owned by First Equity. Carmel
Realty is entitled to receive property and construction management fees and
leasing commissions in accordance with the terms of its property- level
management agreement with Carmel, Ltd.

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

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

<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Fees
Advisory and mortgage servicing . . . . . . . . . . $ 2,657 $ 1,539 $ 1,195
Loan arrangement . . . . . . . . . . . . . . . . . 592 806 95
Brokerage commissions . . . . . . . . . . . . . . . . 7,586 1,889 905
Property and construction management and leasing
commissions* . . . . . . . . . . . . . . . . . . . 865 892 1,200
--------- --------- ---------
$ 11,700 $ 5,126 $ 3,395
========= ========= =========

Cost reimbursements . . . . . . . . . . . . . . . . $ 1,809 $ 691 $ 516
========= ========= =========
</TABLE>

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

F-27
<PAGE> 82
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 17. INDUSTRY SEGMENTS

<TABLE>
<CAPTION>
Real Pizza
1997 Estate Parlor Total
- ------ ------------ ------------ ----------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 29,075 $ 17,926 $ 47,001
Income (loss) before income taxes . . . . . . . . . . (4,007) 1,579 (2,428)
Identifiable assets . . . . . . . . . . . . . . . . . 410,000 23,799 433,799
Depreciation and amortization . . . . . . . . . . . . 2,652 686 3,338
Capital expenditures . . . . . . . . . . . . . . . . . 10,993 6,693 17,686
</TABLE>

NOTE 18. INCOME TAXES

Financial statement income varies from taxable income, principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated
losses. At December 31, 1997, the Company had a tax net operating loss
carryforwards of $21.0 million expiring through 2011.

At December 31, 1997, the Company has a deferred tax benefit of $8.0 million
due to tax deductions available to it in future years. However, due to, among
other factors, the Company's inconsistent earnings history, the Company was
unable to conclude that the future realization of such deferred tax benefit,
which requires the generation of taxable income, was more likely than not.
Accordingly, a valuation allowance for the entire amount of the deferred tax
benefit has been recorded.

The components of tax expense are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C> <C>
Income tax provision
Current . . . . . . . . . . . . . . . . . . . . . $ - $ - $ 2
========= ========== ==========
</TABLE>

NOTE 19. EXTRAORDINARY GAIN

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

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

F-28
<PAGE> 83
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 20. RENTS UNDER OPERATING LEASES

The Company's operations include the leasing of an office building, a
merchandise mart and shopping centers. The leases thereon expire at various
dates through 2006. The following is a schedule of minimum future rents under
non-cancelable operating leases as of December 31, 1997:

<TABLE>
<S> <C>
1998 . . . . . . . . . . . . . . . . . . . . $ 3,747
1999 . . . . . . . . . . . . . . . . . . . . 3,427
2000 . . . . . . . . . . . . . . . . . . . . 2,773
2001 . . . . . . . . . . . . . . . . . . . . 2,231
2002 . . . . . . . . . . . . . . . . . . . . 1,875
Thereafter . . . . . . . . . . . . . . . . . 10,746
---------
$ 24,799
=========
</TABLE>

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

<TABLE>
<S> <C>
1998 . . . . . . . . . . . . . . . . . . . . $ 2,133
1999 . . . . . . . . . . . . . . . . . . . . 2,176
2000 . . . . . . . . . . . . . . . . . . . . 2,007
2001 . . . . . . . . . . . . . . . . . . . . 1,806
2002 . . . . . . . . . . . . . . . . . . . . 1,773
Thereafter . . . . . . . . . . . . . . . . . 9,387
---------
$ 19,282
=========
</TABLE>

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

NOTE 21. 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-29
<PAGE> 84
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 22. QUARTERLY RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------

1997 March 31, June 30, September 30, December 31,
- ---------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenue . . . . . . . . . . $ 7,499 $ 9,667 $ 15,039 $ 17,766
Expense . . . . . . . . . . 11,795 15,960 24,296 31,304
--------------- ------------- --------------- -------------

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

Net income (loss) . . . . . 271 2,540 (6,197) 958

Preferred dividend
requirement . . . . . . . (50) (49) (49) (58)
--------------- ------------- --------------- -------------

Net income (loss) appli-
cable to common shares . . $ 221 $ 2,491 $ (6,246) $ 900
=============== ============= =============== =============

Earnings per share
Net income (loss) . . . . . $ .02 $ .21 $ (.52) $ .07
=============== ============= =============== =============
</TABLE>

F-30
<PAGE> 85
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------
1997 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
Gains on sale of
real estate . . . . . . 559 547 1,961 592
Extraordinary gain . . . . 13 247 121 --
--------------- ------------- --------------- -------------

Net income (loss) . . . . . (215) (2,144) 770 (3965)

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

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

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

Net income (loss) . . . . . $ (.02) $ (.17) $ .06 $ (.28)
=============== ============= =============== =============
</TABLE>

NOTE 23. SUBSEQUENT EVENTS

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

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

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

In February 1998, the Company purchased Scoggins land, a 314.5 acre parcel of
undeveloped land in Tarrant County, Texas, for $3.0 million. The Company paid
$1.5 million in cash and obtained new mortgage financing of $1.5 million. The
mortgage bears interest at 14% per annum, requires quarterly payments of
interest only, requires a principal paydown of $300,000 in May 1998, and
matures in February 1999.

F-31
<PAGE> 86
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Also in February 1998, the Company purchased Bonneau land, a 8.4 acre parcel of
undeveloped land in Dallas County, Texas, for $1.0 million. The Company
obtained new mortgage financing of $1.0 million. The mortgage bears interest
at 18.5% per annum with the principal and interest being due at maturity in
February 1999.

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

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

Also in February 1998, the Company financed the unencumbered Valley Ranch land
in the amount of $4.3 million. The Company received net financing proceeds of
$4.1 million after the payment of various closing costs associated with the
financing. The mortgage bears interest at 9.0% per annum, requires monthly
payments of interest only and matures in February 2000.

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

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

F-32
<PAGE> 87
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 ART. 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 ART 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>
Available Information . . . . . . . . . . . . . . . . ii
Incorporation of Certain Information
by Reference . . . . . . . . . . . . . . . . . iii
Summary of Terms . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . 4
Ratio of Earnings to Fixed Charges . . . . . . . . . 10
Use of Proceeds . . . . . . . . . . . . . . . . . . . 10
Selling Shareholder . . . . . . . . . . . . . . . . . 10
Plan of Distribution . . . . . . . . . . . . . . . . 11
Description of ART . . . . . . . . . . . . . . . . . 12
The Business of ART . . . . . . . . . . . . . . . . . 13
Description of the Capital Stock of ART . . . . . . . 44
Legal Matters . . . . . . . . . . . . . . . . . . . . 48
Experts . . . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>

PREFERRED STOCK

COMMON STOCK

AMERICAN REALTY TRUST,
INC.

_______________

PROSPECTUS
_______________

MAY ___, 1998

<PAGE> 88
PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Set forth below is an estimate of the amount of fees and expenses to
be incurred in connection with the issuance and distribution of the Preferred
Shares offered hereby, other than underwriting discounts and commissions.

<TABLE>
<S> <C>
SEC Registration Fee $ 2,360
Blue Sky Fees and Expenses 5,000
Legal Fees and Expenses 20,000
Accounting Fees and Expenses 10,000

Printing and Engraving Expenses 10,000
Total $ 47,360
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article Thirteen of the Articles of Incorporation of ART provides that, to
the fullest extent permitted by Georgia law, as the same exists or may be
hereafter be amended, no director of ART shall be personally liable to ART or
the shareholders of ART for monetary damages for breach of the duty of care as
a director, provided that Article Thirteen does not limit or eliminate
liability arising or based upon (i) a breach of duty involving an appropriation
of a business opportunity of ART; (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 ART require ART to indemnify any person who, by reason of the
fact that he is or was a director of ART, is made or is threatened to be made a
party to an action, including an action brought by ART or its shareholders.
The Bylaws provide that ART 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 ART 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 ART give the ART Board the power to cause ART to provide to
officers, employees and agents of ART all or any part of the right to
indemnification afforded to directors of ART 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 ART pursuant
to the foregoing provisions, ART 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.
<PAGE> 89
ITEM 16. EXHIBITS

<TABLE>
<S> <C>
1.1 -- Underwriting agreement (1)

2.1 -- Plan of acquisition, reorganization, arrangement, liquidation or
succession (1)

4.1 -- 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 (2)

5.1 -- Opinion of Holt Ney Zatcoff & Wasserman, LLP as to the legality of
the Series F Preferred Stock and the Common Stock (2)

8.1 -- Opinion re tax matters (1)

10.1 -- Material contracts (1)

11.1 -- Statement re: computation of per share earnings (1)

12.1 -- Statement re: computation of ratios (1)

13.1 -- Annual report to security holders, Form 10-Q (3)

15.1 -- Letter re: unaudited interim financial information (1)

16.1 -- Letter re: change in certifying accountant (1)

23.1 -- Consent of BDO Seidman, LLP (American Realty Trust, Inc.) (4)

23.2 -- Consent of BDO Seidman, LLP (Continental Mortgage and Equity Trust) (4)

23.3 -- Consent of BDO Seidman, LLP (Income Opportunity Realty Investors, Inc.) (4)

23.4 -- Consent of BDO Seidman, LLP (Transcontinental Realty Investors, Inc.) (4)

23.5 -- Consent of BDO Seidman, LLP (National Realty, L.P.) (4)

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

24.1 -- Power of Attorney (4) (included at page II-4)

25.1 -- Statement of eligibility of trustee (1)

26.1 -- Invitation for competitive bids (1)

27.1 -- Financial data schedule (1)
- ----------
</TABLE>

(1) Not Applicable.
(2) Filed as an exhibit to the Post-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (No. 333-21583), filed
with the Commission on September 8, 1997 and incorporated by reference
herein.
(3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997, filed with the Commission on March 30,
1998 and incorporated by reference herein.
(4) Filed herewith.

II-2
<PAGE> 90
ITEM 17. UNDERTAKINGS

(a) The undersigned Company hereby undertakes:

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

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

(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement;

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

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

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

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

(b) The undersigned officer of ART hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of ART's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of ART pursuant to Item 15, above, or otherwise, ART 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 ART 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, ART 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> 91
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-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Dallas, State of Texas, on the 14th day of May,
1998.

AMERICAN REALTY TRUST, INC.

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

POWER OF ATTORNEY

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

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Karl L. Blaha President (Principal Executive May 14, 1998
- ---------------------------- Officer) and Director
Karl L. Blaha

/s/ Roy E. Bode Director May 14, 1998
- ----------------------------
Roy E. Bode

/s/ Oscar W. Cashwell Director May 14, 1998
- ---------------------------
Oscar W. Cashwell

Director May ___, 1998
- ---------------------------
Al Gonzalez

Director May ___, 1998
- ---------------------------
Cliff Harris

/s/ Thomas A. Holland Executive Vice President and May 14, 1998
- --------------------------- Chief Financial Officer
Thomas A. Holland (Principal Accounting Officer)
</TABLE>

II-4
<PAGE> 92
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM
------- ----
<S> <C>
1.1 -- Underwriting agreement (1)

2.1 -- Plan of acquisition, reorganization, arrangement, liquidation or
succession (1)

5.1 -- Opinion of Holt Ney Zatcoff & Wasserman, LLP as to the legality of
the Series F Preferred Stock and the Common Stock (2)

8.1 -- Opinion re tax matters (1)

10.1 -- Material contracts (1)

11.1 -- Statement re: computation of per share earnings (1)

12.1 -- Statement re: computation of ratios (1)

13.1 -- Annual report to security holders, Form 10-Q (3)

15.1 -- Letter re: unaudited interim financial information (1)

16.1 -- Letter re: change in certifying accountant (1)

23.1 -- Consent of BDO Seidman, LLP (American Realty Trust, Inc.) (4)

23.2 -- Consent of BDO Seidman, LLP (Continental Mortgage and Equity Trust) (4)

23.3 -- Consent of BDO Seidman, LLP (Income Opportunity Realty Investors, Inc.) (4)

23.4 -- Consent of BDO Seidman, LLP (Transcontinental Realty Investors, Inc.) (4)

23.5 -- Consent of BDO Seidman, LLP (National Realty, L.P.) (4)

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

24.1 -- Power of Attorney (4) (included at page II-4)

25.1 -- Statement of eligibility of trustee (1)

26.1 -- Invitation for competitive bids (1)

27.1 -- Financial data schedule (1)
- ----------
</TABLE>

<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 25, 1998, relating to the
consolidated financial statements of American Realty Trust, Inc. for the year
ended December 31, 1997.

We also consent to the reference to us under the caption "Experts" in the
Prospectus.

/s/ BDO Seidman, LLP

Dallas, Texas
May 13, 1998

<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 6,
1998, 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, 1997.

/s/ BDO Seidman, LLP

Dallas, Texas
May 13, 1998

<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 18,
1998, relating to the consolidated financial statements and schedules of Income
Opportunity Realty Investors, Inc. appearing in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.

/s/ BDO Seidman, LLP

Dallas, Texas
May 13, 1998

<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 12,
1998, 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, 1997.

/s/ BDO Seidman, LLP

Dallas, Texas
May 13, 1998

<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 17,
1998, 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, 1997.

/s/ BDO Seidman, LLP

Dallas, Texas
May 13, 1998