AMERICAN REALTY TRUST INC, 10-K405/A, 1999-04-20

AMERICAN REALTY TRUST INC
10-K405/A, 1999-04-20
REAL ESTATE OPERATORS (NO DEVELOPERS) & LESSORS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K/A

[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Year Ended December 31, 1998

Commission File Number 1-9948

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American Realty Trust, Inc.
(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

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

NONE

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

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

As of March 5, 1999, the Registrant had 10,561,586 shares of Common Stock
outstanding. Of the total shares outstanding 3,499,500 were held by other than
those who may be deemed to be affiliates, for an aggregate value of
$58,617,000 based on the closing price on the New York Stock Exchange on March
5, 1999. The basis of this calculation does not constitute a determination by
the Registrant that all of such persons or entities are affiliates of the
Registrant as defined in Rule 405 of the Securities Act of 1933, as amended.

Documents Incorporated by Reference:

Consolidated Financial Statements of National Realty, L.P.; Commission File
No. 1-9648
Consolidated Financial Statements of Continental Mortgage and Equity Trust;
Commission File No. 0-10503
Consolidated Financial Statements of Income Opportunity Realty Investors,
Inc.; Commission File No. 1-14784
Consolidated Financial Statements of Transcontinental Realty Investors, Inc.;
Commission File No. 1-9240

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This Form 10-K/A amends the Registrant's annual report on Form
10-K for the year ended December 31, 1998 in its entirety.

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INDEX TO
ANNUAL REPORT ON FORM 10-K

<TABLE>
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Page
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PART I

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

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

Item 3. Legal Proceedings................................................ 29

Item 4. Submission of Matters to a Vote of Security Holders.............. 29

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................. 29

Item 6. Selected Financial Data.......................................... 32

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 32

Item 8. Consolidated Financial Statements and Supplementary Data......... 41

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 89

PART III

Item 10. Directors, Executive Officers and Advisor of the Registrant..... 89

Item 11. Executive Compensation.......................................... 95

Item 12. Security Ownership of Certain Beneficial Owners and Management.. 97

Item 13. Certain Relationships and Related Transactions.................. 99

PART IV

Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-
K....................................................................... 102

Signature Page........................................................... 105
</TABLE>

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PART I

ITEM 1. BUSINESS

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

Business Plan and Investment Policy

The Company's primary business is investing in equity interests in real
estate (including equity securities of real estate-related entities), leases,
joint venture development projects and partnerships and to a lesser extent
financing real estate and real estate activities through investments in
mortgage loans, including first, wraparound and junior mortgage loans.
Information regarding the real estate and mortgage notes receivable portfolios
of the Company is set forth in ITEM 2. "PROPERTIES" and in Schedules III and
IV to the Consolidated Financial Statements included at ITEM 8. "CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."

Effective December 18, 1998, NRLP Management Corp. ("NMC"), a wholly-owned
subsidiary of the Company, was elected general partner of National Realty,
L.P. ("NRLP") and National Operating, L.P. ("NOLP"). 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. Until December 18, 1998, the general partner and
owner of 1% of the beneficial interest in each of NRLP and NOLP was Syntek
Asset Management, L.P. ("SAMLP"), a Delaware limited partnership, of which the
Company is a 96% limited partner. With its election as general partner, NMC
succeeded to SAMLP's 1% beneficial interest in each of NRLP and NOLP. NMC also
assumed liability for SAMLP's note for its capital contribution to the
Partnership. In addition, NMC assumed liability for a note which requires the
repayment of the $11.4 million paid by the Partnership under the Moorman
litigation settlement plus the $808,000 in court ordered attorney's fees and
the $30,000 paid to Joseph B. Moorman. This note requires repayment over a
ten-year period, bears interest at a variable rate, currently 7.2% per annum,
and is guaranteed by the Company. See ITEM 2. "PROPERTIES--Investments in Real
Estate Investment Trusts and Real Estate Partnerships."

At December 31, 1998, in addition to its general partner interest, the
Company owned approximately 55.0% of the outstanding limited partner units of
NRLP. Prior to NMC being elected general partner the Company accounted for its
investment in the Partnership under the equity method. As of December 31,
1998, the Company has consolidated the Partnership's accounts and will
consolidate its operations subsequent to such date.

NMC, has discretion in determining methods of obtaining funds for the
Partnership's operations, and the acquisition and disposition of its assets.
See ITEM 2. "PROPERTIES--Investments in Real Estate Investment Trusts and Real
Estate Partnerships."

The Company, through a wholly owned subsidiary, Pizza World Supreme, Inc.
("PWSI"), also operates and franchises pizza parlors featuring pizza delivery,
carry-out and dine-in under the trademark "Me-N-Ed's" in California and Texas.
The first Me-N-Ed's pizza parlor opened in 1962. At December 31, 1998, there
were 57 Me-N-Ed's pizza parlors in operation, consisting of 51 owned and 6
franchised pizza parlors, 7 of the owned pizza parlors were in Texas and the
remainder were in California.

The Company's businesses are not seasonal. With regard to real estate
investments, the Company is seeking both current income and capital
appreciation. The Company's plan of operation is to continue, to the extent
its liquidity permits, to make equity investments in income producing real
estate such as apartments and commercial properties or equity securities of
real estate-related entities. The Company also intends to continue to pursue

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higher risk, higher reward investments, such as improved and unimproved land
where it can obtain financing of substantially all of a property's purchase
price. The Company intends to seek selected dispositions of certain of its
assets, in particular certain of its land holdings, where the prices
obtainable for such assets justify their disposition. The Company has
determined that it will no longer actively seek to fund or purchase mortgage
loans. It may, however, in selected instances, originate mortgage loans or it
may provide purchase money financing in conjunction with a property sale. The
Partnership, however, has increased its lending activity, funding 16 loans in
1998, including a $95.0 million loan commitment to the Company and a $12.2
million loan assumed by NMC in connection with the Moorman litigation
settlement. See ITEM 2. "PROPERTIES--Investments in Real Estate Investment
Trusts and Real Estate Partnerships."

The Company's Board of Directors has broad authority under the Company's
governing documents to make all types of investments, and may devote available
assets to particular investments or types of investments, without restriction
on the amount or percentage of assets that may be allocated to a single
investment or to any particular type of investment, and without limit on the
percentage of securities of any one issuer that may be acquired. Investment
objectives and policies may be changed at any time by the Board of Directors
without stockholder approval.

The specific composition of the Company's real estate portfolio will depend
largely on the judgment of management as to changing investment opportunities
and the level of risk associated with specific investments or types of
investments. Management intends to attempt to maintain a real estate portfolio
diversified by location and type of property.

In addition to its equity investments in real estate, the Company has also
invested in private and open market purchases of the equity securities of
Continental Mortgage and Equity Trust ("CMET"), Income Opportunity Realty
Investors, Inc. ("IORI"), and Transcontinental Realty Investors, Inc. ("TCI")
and units of limited partner interest in NRLP. See ITEM 2. "PROPERTIES--
Investments in Real Estate Investment Trusts and Real Estate Partnerships."

Management of the Company

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

BCM is a company owned by a trust for the benefit of the children of Gene
E. Phillips, the Chairman of the Board and a Director of the Company until
November 16, 1992. Mr. Phillips served as a director of BCM until December 22,
1989 and as Chief Executive Officer of BCM until September 1, 1992. Mr.
Phillips serves as a representative of the trust for the benefit of his
children that owns BCM and, in such capacity, has substantial contact with the
management of BCM and input with respect to BCM's performance of advisory
services to the Company. As of March 5, 1999, BCM owned 5,738,472 shares of
the Company's Common Stock, approximately 54.3% of the shares then
outstanding. BCM is more fully described in ITEM 10. "DIRECTORS, EXECUTIVE
OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor." BCM has been providing
advisory services to the Company since February 6, 1989. BCM also serves as
advisor to CMET, IORI and TCI. The executive officers of the Company, are also
executive officers of CMET, IORI, TCI and NMC. Karl L. Blaha, President and a
Director of the Company, serves as Executive Vice President and as director of
NMC, the general partner of NRLP and NOLP. BCM performs certain administrative
functions for NRLP and NOLP on a cost reimbursement basis.

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Ltd. subcontracts with other entities for the provision of the property-level
management services 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 a subsidiary of BCM, (ii) Mr.
Phillips and (iii) a trust for the benefit of the children of Mr. Phillips.
Carmel, Ltd. subcontracts the property-level management of 15 of the Company's
commercial properties (shopping centers, office buildings and a merchandise
mart) and its hotels to Carmel Realty, Inc. ("Carmel Realty") which is a
company owned by First Equity. Carmel Realty is entitled to receive property
and construction management fees and leasing commissions in accordance with
the terms of its property-level management agreement with Carmel, Ltd.

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

The Company has no employees itself, but PWSI has 865 employees and a
majority-owned development subsidiary has five employees. Employees of the
Advisor render services to the Company.

Competition

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

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

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

In addition, also as described in ITEM 13. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS," the Company also competes with other entities which are
affiliates of the Advisor and which may have investment objectives similar to
the Company's and that may compete with the Company in purchasing, selling,
leasing and financing real estate and real estate-related investments. In
resolving any

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potential conflicts of interest which may arise, the Advisor has informed the
Company that it intends to continue to exercise its best judgment as to what
is fair and reasonable under the circumstances in accordance with applicable
law.

The Company is subject to all the risks incident to ownership and financing
of real estate and interests therein, many of which relate to the general
illiquidity of real estate investments. These risks include, but are not
limited to, changes in general or local economic conditions, changes in
interest rates and availability of permanent mortgage financing which may
render the acquisition, sale or refinancing of a property difficult or
unattractive and which may make debt service burdensome; changes in real
estate and zoning laws, increases in real estate taxes, federal or local
economic or rent controls, floods, earth quakes, hurricanes and other acts of
God and other factors beyond the control of management or the Advisor. The
illiquidity of real estate investments generally may impair the ability of
management to respond promptly to changing circumstances. Management believes
that such risks are partially mitigated by the diversification by geographic
region and property type of the Company's real estate. However, to the extent
new property acquisitions, in particular developed, partially developed and
undeveloped land, and mortgage lending are concentrated in any particular
region the advantages of geographic diversification are mitigated.

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

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

The quick-service restaurant industry is extremely competitive with respect
to price, service, location and food quality. PWSI and its franchisees compete
with a variety of other restaurants in the quick-service restaurant industry,
including those that offer dine-in, carry-out and delivery services. These
competitors include national and regional chains, franchisees of other
restaurant chains and local owner-operated restaurants. Some of these
competitors have been in existence longer and have an established market
presence in certain geographic regions, and some have substantially greater
financial, marketing and other resources than PWSI and its franchisees. PWSI
competes for qualified franchisees with many other restaurant concepts,
including national and regional restaurant chains.

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

At December 31, 1998, PWSI owned and operated 51 and franchised six pizza
parlors. The results achieved by PWSI's relatively small pizza parlor base may
not be indicative of the results of a larger number of pizza parlors in a more
geographically dispersed area. Because of PWSI's relatively small pizza parlor
base, an unsuccessful pizza parlor has a more significant effect on PWSI's
results of operations than would be the case in a company owning more pizza
parlors.

PWSI's existing pizza parlors, both owned and franchised, are located in
California or Texas. There are 50 pizza parlors in California and seven in
Texas. Accordingly, PWSI's results of operations may be affected by economic
or other conditions in these regions. Also, given PWSI's present geographic
concentration, publicity relating to PWSI's pizza parlors could have a more
pronounced effect on PWSI's overall sales than might be the case if PWSI's
pizza parlors were more broadly dispersed.

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All of the PWSI owned pizza parlors are operated on premises leased from
third parties. Most of the pizza parlor leases provide for a minimum annual
rent and additional rental payments if sales volumes exceed specified amounts.
There can be no assurance that PWSI will be able to renew leases upon
expiration or that the lease terms upon renewal will be as favorable as the
current lease terms. In 1999, PWSI plans to expand its franchised stores and
to construct and open five new company-owned stores.

ITEM 2. PROPERTIES

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

Details of the Company's real estate and mortgage notes receivable
portfolios at December 31, 1998 are set forth in Schedules III and IV,
respectively, to the Consolidated Financial Statements included at ITEM 8.
"CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The discussions
set forth below under the headings "Real Estate" and "Mortgage Loans" provide
certain summary information concerning the Company's real estate and mortgage
notes receivable portfolios.

At December 31, 1998, no single asset of the Company accounted for 10% or
more of its total assets. At December 31, 1998, 80.0% of the Company's assets
consisted of real estate, 5.7% consisted of notes and interest receivable,
3.8% consisted of investments in the equity investees, including CMET, IORI
and TCI, and 2.4% consisted of pizza parlor equipment and related goodwill.
The remaining 8.1% of the Company's assets were invested in cash, cash
equivalents, marketable equity securities and other assets. The percentage of
the Company's assets invested in any one category is subject to change and no
assurance can be given that the composition of the Company's assets in the
future will approximate the percentages listed above.

At December 31, 1998, the Company's real estate was located in all
geographic regions of the continental United States, other than the Northeast
region, as shown more specifically in the table under "Real Estate" below. The
Company also holds mortgage notes receivable secured by real estate located in
the Southeast, Southwest, Northeast and Midwest regions of the continental
United States, as shown more specifically in the table under "Mortgage Loans"
below.

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Geographic Regions

[MAP OF GEOGRAPHIC REGIONS APPEARS HERE]
Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. The
Company has 42 apartments, 4 commercial properties and 2 hotels in this
region.
Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New
Mexico, Oklahoma and Texas. The Company has 20 apartments and 5 commercial
properties in this region.
Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas,
Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South
Dakota, West Virginia and Wisconsin. The Company has 24 apartments, 2
commercial properties and 1 hotel in this region.
Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada,
Utah and Wyoming. The Company has 2 apartments, 3 commercial properties and 2
hotels in this region.
Pacific region comprised of the states of Alaska, California, Hawaii, Oregon
and Washington. The Company has 3 apartments, 3 commercial properties and 4
hotels in this region.
Excluded above are 59 parcels of improved and unimproved land and a single
family residence, as described below.

Northeast region comprised of the states of Connecticut, Delaware, Maryland,
Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island
and Vermont, and the District of Columbia. The Company has no properties in
this region.
Excluded above are 59 parcels of improved and unimproved land and a single
family residence, as described below.

Real Estate

At December 31, 1998, 80% of the Company's assets were invested in real
estate and the equity securities of real estate entities. The Company has
invested in real estate located throughout the continental United States,
either on a leveraged or nonleveraged basis. The Company's real estate
portfolio consists of properties held for investment, investments in
partnerships, properties held for sale and investments in equity securities of
CMET, IORI and TCI.

Types of Real Estate Investments. The Company's real estate consists of
apartments, commercial properties (office buildings, shopping centers and a
merchandise mart), hotels and improved and unimproved 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. Properties may be acquired subject to, or existing debt may be
assumed and properties may be mortgaged, pledged or otherwise collateralized
to obtain financing. The Board of Directors may alter the types of and
criteria for selecting new real estate investments and for obtaining financing
without a vote of the Company's stockholders.

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

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In 1998, the Company completed construction of One Hickory Center, a
102,615 sq. ft. office building in Farmers Branch, Texas. In December 1998,
the Company commenced construction of Two Hickory Center, a 102,607 sq. ft.
office building, also in Farmers Branch, Texas.

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

The following table sets forth the percentages, by property type and
geographic region, of owned real estate (excluding the 59 parcels of improved
and unimproved land, and a single family residence, described below) at
December 31, 1998.

<TABLE>
<CAPTION>
Commercial
Region Apartments Properties Hotels
------ ---------- ---------- ------
<S> <C> <C> <C>
Midwest........................................ 32.6% 34.7% 13.9%
Mountain....................................... 4.2 26.6 11.4
Pacific........................................ 2.5 9.5 45.9
Southeast...................................... 29.1 16.8 28.8
Southwest...................................... 31.6 12.4 --
----- ----- -----
100.0% 100.0% 100.0%
</TABLE>

The foregoing table is based solely on the apartment units, commercial
square footage and hotel rooms owned and does not reflect the value of the
Company's investment in each region.

Excluded from the above table are a single family residence in Dallas,
Texas and 59 parcels of improved and unimproved land consisting of: a
developed residential lot in a residential subdivision in Fort Worth, Texas; a
46.1 acre land parcel in Las Colinas, Texas; a 3.5 acre land parcel in
downtown Atlanta, Georgia; a 329.4 acre land parcel in Denver, Colorado; seven
parcels of land in Dallas County, Texas, totaling 436.0 acres; three parcels
of land in Irving, Texas, totaling 294.1 acres; a 420.0 acre land parcel in
Duchense, Utah; a 82.4 acre land parcel in Oceanside, California; four parcels
of land in Tarrant County, Texas, totaling 1,688.0 acres; two parcels of land
in Harris County, Texas, totaling 456.4 acres; nine parcels of land in Collin
County, Texas, totaling 743.4 acres; eight parcels of land in Farmers Branch,
Texas, totaling 101.24 acres; three parcels of land in Plano, Texas, totaling
175.4 acres; a 1,448 acre land parcel in Austin, Texas; three parcels of land
in Palm Desert, California, totaling 946.8 acres; a 41.8 acre land parcel in
Travis County, Texas; two parcels of land in Houston, Texas, totaling 139.5
acres; a 54.2 acre land parcel in Fort Worth, Texas; a 160.0 acre land parcel
in Lewisville, Texas; a 7.7 acre land parcel in Carrollton, Texas; a 19.4 acre
land parcel in Santa Clarita, California; and six additional land parcels
totaling approximately 113.5 acres. See Schedule III to the Consolidated
Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" for a more detailed description of the Company's real
estate portfolio.

A summary of the activity in the Company's owned real estate portfolio
during 1998 was as follows:

<TABLE>
<S> <C>
Owned properties in real estate portfolio at January 1, 1998........... 56
Partnership properties................................................. 66
Properties purchased................................................... 56
Property constructed................................................... 1
Property obtained through foreclosure.................................. 1
Properties sold........................................................ (3)
----
Owned properties in real estate portfolio at December 31, 1998......... 177
====
</TABLE>

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Properties Held for Investment. Set forth below are the Company's
properties held for investment and the monthly rental rate for apartments and
the average annual rental rate for commercial properties and the average daily
room rate and room revenue divided by total available rooms for hotels and
occupancy at December 31, 1998, 1997 and 1996 for apartments and commercial
properties and average occupancy during 1998, 1997 and 1996 for hotels:

<TABLE>
<CAPTION>
Rent Per
Square Foot Occupancy %
Units/ ------------------ --------------
Property Location Square Footage 1998 1997 1996 1998 1997 1996
- -------- ----------------- ------------------------- ------ ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Apartments
Ashford................. Tampa FL 56 units/42,196 sq. ft. $ .74 $ * $ * 98 * *
Bay Anchor.............. Panama City, FL 12 units/10,700 sq. ft. .54 * * 83 * *
Carriage Park........... Tampa, FL 46 units/36,750 sq. ft. .80 * * 94 * *
Chateau Bayou........... Ocean Springs, MS 122 units/105,536 sq. ft. .71 * * 98 * *
Concord................. Indianapolis, IN 198 units/129,380 sq. ft. .19 * * 33 * *
Conradi House........... Tallahassee, FL 98 units/49,900 sq. ft. .71 * * 96 * *
Country Squire.......... Indianapolis, IN 225 units/158,625 sq. ft. .15 * * 27 * *
Crossing Church......... Tampa, FL 52 units/40,024 sq. ft. .73 * * 98 * *
Daluce.................. Tallahassee, FL 112 units/95,432 sq. ft. .59 * * 94 * *
Edgewater Gardens....... Biloxi, MS 140 units/148,900 sq. ft. .56 * * 99 * *
Falcon House............ Ft. Walton, FL 82 units/71,220 sq. ft. .62 * * 93 * *
Georgetown.............. Panama City, FL 44 units/36,160 sq. ft. .61 * * 93 * *
Governor Square......... Tallahassee, FL 168 units/146,550 sq. ft. .60 * * 92 * *
Grand Lagoon............ Panama City, FL 54 units/47,460 sq. ft. .73 * * 80 * *
Greenbriar.............. Tallahassee, FL 50 units/36,600 sq. ft. .70 * * 96 * *
Lake Chateau............ Thomasville, GA 98 units/65,800 sq. ft. .56 * * 97 * *
Landings/Marina......... Pensacola, FL 52 units/34,464 sq. ft. .67 * * 87 * *
Lee Hills............... Tallahassee, FL 16 units/14,720 sq. ft. .54 * * 94 * *
Med Villas.............. San Antonio, TX 140 units/158,960 sq. ft. .49 * * 93 * *
Morning Star............ Tallahassee, FL 82 units/41,000 sq. ft. .76 * * 100 * *
Northside Villas........ Tallahassee, FL 81 units/134,000 sq. ft. .57 * * 93 * *
Oak Hill................ Tallahassee, FL 92 units/81,240 sq. ft. .60 * * 97 * *
Park Avenue............. Tallahassee, FL 121 units/78,979 sq. ft. .79 * * 90 * *
Pinecrest............... Tallahassee, FL 48 units/46,400 sq. ft. .57 * * 90 * *
Regency................. Tampa, FL 78 units/55,810 sq. ft. .81 * * 96 * *
Rolling Hills........... Tallahassee, FL 134 units/115,730 sq. ft. .61 * * 92 * *
Seville................. Tallahassee, FL 62 units/63,360 sq. ft. .56 * * 100 * *
Stonegate............... Tallahassee, FL 83 units/34,900 sq. ft. .77 * * 93 * *
Sunset.................. Odessa, TX 240 units/160,400 sq. ft. .46 * * 96 * *
Valley Hi............... Tallahassee, FL 54 units/27,800 sq. ft. .71 * * 100 * *
Villager................ Ft. Walton, FL 33 units/22,840 sq. ft. .71 * * 97 * *
Waters Edge III......... Gulfport, MS 238 units/212,216 sq. ft. .59 * * 96 * *
Westwood................ Mary Ester, FL 120 units/93,000 sq. ft. .67 * * 91 * *
Westwood Parc........... Tallahassee, FL 94 units/55,950 sq. ft. .69 * * 100 * *
White Pines............. Tallahassee, FL 85 units/17,000 sq. ft. .74 * * 94 * *
Windsor Tower........... Ocala, FL 64 units/66,000 sq. ft. .45 * * 96 * *
Arlington Place......... Pasadena, TX 230 units/205,476 sq. ft. .64 .63 .62 98 95 91
Barcelona............... Tampa, FL 368 units/346,144 sq. ft. .52 .50 .49 91 94 93
Bavarian................ Middletown, OH 259 units/229,560 sq. ft. .63 .63 .62 90 92 96
Bent Tree............... Addison, TX 292 units/244,480 sq. ft. .73 .70 .66 93 96 97
Blackhawk............... Ft. Wayne, IN 209 units/190,520 sq. ft. .57 .54 .53 94 96 95
Bridgestone............. Friendswood, TX 76 units/65,519 sq. ft. .67 .64 .64 97 99 94
Candlelight Square...... Lenexa, KS 119 units/114,630 sq. ft .61 .58 .55 96 94 97
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
Rent Per Square Foot Occupancy %
Units/ -------------------- --------------
Property Location Square Footage 1998 1997 1996 1998 1997 1996
- -------- ---------------- ------------------------- ------ ------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Chalet I................ Topeka, KS 162 units/131,791 sq. ft. $ .65 $ .62 $ .61 97 96 96
Chalet II............... Topeka, KS 72 units/49,164 sq. ft. .70 .68 .67 91 93 89
Chateau................. Bellevue, NE 115 units/99,220 sq. ft. .71 .69 .63 94 95 99
Club Mar................ Sarasota, FL 248 units/230,180 sq. ft. .65 .61 .59 93 99 91
Confederate Point....... Jacksonville, FL 206 units/277,860 sq. ft. .58 .46 .45 93 91 94
Country Place........... Round Rock, TX 152 units/119,808 sq. ft. .72 .71 .71 94 88 93
Covered Bridge.......... Gainesville, FL 176 units/171,416 sq. ft. .64 .64 .63 97 98 94
Fair Oaks............... Euless, TX 208 units/166,432 sq. ft. .65 .61 .58 93 96 96
Four Seasons............ Denver, CO 384 units/254,900 sq. ft. .86 .80 .78 96 98 94
Fox Club................ Indianapolis, IN 336 units/317,600 sq. ft. .56 .54 .54 89 95 88
Foxwood................. Memphis, TN 220 units/212,000 sq. ft. .57 .54 .51 90 94 93
Hidden Valley........... Grand Rapids, MI 176 units/260,970 sq. ft. .54 .52 .52 96 96 93
Horizon East............ Dallas, TX 166 units/141,081 sq. ft. .55 .53 .52 96 93 92
Kimberly Woods.......... Tucson, AZ 279 units/249,678 sq. ft. .59 .57 .55 92 92 93
La Mirada............... Jacksonville, FL 320 units/341,400 sq. ft. .52 .51 .50 99 91 93
Lake Nora Arms.......... Indianapolis, IN 588 units/429,380 sq. ft. .68 .65 .63 94 95 91
Lantern Ridge........... Richmond, VA 120 units/112,296 sq. ft. .54 .53 .51 97 93 95
Mallard Lake............ Greensboro, NC 336 units/295,560 sq. ft. .64 .63 .62 91 93 95
Manchester Commons...... Manchester, MO 280 units/331,820 sq. ft. .56 .53 .50 91 95 93
Mesa Ridge.............. Mesa, AZ 480 units/386,336 sq. ft. .68 .65 .65 95 98 88
Nora Pines.............. Indianapolis, IN 254 units/254,676 sq. ft. .60 .59 .57 95 92 94
Oak Hollow.............. Austin, TX 409 units/290,072 sq. ft. .90 .87 .87 97 94 91
Oak Tree................ Grandview, MO 189 units/160,591 sq. ft. .90 .57 .54 99 95 94
Olde Towne.............. Middletown, OH 199 units/179,395 sq. ft. .60 .57 .57 90 94 92
Pheasant Ridge.......... Bellevue, NE 264 units/243,960 sq. ft. .58 .61 .56 89 93 94
Pines................... Little Rock, AR 257 units/221,981 sq. ft. .62 .41 .41 92 90 93
Place One............... Tulsa, OK 407 units/302,263 sq. ft. .42 .57 .51 93 92 96
Quail Point............. Huntsville, AL 184 units/202,602 sq. ft. .58 .42 .42 89 91 96
Regency................. Lincoln, NE 106 units/111,700 sq. ft. .44 .63 .60 87 98 95
Regency Falls........... San Antonio, TX 546 units/348,692 sq. ft. .67 .63 .63 82 92 93
Rockborough............. Denver, CO 345 units/249,723 sq. ft. .64 .73 .70 94 94 92
Santa Fe................ Kansas City, MO 225 units/180,416 sq. ft. .80 .56 .53 92 93 91
Shadowood............... Addison, TX 184 units/134,616 sq. ft. .58 .74 .69 94 96 97
Sherwood Glen........... Urbandale, IA 180 units/143,745 sq. ft. .76 .77 .75 90 94 96
Stonebridge............. Florissant, MO 100 units/140,576 sq. ft. .79 .45 .43 95 100 98
Summerwind.............. Reseda, CA 172 units/114,711 sq. ft. .46 .90 .90 97 96 92
Sun Hollow.............. El Paso, TX 216 units/156,000 sq. ft. .93 .65 .64 93 97 90
Tanglewood.............. Arlington
Heights, IL 838 units/612,816 sq. ft. 1.07 1.03 .99 92 93 92
Timber Creek............ Omaha, NE 180 units/162,252 sq. ft. .70 .66 .64 97 95 98
Villa Del Mar........... Wichita, KS 162 units/128,004 sq. ft. .60 .58 .58 92 97 94
Villas.................. Plano, TX 208 units/156,632 sq. ft. .80 .77 .73 94 98 95
Whispering Pines........ Canoga Park, CA 102 units/61,671 sq. ft. 1.05 1.01 1.00 93 94 92
Whispering Pines........ Topeka, KS 320 units/299,264 sq. ft. .51 .49 .49 95 95 89
Windridge............... Austin, TX 408 units/281,778 sq. ft. .89 .88 .88 94 95 93
Windtree I & II......... Reseda, CA 159 units/109,062 sq. ft. .93 .90 .90 95 96 94
Woodlake................ Carrollton, TX 256 units/210,208 sq. ft. .77 .73 .68 97 98 99
Woodsong II............. Smyrna, GA 190 units/207,460 sq. ft. .56 .54 .54 99 96 85
Woodstock............... Dallas, TX 320 units/222,112 sq. ft. .63 .60 .56 95 92 95
</TABLE>

11
<PAGE>

<TABLE>
<CAPTION>
Rent Per Square Foot Occupancy %
-------------------- --------------
Property Location Square Footage 1998 1997 1996 1998 1997 1996
- -------- ------------------ -------------- ------ ------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office Buildings
56 Expressway........... Oklahoma City, OK 54,649 sq.ft. $ 9.53 $ 8.64 $ 8.21 91 94 88
Executive Court......... Memphis, TN 41,840 sq.ft. 10.64 9.79 10.11 96 96 95
Marina Playa............ Santa Clara, CA 124,322 sq.ft. 21.55 20.54 19.54 97 100 99
Melrose Business Park... Oklahoma City, OK 124,200 sq.ft. 3.03 2.88 2.76 80 93 90
One Hickory Center...... Farmers Branch, TX 102,615 sq.ft. -- * * 0 * *
Rosedale Towers......... Minneapolis, MN 84,798 sq.ft. 15.48 15.03 14.88 94 93 91
University Square....... Anchorage, AK 22,260 sq.ft. 13.83 14.07 15.07 81 100 84
Shopping Centers
Collection.............. Denver, CO 267,812 sq.ft. 8.92 9.46 * 94 82 *
Cross County Mall....... Mattoon, IL 304,575 sq.ft. 4.99 4.88 4.90 90 89 90
Cullman................. Cullman, AL 92,466 sq.ft. 3.91 3.87 3.86 98 97 98
Harbor Plaza............ Aurora, CO 45,863 sq.ft. 9.86 9.44 8.73 86 94 97
Katella Plaza........... Orange, CA 52,169 sq.ft. 9.79 9.20 7.73 71 71 71
Oaktree Village......... Lubbock, TX 45,623 sq.ft. 8.27 8.17 7.98 70 90 89
Preston Square.......... Dallas, TX 35,508 sq.ft. 16.04 15.26 * 77 92 *
Regency Point........... Jacksonville, FL 67,410 sq.ft. 12.36 12.07 11.39 91 83 84
Westwood................ Tallahassee, FL 149,855 sq.ft. 6.77 6.44 6.42 93 93 74
Merchandise Mart
Denver Mart............. Denver, CO 509,008 sq.ft. $11.35 $14.75 $15.33 92 93 95
Single Family Residence
Tavel Circle............ Dallas, TX 2,271 sq.ft.
</TABLE>

<TABLE>
<CAPTION>
Total Room Revenue
Divided by
Total Available
Average Room Rate Occupancy % Rooms
-------------------- -------------- --------------------
Property Location Rooms 1998 1997 1996 1998 1997 1996 1998 1997 1996
- -------- ------------------ --------- ------ ------ ------ ---- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hotels
Best Western............ Virginia Beach, VA 110 rooms $92.65 $90.44 $41.11 65 60 42 $60.37 $54.03 $17.69
Continental............. Las Vegas, NV 371 rooms ** * * ** * * ** * *
Holiday Inn............. Kansas City, MO 196 rooms 65.38 70.73 66.46 79 77 79 51.38 54.13 52.63
Piccadilly Airport...... Fresno, CA 185 rooms 68.53 62.98 * 61 50 * 41.68 35.94 *
Piccadilly Chateau...... Fresno, CA 78 rooms 55.18 50.86 * 60 49 * 33.19 27.74 *
Piccadilly Shaw......... Fresno, CA 194 rooms 70.63 64.07 * 66 62 * 46.71 41.17 *
Piccadilly University... Fresno, CA 190 rooms 67.42 62.22 * 59 49 * 39.42 35.65 *
Quality Inn............. Denver, CO 161 rooms 54.07 53.15 46.66 61 53 36 32.95 28.02 16.80
Williamsburg Hospitality
House.................. Williamsburg, VA 296 rooms 85.87 81.87 * 64 60 * 54.85 55.30 *
</TABLE>
- --------
* Property was purchased, obtained through foreclosure or under construction
in 1998 or 1997.
** Leased to a licensed casino operator.

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

12
<PAGE>

properties for a total of $7.8 million, receiving net cash of $3.9 million
after paying off $3.7 million in mortgage debt and the payment of various
closing costs. The new mortgages bear interest at 9.5% per annum, require
monthly principal and interest payments totaling $66,000 and mature in
February 2008. In conjunction with reacquiring the properties, the Company
received from Carmel Realty a refund of the $230,000 real estate commission
the Company had paid in 1994 on the sale of the three properties. In June
1998, the remaining two properties were reacquired for $8.6 million. The
Company paid $2.1 million in cash and assumed the existing mortgages totaling
$6.5 million. The mortgages bear interest at 8.73% per annum, require monthly
principal and interest payments totaling $49,000 and mature in January 2019.
The Company also received from Carmel Realty a refund of the $323,000 real
estate commission the Company had paid in 1994 on the sale of these two
properties.

In May 1998, but effective April 1, 1998, the Company purchased, in a
single transaction, twenty-nine apartments with a total of 2,441 units in
Florida and Georgia for $56.1 million. The properties were acquired through
three newly-formed controlled limited partnerships. The partnerships paid a
total of $6.1 million in cash, assumed $43.4 million in mortgage debt and
issued a total of $6.6 million in Class A limited partner units in the
acquiring partnerships, in which the Company is the Class B Limited Partner
and a wholly-owned subsidiary of the Company is the Managing General Partner.
The Class A limited partners were entitled to an annual preferred return of
$.08 per unit in 1998 and are entitled to an annual preferred return of $.09
per unit in 1999 and $.10 per unit in 2000 and thereafter. The Class A units
are exchangeable after April 1, 1999 into shares of Series F Cumulative
Convertible Preferred Stock on the basis of ten units for each preferred
share. The assumed mortgages bear interest at rates ranging from 7.86% and
11.22% per annum, require monthly principal and interest payments totaling
$384,000 and mature between July 1, 2000 and September 1, 2017. A real estate
brokerage commission of $1.7 million was paid to Carmel Realty.

In November 1998, the Company purchased two apartments with a total of 423
units in Indianapolis, Indiana for $7.2 million. The properties were acquired
through a newly-formed controlled partnership. The partnership paid a total of
$14,000 in cash, assumed $5.9 million in mortgage debt and issued $1.3 million
in Class A limited partner units in the acquiring partnership, in which the
Company is the Class B limited partner and a wholly-owned subsidiary of the
Company is the Managing General Partner. The Class A limited partners are
entitled to a preferred return of $.07 per annum per unit. The Class A units
are exchangeable after November 18, 1999, into shares of Series F Cumulative
Convertible Preferred Stock on the basis of ten units for each preferred
share. The assumed mortgages bear interest at 9.95% per annum and 10.75% per
annum, one requires monthly payments of interest and principal of $25,000 and
matures in October 2012 and the other requires monthly interest only payments
and matures in June 1999.

At December 31, 1997, the Company had under construction One Hickory
Center, a 102,615 sq. ft. office building in Farmers Branch, Texas.
Construction was completed in December 1998, at a cost of $7.8 million.

In January 1999, the Partnership sold the 199 unit Olde Towne Apartments in
Middleton, Ohio, for $4.6 million, receiving net cash of $4.4 million after
the payment of various closing costs. A gain will be recognized on the sale.

In February 1999, the Partnership sold the 225 unit Santa Fe Apartments in
Kansas City, Missouri, for $4.6 million, receiving net cash of $4.3 million
after the payment of various closing costs. A gain will be recognized on the
sale.

Also in February 1999, the Partnership sold the 480 unit Mesa Ridge
Apartments in Mesa, Arizona, for $19.5 million, receiving net cash of $793,000
after the payment of various closing costs and remitting $17.8 million to the
lender to hold in escrow pending a substitution of collateral. Such funds will
be released when substitute collateral is approved. If substitute collateral
is not provided by August 1999, $13.0 million of the escrow will be applied
against the mortgage's principal balance, approximately $885,000 will be
retained by the lender as a prepayment penalty and the remaining $3.9 million
will be returned to the Partnership. A gain will be recognized on the sale.

13
<PAGE>

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

<TABLE>
<CAPTION>
Property Location Acres/Lots
-------- ------------------ -------------
<S> <C> <C>
Atlanta..................................... Atlanta, GA 3.5 acres
Bad Lands................................... Duchense, UT 420.0 acres
Bonneau..................................... Dallas County, TX 8.4 acres
Chase Oaks.................................. Plano, TX 39.0 acres
Croslin..................................... Dallas, TX .8 acres
Dalho....................................... Farmers Branch, TX 3.4 acres
Desert Wells................................ Palm Desert, CA 420.0 acres
Dowdy....................................... Collin County, TX 165.0 acres
Eldorado Parkway............................ Collin County, TX 8.5 acres
FRWM Cummings............................... Farmers Branch, TX 6.4 acres
Hollywood Casino............................ Farmers Branch, TX 51.7 acres
HSM......................................... Farmers Branch, TX 6.2 acres
Jeffries Ranch.............................. Oceanside, CA 82.4 acres
JHL Connell................................. Carrollton, TX 7.7 acres
Katrina..................................... Palm Desert, CA 454.8 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 46.1 acres
Marine Creek................................ Fort Worth, TX 54.2 acres
Mason/Goodrich.............................. Houston, TX 244.8 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
Mendoza..................................... Dallas, TX .35 acres
Messick..................................... Palm Springs, CA 72.0 acres
Pantex...................................... Collin County, TX 182.5 acres
Parkfield................................... Denver, CO 329.4 acres
Pioneer Crossing............................ Austin, TX 1,448.0 acres
Plano Parkway............................... Plano, TX 81.2 acres
Rasor....................................... Plano, TX 141.7 acres
Rivertrails I............................... Ft. Worth, TX 1 lot
Santa Clarita............................... Santa Clarita, CA 19.5 acres
Scoggins.................................... Tarrant County, TX 314.5 acres
Scout....................................... Tarrant County, TX 546.0 acres
Stagliano................................... Farmers Branch, TX 3.2 acres
Stone Meadow................................ Houston, TX 13.5 acres
Thompson.................................... Farmers Branch, TX 4.0 acres
Thompson II................................. Dallas County, TX 3.5 acres
Tomlin...................................... Farmers Branch, TX 9.2 acres
Tree Farm--LBJ.............................. Dallas County, TX 10.4 acres
Valley Ranch................................ Irving, TX 319.8 acres
Valley Ranch III............................ Irving, TX 12.5 acres
Valley Ranch IV............................. Irving, TX 12.4 acres
Valwood..................................... Dallas, TX 280.0 acres
Van Cattle.................................. McKinney, TX 126.6 acres
</TABLE>

14
<PAGE>

<TABLE>
<CAPTION>
Property Location Acres/Lots
-------- ----------------- -----------
<S> <C> <C>
Vineyards...................................... Grapevine, TX 15.8 acres
Vista Business Park............................ Travis County, TX 41.8 acres
Vista Ridge.................................... Lewisville, TX 160.0 acres
Walker......................................... Dallas County, TX 132.6 acres
Yorktown....................................... Harris County, TX 325.8 acres
Other (6 properties)........................... Various 113.5 acres
</TABLE>

In January 1998, the Company purchased El Dorado Parkway land, a 8.5 acre
parcel of unimproved land in Collin County, Texas, for $952,000. The Company
paid $307,000 in cash, 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 seller financing bears
interest at 8% per annum, requires semiannual payments of principal and
interest of $67,000 and matures in January 2002. A real estate brokerage
commission of $57,000 was paid to Carmel Realty.

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

Further in January 1998, the Company purchased JHL Connell land, a 7.7 acre
parcel of unimproved land in Carrollton, Texas, for $1.3 million in cash. A
real estate brokerage commission of $39,000 was paid to Carmel Realty.

In February 1998, the Company purchased Scoggins land, a 314.5 acre parcel
of unimproved land in Tarrant County, Texas, for $3.0 million. The Company
paid $1.5 million in cash and obtained mortgage financing of $1.5 million. The
mortgage bore interest at 14% per annum, required quarterly payments of
interest only, required a principal reduction payment of $300,000 in May 1998,
and matured in February 1999. A real estate brokerage commission of $91,000
was paid to Carmel Realty. In May 1998, the Company refinanced the mortgage
debt along with the debt secured by its Scout land parcel under the Las
Colinas I term loan, as discussed below.

Also in February 1998, the Company purchased Bonneau land, a 8.4 acre
parcel of unimproved land in Dallas County, Texas, for $1.0 million. The
Company obtained mortgage financing of $1.0 million. The mortgage bore
interest at 18.5% per annum with principal and interest due at maturity in
February 1999. The JHL Connell land was pledged as additional collateral for
this loan. A real estate brokerage commission of $30,000 was paid to Carmel
Realty. In March 1999, the Company refinanced the mortgage debt secured by the
property along with the mortgage debt secured by the Dalho and Stagliano land
parcels under the Las Colinas I term loan in the amount of $703,000. The
Company paid an additional $1.5 million in cash to pay off the $2.1 million in
mortgage debt and accrued but unpaid interest. A mortgage brokerage and equity
refinancing fee of $7,000 was paid to BCM.

Further in February 1998, the Company financed its unencumbered Kamperman
land in the amount of $1.6 million, receiving net cash of $1.5 million after
the payment of various closing costs. The mortgage bears interest at 9.0% per
annum, requires monthly payments of interest only and matures in February
2000. A mortgage brokerage and equity refinancing fee of $16,000 was paid to
BCM.

In February 1998, the Company refinanced the mortgage debt secured by its
Vineyards land in the amount of $3.4 million, receiving net cash of $2.3
million, after paying off $540,000 in mortgage debt and the payment of various
closing costs. The new mortgage bears interest at 9.0% per annum, requires
monthly payments of interest only and matures in February 2000. A mortgage
brokerage and equity refinancing fee of $34,000 was paid to BCM.

15
<PAGE>

Also in February 1998, the Company financed its unencumbered Valley Ranch
land in the amount of $4.3 million, receiving net cash of $4.1 million after
the payment of various closing costs. The mortgage bears interest at 9.0% per
annum, requires monthly payments of interest only and matures in February
2000. A mortgage brokerage and equity refinancing fee of $43,000 was paid to
BCM.

In March 1998, the Company financed its unencumbered Stagliano and Dalho
land in the amount of $800,000 with the lender on the Bonneau land, described
above, receiving net cash of $790,000 after the payment of various closing
costs. The mortgage bore interest at 18.5% per annum with principal and
interest due at maturity in February 1999. The JHL Connell land was pledged as
additional collateral for this loan. A mortgage brokerage and equity
refinancing fee of $8,000 was paid to BCM. In March 1999, the Company
refinanced the mortgage debt secured by these properties along with the
mortgage debt secured by the Bonneau land parcel under the Las Colinas I term
loan in the amount of $703,000. The Company paid an additional $1.5 million in
cash to pay off the $2.1 million in mortgage debt and accrued but unpaid
interest. A mortgage brokerage and equity refinancing fee of $7,000 was paid
to BCM.

Also in March 1998, the Company purchased Desert Wells land, a 420 acre
parcel of unimproved land in Palm Desert, California, for $12.0 million. The
Company paid $400,000 in cash, obtained mortgage financing of $10.0 million
and obtained seller financing of the remaining $1.6 million of the purchase
price. The mortgage bore interest at 4.5% above the prime rate, currently
12.25% per annum, required monthly payments of interest only and matured in
March 1999. The seller financing bore interest at 10% per annum, required
monthly payments of interest only and matured in July 1998. The seller
financing was paid at maturity. A real estate brokerage commission of $720,000
was paid to Carmel Realty. The lender has agreed to an extension of its
matured mortgage to March 2000. All other terms would remain unchanged.

Further in March 1998, the Company refinanced the mortgage debt secured by
its McKinney Corners I, II, III, IV and V and Dowdy land in the amount of
$20.7 million, receiving net cash of $5.9 million after paying off $2.5
million in existing mortgage debt, the paydown of $10.2 million on the Las
Colinas I term loan and the payment of various closing costs. The new mortgage
bore interest at 12% per annum, required monthly payments of interest only and
matured in March 1999. A mortgage brokerage and equity refinancing fee of
$207,000 was paid to BCM. The lender has agreed to extend its mature mortgage
to January 2000, for a 2% fee and a paydown of any net refinancing proceeds
received by the Company from refinancing the Williamsburg Hospitality House.
All other terms would remain unchanged.

In April 1998, the Company purchased Yorktown land, a 325.8 acre parcel of
undeveloped land in Harris County, Texas, for $7.4 million. The Company paid
$3.0 million in cash and obtained seller financing of the remaining $4.4
million of the purchase price. The seller financing bore interest at 8.5% per
annum, required monthly payments of interest only and matured in February
1999. A real estate brokerage commission of $223,000 was paid to Carmel
Realty. The Company has received a written commitment from a lender to
refinance the matured mortgage in the approximate amount of $5.0 million. The
new mortgage is scheduled to close on or about April 15, 1999.

Also in April 1998, the Company sold a 77.7 acre tract of its Lewisville
land parcel, for $6.8 million, receiving net cash of $153,000 after paying off
first and second lien mortgages totaling $5.9 million and the payment of
various closing costs. A real estate brokerage commission of $203,000 was paid
to Carmel Realty. A gain of $1.9 million was recognized on the sale.

Further in April 1998, the Company obtained a second lien mortgage of $2.0
million secured by its BP Las Colinas land from the limited partner, at the
time, in a partnership that owned approximately 15.8% of the outstanding
shares of the Company's Common Stock. The second lien mortgage bore interest
at 12% per annum, with principal and interest paid at maturity in October
1998.

In April 1998, the Company refinanced the mortgage debt secured by its
Parkfield land in the amount of $7.3 million, receiving net cash of $1.2
million after paying off $5.0 million in mortgage debt and the payment

16
<PAGE>

of various closing costs. The new mortgage bears interest at 9.5% per annum,
requires monthly payments of interest only and matures in April 2000. A
mortgage brokerage and equity refinancing fee of $73,000 was paid to BCM.

Also in April 1998, the Company foreclosed on the Continental Hotel and
Casino in Las Vegas, Nevada, the collateral securing a wraparound mortgage
note with a principal balance of $22.7 million at March 31, 1998. The property
is classified as held for investment. See "Mortgage Loans," below.

In May 1998, the Company sold a 15.4 acre tract of its Valley Ranch land
parcel, for $1.2 million, receiving no net cash after paying down by $1.1
million the mortgage secured by such land parcel and the payment of various
closing costs. A real estate brokerage commission of $37,000 was paid to
Carmel Realty. A gain of $663,000 was recognized on the sale.

Also in May 1998, the Company purchased the FRWM Cummings land, a 6.4 acre
parcel of unimproved land in Farmers Branch, Texas, for $1.2 million in cash.
A real estate brokerage commission of $36,000 was paid to Carmel Realty.

Further in May 1998, the Company sold a 21.3 acre tract of its Parkfield
land parcel, for $1.3 million, receiving no net cash after paying down by $1.1
million the mortgage secured by such land parcel and the payment of various
closing costs. A real estate brokerage commission of $38,000 was paid to
Carmel Realty. A gain of $670,000 was recognized on the sale.

In May 1998, the Company refinanced the mortgage debt secured by its Scout
and Scoggins land in the amount of $10.4 million under the Las Colinas I term
loan, receiving net cash of $6.6 million after paying off mortgage debt of
$1.4 million on the Scout land and $1.5 million on the Scoggins land, a pay
down of $250,000 on the Keller land mortgage, and the payment of various
closing costs. The Company also pledged 250,000 shares of its Common Stock and
BCM, the Company's advisor, pledged 177,000 shares of the Company's Common
Stock as additional security on the term loan.

In June 1998, the Company sold a 21.6 acre tract of its Chase Oaks land
parcel, for $3.3 million, receiving net cash of $418,000 after paying down by
$2.0 million the mortgage secured by such land parcel and the payment of
various closing costs. A real estate brokerage commission of $99,000 was paid
to Carmel Realty. A gain of $848,000 was recognized on the sale.

Also in June 1998, the Company sold a 150.0 acre tract of its Rasor land
parcel, for $6.8 million, receiving net cash of $1.4 million after paying down
by $5.3 million the mortgage secured by such land parcel and the payment of
various closing costs. A real estate brokerage commission of $203,000 was paid
to Carmel Realty. A gain of $789,000 was recognized on the sale.

Further in June 1998, the Company sold its entire 315.2 acre Palm Desert
land parcel, for $17.2 million, receiving net cash of $8.6 million after
paying off $7.2 million in mortgage debt and the payment of various closing
costs. A real estate brokerage commission of $516,000 was paid to Carmel
Realty. A gain of $3.9 million was recognized on the sale.

In July 1998, the Company purchased Thompson II land, a 3.5 acre parcel of
unimproved land in Dallas County, Texas, for $471,000 in cash. A real estate
brokerage commission of $14,000 was paid to Carmel Realty.

Also in July 1998, the Company purchased Katrina land, a 454.8 acre parcel
of unimproved land in Palm Desert, California, for $38.2 million. The purchase
was made by a newly formed controlled partnership of which a wholly-owned
subsidiary of the Company is the general partner and Class B limited partner.
The partnership issued $23.2 million of Class A limited partner units and
obtained mortgage financing of $15.0 million. The mortgage bears interest at
15.5% per annum, requires monthly payments of interest only and matures in
July 1999. The Class A limited partners were entitled to an annual preferred
return of $.07 per unit in 1998, and are entitled to an annual preferred
return of $.08 per unit in 1999, $.09 per unit in 2000 and $.10 per unit in
2001 and thereafter. The Class A units may be converted into a total of
231,750 shares of the Company's Series H Cumulative Convertible Preferred
Stock after July 13, 1999, on the basis of 100 Class A units for each share of

17
<PAGE>

Series H Preferred Stock. A portion of such preferred shares may be converted
into the Company's Common Stock using a 90% factor starting in December 2000.
A real estate brokerage commission of $1.1 million was paid to Carmel Realty.

Further in July 1998, the Company purchased Walker land, a 132.8 acre
parcel of unimproved land in Dallas County, Texas, for $12.8 million in cash.
Subsequently, the Company obtained mortgage financing in the amount of $13.3
million, receiving net cash of $12.8 million after the payment of various
closing costs. The mortgage bears interest at 15.5% per annum, requires
monthly payments of interest only and matures in July 1999. The mortgage is
also secured by the FRWM Cummings land. A real estate brokerage commission of
$375,000 was paid to Carmel Realty.

In July 1998, the Company sold a 2.5 acre tract of its Las Colinas I land
parcel, for $1.6 million, receiving net cash of $605,000 after paying down by
$750,000 the Las Colinas I term loan secured by such land parcel and the
payment of various closing costs. A real estate brokerage commission of
$48,000 was paid to Carmel Realty. A gain of $869,000 was recognized on the
sale.

In August 1998, the Company financed its unencumbered Keller land in the
amount of $5.0 million under the Las Colinas I term loan, receiving net cash
of $4.9 million after the payment of various closing costs.

In September 1998, a newly formed controlled limited partnership, in which
the Company has a combined 95% general and limited partner interest, purchased
Messick land, a 72.0 acre parcel of unimproved land in Palm Springs,
California, for $3.5 million, paying $1.0 million in cash and obtaining seller
financing of the remaining $2.5 million of the purchase price. The seller
financing bears interest at 8.5% per annum, requires quarterly payments of
interest only, principal payments of $300,000 in July 1999 and July 2000, and
matures in August 2001. A real estate brokerage commission of $105,000 was
paid to Carmel Realty.

Also in September 1998, the Company sold a 60.0 acre tract of its Parkfield
land parcel, for $1.5 million, receiving no net cash after paying down by $1.4
million the mortgage secured by such land parcel and the payment of various
closing costs. A real estate brokerage commission of $45,000 was paid to
Carmel Realty. A gain of $44,000 was recognized on the sale.

Further in September 1998, the Company purchased HSM land, a 6.2 acre
parcel of unimproved land in Farmers Branch, Texas, for $2.2 million in cash.
A real estate brokerage commission of $95,000 was paid to Carmel Realty.

In September 1998, the Company sold the remaining 10.5 acres of its BP Las
Colinas land parcel for $4.7 million, receiving net cash of $1.8 million after
paying off $2.6 million in mortgage debt and the payment of various closing
costs. A real estate brokerage commission of $140,000 was paid to Carmel
Realty. A gain of $3.4 million was recognized on the sale.

Also in September 1998, the Company purchased Vista Ridge land, a 160.0
acre parcel of unimproved land in Lewisville, Texas, for $15.6 million. The
Company paid $3.1 million in cash and obtained mortgage financing of $12.5
million. The mortgage bears interest at 15.5% per annum and requires monthly
interest only payments at a rate of 12.5% per annum with the deferred interest
and principal due at maturity in July 1999. A real estate brokerage commission
of $235,000 was paid to Carmel Realty.

Further in September 1998, the Company sold its entire 30.0 acre Kamperman
land parcel for $2.4 million, receiving net cash of $584,000 after paying down
by $1.6 million the Las Colinas I term loan secured by such land parcel and
the payment of various closing costs. A real estate brokerage commission of
$72,000 was paid to Carmel Realty. A gain of $969,000 was recognized on the
sale.

In September 1998, the Company sold a 1.1 acre tract of its Santa Clarita
land parcel for $543,000, receiving net cash of $146,000 after paying down by
$350,000 the Las Colinas I term loan secured by such land parcel and the
payment of various closing costs. A real estate brokerage commission of
$16,000 was paid to Carmel Realty. A gain of $409,000 was recognized on the
sale.

18
<PAGE>

Also in September 1998, the Company purchased Marine Creek land, a 54.2
acre parcel of unimproved land in Fort Worth, Texas, for $2.2 million in cash.
A real estate brokerage commission of $134,000 was paid to Carmel Realty.

Further in September 1998, the Company obtained second lien financing of
$5.0 million secured by its Katy Road land from the limited partner, at the
time, in a partnership that owned approximately 15.8% of the outstanding
shares of the Company's Common Stock. The second lien mortgage bears interest
at 12.5% per annum, compounded monthly, with principal and interest due at
maturity in April 1999. The loan is guaranteed by Gene E. Phillips.

In October 1998, the Company purchased Vista Business Park land, a 41.8
acre parcel of unimproved land in Travis County, Texas, for $3.0 million. The
Company paid $730,000 in cash and obtained mortgage financing of $2.3 million.
The mortgage bears interest at 8.9% per annum, requires monthly payments of
interest only and matures in September 2000. A real estate brokerage
commission of $57,000 was paid to Carmel Realty.

Also in October 1998, the Company purchased Mendoza land, a .35 acre parcel
of unimproved land in Dallas, Texas, for $180,000. The Company paid $27,000 in
cash and obtained seller financing for the remaining $153,000 of the purchase
price. The seller financing bears interest at 10.0% per annum, requires
quarterly interest only payments and matures in October 2001. A real estate
brokerage commission of $5,000 was paid to Carmel Realty.

Further in October 1998, the Company purchased Croslin land, a .8 acre
parcel of unimproved land in Dallas, Texas, for $306,000. The Company paid
$46,000 in cash and obtained seller financing for the remaining $260,000 of
the purchase price. The seller financing bears interest at 10% per annum,
requires quarterly interest only payments and matures in October 2001. A real
estate brokerage commission of $9,000 was paid to Carmel Realty.

In October 1998, the Company purchased Stone Meadows land, a 13.5 acre
parcel of unimproved land in Houston, Texas, for $1.6 million. The Company
paid $491,000 in cash and obtained seller financing for the remaining $1.1
million of the purchase price. The seller financing bears interest at 10% per
annum, requires quarterly principal and interest payments of $100,000 and
matures in October 1999. A real estate brokerage commission of $98,000 was
paid to Carmel Realty.

Also in October 1998, the Company financed its unencumbered Rasor land in
the amount of $15.0 million, receiving net cash of $13.5 million after the
payment of various closing costs. Portions of the Company's Las Colinas I and
Valwood land parcels are included as additional collateral for this loan. The
Company used the proceeds from this loan along with an additional $1.8 million
to payoff the $15.8 million in mortgage debt secured by its Las Colinas I and
Valwood land parcels. A mortgage brokerage and equity refinancing fee of
$150,000 was paid to BCM. The new mortgage bears interest at 14% per annum,
required a principal reduction payment of $3.0 million in November 1998,
requires monthly interest only payments and matures in September 1999.

Further in October 1998, the Company financed its unencumbered Marine Creek
and HSM land in the amount of $2.8 million under the Las Colinas I term loan,
receiving net cash of $2.7 million after the payment of various closing costs.

In November 1998, the Company obtained a $95.0 million line of credit from
Garden Capital, L.P. ("GCLP"), a partnership controlled by NOLP. The Company
received fundings $18.9 million in November 1998, $31.1 million in December
1998, and an additional $26.7 million in the first quarter of 1999. The line
of credit is secured by second liens on the Company's Waters Edge III,
Edgewater Gardens, Chateau Bayou and Sunset Apartments, Rosedale Towers Office
Building, Katy Road land and the stock of its wholly-owned subsidiaries, NMC,
the general partner of the Partnership, and ART Holdings, Inc., which owns
3,349,535 NRLP units of limited partner interest. The loan bears interest at
12% per annum, requires monthly interest only payments and matures in November
2003. The Company accounted for its investment in the Partnership under the
equity method until December 1998 when NMC was elected general partner of the
Partnership. As of December 31, 1998, the accounts of the Partnership are
consolidated with those of the Company. The line of credit is eliminated in
consolidation.

19
<PAGE>

Also in November 1998, the Company purchased Mason/Goodrich land, a 265.5
acre parcel of unimproved land in Houston, Texas, for $10.9 million. The
Company paid $3.7 million in cash and obtained mortgage financing of $7.2
million. The mortgage bore interest at 8.9% per annum, required monthly
interest only payments and matured in February 1999. A real estate brokerage
commission of $252,000 was paid to Carmel Realty. In March 1999, the Company
sold two tracts of its Mason/Goodrich land parcel totaling 9.9 acres for
$956,000, receiving net cash of $4,000 after paying down by $860,000 the
mortgage secured by such land parcel and the payment of various closing costs.
A real estate brokerage commission of $29,000 was paid to Carmel Realty. A
gain will be recognized on the sale. The lender has agreed to extend its
matured mortgage to September 1999, for a $500,000 principal paydown. All
other terms of the loan would remain unchanged.

In December 1998, the Company purchased Plano Parkway land, a 81.2 acre
parcel of unimproved land in Plano, Texas, for $11.1 million. The Company paid
$2.2 million in cash and obtained seller financing of the remaining $8.9
million of the purchase price. The seller financing bore interest at 10% per
annum and required the payment of principal and interest at maturity in
January 1999. A real estate brokerage commission of $187,000 was paid to
Carmel Realty. In February 1999, the Company sold a 4.6 acre tract for $1.2
million. A real estate brokerage commission of $36,000 was paid to Carmel
Realty. A gain will be recognized on the sale. Simultaneously with the sale,
the debt securing the parcel was refinanced in the amount of $7.1 million. The
new mortgage bears interest at the prime rate plus 4.5%, currently 12.25% per
annum, requires monthly interest only payments and matures in January 2000.
The net cash from the sale and refinancing along with an additional $921,000
were used to payoff the mortgage. A mortgage brokerage and equity refinancing
fee of $71,000 was paid to BCM.

Also in December 1998, the Company purchased Van Cattle land, a 126.6 acre
parcel of unimproved land in McKinney, Texas, for $2.0 million. The Company
paid $500,000 in cash and obtained seller financing of the remaining $1.5
million of the purchase price. The seller financing bears interest at 10% per
annum, requires monthly interest only payments and matures in December 2000. A
real estate brokerage commission of $118,000 was paid to Carmel Realty.

Further in December 1998, the Company sold two tracts totaling 63.1 acres
of its Valley Ranch land parcel for $4.2 million, receiving net cash of
$135,000 after a $3.0 million paydown on the mortgage secured by such land
parcel and the payment of various closing costs. A real estate brokerage
commission of $127,000 was paid to Carmel Realty. No gain or loss was
recognized on the sales.

In December 1998, the Company financed its unencumbered Valwood land in the
amount of $12.0 million, receiving net cash of $4.7 million after paying down
by $5.5 million the Rasor land mortgage and the payment of various closing
costs. The mortgage bears interest at 13% per annum, requires monthly payments
of interest only and matures in December 2000. A mortgage brokerage and equity
refinancing fee of $120,000 was paid to BCM.

In the third and fourth quarters of of 1998, provisions for loss of $3.0
million and $916,000, respectively, were recorded to write down the Valley
Ranch land to its estimated realizable value less estimated costs of sale.
Such write downs were necessitated by an increase in the acreage designated as
flood plain.

In February 1999, the Company purchased Frisco Bridges land, a 336.8 parcel
of unimproved land in Collin County, Texas, for $46.8 million. The Company
paid $7.8 million in cash and obtained mortgage financing totaling $39.0
million. Seller financing in the amount of $22.0 million, secured by 191.5
acres of the parcel, bears interest at 14% per annum, requires monthly
interest only payments and matures in January 2000. A mortgage in the amount
of $15.0 million, secured by 125.0 acres of the parcel, bears interest at the
prime rate plus 4.5%, currently 12.25% per annum, requires three quarterly
principal reduction payments of $3.0 million on each of May 1, August 1 and
November 1, 1999 in addition to monthly interest payments and matures in
February 2000. Another mortgage in the amount of $2.0 million, secured by 13.5
acres of the parcel, bears interest at 14% per annum, requires monthly
interest only payments and matures in January 2000. The Company's Double O
land in Las Colinas, Texas and its Desert Wells land in Palm Desert,
California are pledged as additional collateral for these loans. The Company
drew down $6.0 million under its line of credit with the GCLP, for a portion
of the cash requirement. A $1.4 million real estate brokerage commission was
paid to Carmel Realty in the form of a 6.8 acre tract of the Frisco Bridges
land parcel.

20
<PAGE>

In March 1999, the Company sold a 13.7 acre tract of its McKinney Corners
II and IV land parcels, for $7.7 million, receiving no net cash after paying
down by $5.5 million the mortgage debt secured by such land parcels, the
funding of required escrows and the payment of various closing costs. A gain
will be recognized on the sale.

Mortgage Loans

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

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

Types of Properties Subject to Mortgages. The types of properties securing
the Company's mortgage notes receivable portfolio at December 31, 1998
consisted of an office building, shopping centers, improved land and
partnership interests. The Company's Board of Directors may alter the types of
properties subject to mortgages in which the Company invests without a vote of
stockholders.

As of December 31, 1998, the obligors on $594,000 or 1.1% of the mortgage
notes receivable portfolio were affiliates of the Company. Also at that date,
$9.2 million or 16.8% of the mortgage notes receivable portfolio were
nonperforming.

The following table sets forth the percentages (based on the outstanding
mortgage loan balance at December 31, 1998), by geographic region, of the
commercial properties that serve as collateral for the Company's mortgage
notes receivable excluding $43.8 million of mortgage notes secured by
unimproved land and other securities. See Schedule IV to the Consolidated
Financial Statements included in ITEM 8. "CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA" for additional details of the Company's mortgage notes
receivable portfolio.

<TABLE>
<CAPTION>
Commercial
Region Properties
------ ----------
<S> <C>
Midwest........................................................... 53.8%
Northeast......................................................... 17.4
Southwest......................................................... 28.8
-----
100.0%
</TABLE>

A summary of the activity in the Company's mortgage notes receivable
portfolio during 1998 is as follows:

<TABLE>
<S> <C>
Loans in mortgage notes receivable portfolio at January 1, 1998.......... 11*
Partnership loans........................................................ 24
Loans funded............................................................. 1
Loans collected in full.................................................. (6)
Loans sold............................................................... (3)
Loan foreclosed.......................................................... (1)
---
Loans in mortgage notes receivable portfolio at December 31, 1998........ 26*
===
</TABLE>
- --------
* Includes a mortgage note receivable collateralized by two condominium
mortgage loans in 1997 and one condominium mortgage loan in 1998.

During 1998, the Company collected $188,000 in interest and $7.9 million in
principal on its mortgage notes receivable.

21
<PAGE>

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

The following discussion briefly describes the events that affected
previously funded first mortgage loans during 1998.

At December 31, 1998, the Company sold a matured first mortgage note at its
carrying value of $124,000 to BCM. No gain or loss was recognized on the sale.
See "Junior Mortgage Loans," below.

Wraparound Mortgage Loans. The Company may invest in wraparound mortgage
loans, sometimes called all-inclusive loans, made on real estate subject to
prior mortgage indebtedness. A wraparound mortgage note is a mortgage note
having an original principal amount equal to the outstanding balance under the
prior existing mortgage loan plus the amount actually advanced under the
wraparound mortgage loan. Wraparound mortgage loans may provide for full,
partial or no amortization of principal. The Company's policy is to make
wraparound mortgage loans in amounts and on properties on which it would
otherwise make a first mortgage loan.

The following discussion briefly describes the events that affected
previously funded wraparound mortgage loans during 1998.

In June 1992, the Company sold the Continental Hotel and Casino in Las
Vegas, Nevada, for, among other consideration, a $22.0 million wraparound
mortgage note. The Company recorded a deferred gain of $4.6 million on the
sale resulting from a disputed third lien mortgage being subordinated to the
Company's wraparound mortgage note. In March 1997, the wraparound note was
modified and extended in exchange for the borrower's commitment to invest $2.0
million in improvements to the hotel and casino within four months of March
1997, and an additional $2.0 million prior to December 1997. The borrower
stopped making the payments required by the note in April 1997, and did not
make the required improvements. In December 1997, the borrower filed for
bankruptcy protection. In February 1998, a hearing was held to allow
foreclosure of the hotel and casino. At the hearing, the bankruptcy 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. The
Company received only the first such payment. The wraparound mortgage note had
a principal balance of $22.7 million at March 31, 1998. In April 1998, the
bankruptcy court allowed the foreclosure of the hotel and casino. No loss was
incurred on foreclosure as the fair value of the property, exceeded the
carrying value of the mortgage note receivable.

In December 1997, the Company sold its Pin Oak land, a 567.6 acre parcel of
unimproved land in Houston, Texas, for $11.4 million, receiving net cash of
$3.5 million and providing $6.9 million in short-term purchase money
financing. The purchase money financing was collected in full in January 1998,
the Company receiving net cash of $1.5 million after paying off $5.2 million
in underlying mortgage debt and the payment of various closing costs.

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

The following discussion briefly describes the events that affected
previously funded junior mortgage loans during 1998.

22
<PAGE>

In December 1997, the Company sold a 25.1 acre tract of its Valley Ranch
land parcel, for $3.3 million, receiving net cash of $2.2 million and
providing $891,000 of short-term purchase money financing. The Company
received a $624,000 paydown on the purchase money financing in January 1998
with the remaining $267,000 being received in February 1998.

As of December 31, 1998, the Company sold two matured second lien mortgage
notes at their carrying values totaling $504,000 to BCM. No gain or loss was
recognized on the sale. See "First Mortgage Loans," above.

Investments in Real Estate Investment Trusts and Real Estate Partnerships

Real estate entities. The Company's investment in real estate entities
includes (1) equity securities of three publicly traded Real Estate Investment
Trusts (collectively the "REITs"), CMET, IORI and TCI, (2) units of limited
partner interest of NRLP, and (3) interests in real estate joint venture
partnerships. BCM, the Company's advisor, serves as advisor to the REITs, and
performs certain administrative and management functions for NRLP and NOLP on
behalf of NMC, the general partner of NRLP and NOLP and a wholly-owned
subsidiary of the Company.

Since acquiring its initial investments in the equity securities of the
REITs and NRLP in 1989, the Company has made additional investments in the
equity securities of these entities through private and open market purchases.
The cost with respect to shares of the REITs at December 31, 1998 totaled
$22.0 million, and its cost with respect to units of limited partner interest
in NRLP totaled $24.1 million. The aggregate carrying value (cost plus or
minus equity in income or losses and less distributions received) of such
equity securities of the REITs was $29.0 million at December 31, 1998 and the
aggregate market value of such equity securities was $43.5 million. The
aggregate investee book value of the equity securities of the REITs based upon
the December 31, 1998 financial statements of each such REIT was $71.0
million. See ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

The Board of Directors has authorized the expenditure of up to an aggregate
of $35.0 million to acquire, in open market purchases, units of NRLP and
shares of the REITs, excluding private purchase transactions which were
separately authorized. As of December 31, 1998, the Company had expended $4.4
million to acquire units of NRLP and an aggregate of $6.4 million to acquire
shares of the REITs, in open market purchases, in accordance with these
authorizations. The Company expects to make additional investments in the
equity securities of the REITs and NRLP.

The equity securities of the REITs and NRLP were purchased for the purpose
of investment based principally on the opinion of management that the equity
securities of each were and are currently undervalued. The determination to
purchase additional equity securities of the REITs and NRLP is made on an
entity-by-entity basis and depends on the market price of each entity's equity
securities relative to the value of its assets, the availability of sufficient
funds and the judgment of management regarding the relative attractiveness of
alternative investment opportunities. Substantially all of the equity
securities of the REITs and NRLP are pledged as collateral for borrowings.
Pertinent information regarding the Company's investment in the equity
securities of the REITs and NRLP, at December 31, 1998, is summarized below
(dollars in thousands):

<TABLE>
<CAPTION>
Percentage Carrying Equivalent
of the Company's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee December 31, 1998 December 31, 1998 December 31, 1998 December 31, 1998
- -------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
NRLP*................... 55.0% $33,589 $ * $79,081
CMET.................... 40.9 15,550 35,727 25,052
IORI.................... 30.0 3,132 7,068 3,034
TCI..................... 31.0 10,291 28,251 15,398
</TABLE>
- --------
* The Company accounted for its investment in the Partnership under the
equity method until December 1998 when NMC, a wholly-owned subsidiary of
the Company, was elected general partner of NRLP and NOLP, as more fully
discussed in "NRLP", below. As of December 31, 1998, the accounts of the
Partnership are consolidated with those of the Company.

23
<PAGE>

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

The Company does not have a controlling equity interest in any of the REITs
and therefore it cannot, acting by itself, determine either the individual
investments or the overall investment policies of such investees. However, due
to the Company's equity investments in, and the existence of common officers
with, each of the REITs, and that the REITs have the same advisor as the
Company and that Mr. Paulson, an Executive Vice President of the Company, is
also the President of the REITs and BCM, the Company's advisor. The Company
may be considered to have the ability to exercise significant influence over
the operating and investing policies of the REITs. The Company accounts for
its investment in the REITs using the equity method. Under the equity method,
the Company recognizes its proportionate share of the income or loss from the
operations of the REITs currently, rather than when realized through dividends
or on sale. The Company discontinued accounting for its investment in the
Partnership under the equity method as of December 31, 1998, due to the
election of NMC, a wholly-owned subsidiary of the Company, as general partner
of NRLP and NOLP, as more fully discussed in "NRLP" below. The carrying value
of the Company's investment in the REITs, as set forth in the table above, is
the original cost of each such investment adjusted for the Company's
proportionate share of each REIT's income or loss and distributions received.

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

NRLP. NRLP is a publicly traded master limited partnership which was formed
under the Delaware Uniform Limited Partnership Act on January 29, 1987. It
commenced operations on September 18, 1987 when, through NOLP, it acquired all
of the assets, and assumed all of the liabilities, of 35 public and private
limited partnerships. NRLP is the sole limited partner of NOLP and owns 99% of
the beneficial interest in NOLP. NRLP and NOLP operate as an economic unit
and, unless the context otherwise requires, all references herein to the
Partnership shall constitute references to NRLP and NOLP as a unit. In
December 1998, NMC, a wholly-owned subsidiary of the Company, was elected
general partner and succeeded to SAMLP's 1% beneficial interest in each of
NRLP and NOLP. NMC also assumed liability for SAMLP's note for its capital
contribution. In addition, NMC assumed liability for a note which requires the
repayment of the $11.4 million paid by the Partnership under the Moorman
litigation settlement plus the $808,000 in court ordered attorney's fees and
the $30,000 paid to Joseph B. Moorman.

In November 1992, NOLP transferred 52 apartments and a wraparound mortgage
note receivable to 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. Effective August 1998, a wholly-owned subsidiary of
the Company acquired the .7% managing general partner interest of Garden
Capital Management Incorporated in GCLP and the 1% general partner interest of
Garden Capital Incorporated in 50 single asset limited partnerships in which
GCLP is the 99% limited partner, in exchange for 250,000 shares of the
Company's Series F Cumulative Convertible Preferred Stock.

At December 31, 1998, the Company owned approximately 55.0% of the
outstanding limited partner units of NRLP.

NMC, as the general partner, has discretion in determining the methods of
obtaining funds for the Partnership's operations, and the acquisition and
disposition of its assets.

At December 31, 1998, NRLP owned 66 properties located in 21 states,
consisting of 55 apartments comprising 13,957 units, five office buildings
with an aggregate of 367,271 square feet and six shopping centers with an
aggregate of 712,388 sq. ft.

24
<PAGE>

The Partnership reported net income of $47.5 million in 1998 compared to
net income of $8.7 million in 1997. The Partnership had a loss from
operations, prior to gains on sale of real estate, of $5.1 million in 1998
compared to income of $362,000 in 1997. The decline in the Partnership's 1998
income from operations was due to $13.0 million of GCLP deferred borrowing
costs written off on the refinancing of the GCLP properties in 1998 and the
sale of 10 apartments and two shopping centers by the Partnership in 1998. The
decline was mitigated by a 4% increase in average rental rates at the
Partnership's apartments and an average 4% increase in rental rates at the
Partnership's commercial properties coupled with an average 1% decrease in
occupancy at the Partnership's apartments and an average 3.5% decrease in
occupancy at the Partnership's commercial properties.

The Partnership's cash flow from property operations (rents collected less
payments for property operations) decreased to $42.9 million in 1998 from
$50.5 million in 1997. At December 31, 1998, the Partnership had total assets
of $337.8 million, which consisted of $167.4 million of real estate held for
investment, $114.5 million of notes and interest receivable, $46.9 million of
investments in equity securities and other assets and $9.0 million in cash and
cash equivalents.

The Partnership has paid quarterly distributions to unitholders since the
fourth quarter of 1993. In 1998, the Company received a total of $7.2 million
in distributions from the Partnership including $5.5 million which was accrued
at December 31, 1997.

The Company owns a 96% limited partner interest in SAMLP. SAMLP was the
general partner of the Partnership until December 18, 1998 when NMC, a wholly-
owned subsidiary of the Company, was elected general partner. Gene E.
Phillips, a Director and Chairman of the Board of the Company until November
16, 1992, is also a general partner of SAMLP.

NRLP, SAMLP and Mr. Phillips were among the defendants in a class action
lawsuit (the "Moorman litigation") arising from the formation of NRLP. An
agreement settling such lawsuit (the "Settlement Agreement") for the above
named 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 provided for the resignation and replacement of
SAMLP as general partner if the unit price targets were 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 expected to resign as general partner of
NRLP and NOLP.

The Settlement Agreement provided that 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 NRLP
partnership agreement. Syntek Asset Management, Inc. ("SAMI"), the managing
general partner of SAMLP, 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 July 15, 1998, NRLP, SAMLP and the NRLP oversight committee executed an
Agreement for Cash Distribution and Election of Successor General Partner (the
"Cash Distribution Agreement") which provides for the nomination of an entity
affiliated with SAMLP to be the successor general partner of NRLP, for the
distribution of $11.4 million to the plaintiff class members and for the
resolution of all related matters under the Settlement Agreement. The Cash
Distribution Agreement was submitted to the Court on July 23, 1998. On August
4, 1998, the Court entered an order granting preliminary approval of the Cash
Distribution Agreement. On September 9, 1998, a notice was mailed to the
plaintiff class members describing the Cash Distribution Agreement. On October
16, 1998, a hearing was held to consider any objections to the Cash
Distribution

25
<PAGE>

Agreement. On October 23, 1998, the Court entered an order granting final
approval of the Cash Distribution Agreement. The Court also entered orders
requiring NRLP to pay $404,000 in attorney's fees to Joseph B. Moorman's legal
counsel, $30,000 to Joseph B. Moorman and $404,000 in attorney's fees to
Robert A. McNeil's legal counsel.

Pursuant to the order, $11.4 million was deposited by the Partnership into
an escrow account and then transferred to the control of an independent
settlement administrator. The distribution of the cash shall be made to the
plaintiff class members pro rata based upon the number of units originally
issued to each plaintiff class member upon the formation of the Partnership in
1987. On March 10, 1999, the Court entered an order providing for the initial
distribution of the cash not later than March 31, 1999. The distribution of
cash is under the control of the independent settlement administrator.

The proposal to elect NMC, a wholly-owned subsidiary of the Company, as the
successor general partner was submitted to the unitholders of NRLP for a vote
at a special meeting held on December 18, 1998. All units of NRLP owned by
affiliates of the Company and SAMLP (approximately 61.8% of the outstanding
units of NRLP as of the November 27, 1998 record date) were voted pro rata
with the vote of the other limited partners. NMC was elected by a majority of
the NRLP unitholders. On December 18, 1998, SAMLP withdrew as general partner
and NMC took office. Upon the election and taking office of NMC as the
successor general partner, the Settlement Agreement terminated.

Under the Cash Distribution Agreement, SAMLP waived its right under the
Settlement Agreement to receive any payment from the Partnership for its
Redeemable General Partner Interest and fees it was entitled to receive upon
the election of a successor general partner. In addition, pursuant to the Cash
Distribution Agreement, the NRLP partnership agreement was amended to provide
that, upon voluntary resignation of the general partner, the resigning general
partner shall not be entitled to the repurchase of its general partner
interest under Paragraph 17.9 of the NRLP partnership agreement.

Under the Cash Distribution Agreement, NMC, as successor general partner,
assumed liability for the note from SAMLP for its capital contribution to
NRLP. In addition, NMC assumed liability for a note which requires the
repayment of the $11.4 million paid by NRLP under the Cash Distribution
Agreement, plus the $808,000 in Court ordered attorney's fees and the $30,000
paid to Joseph B. Moorman. This note requires repayment over a ten-year
period, bears interest at a variable rate, currently 7.2% per annum and is
guaranteed by the Company. As of December 31, 1998, the Company discontinued
accounting for its investment in the Partnership under the equity method upon
the election of NMC as general partner of the Partnership and the settlement
of the Moorman litigation. The Company began consolidation of the
Partnership's accounts at that date and its operations subsequent to that
date.

CMET. CMET is a California business trust which was organized on August 27,
1980 and commenced operations on December 3, 1980. CMET's 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 apartments and
commercial properties (office buildings, industrial warehouses and shopping
centers) throughout the continental United States. CMET's apartments and
commercial properties are concentrated in the Southeast, Southwest and Midwest
regions of the continental United States. At December 31, 1998, CMET owned 57
income producing properties located in 14 states consisting of 34 apartments
comprising of 6,158 units, 11 office buildings with an aggregate of 2.1
million sq. ft., 11 industrial warehouses with an aggregate of 1.5 million sq.
ft. and a shopping center with 133,558 sq. ft. 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.

CMET reported net income of $347,000 in 1998 as compared with net income of
$4.2 million in 1997. CMET's 1998 net income included gains on the sale of
real estate of $6.1 million, where as its 1997 net income included gains on
the sale of real estate of $8.2 million. CMET's cash flow from property
operations improved to $28.9 million in 1998 from $23.7 million in 1997. At
December 31, 1998, CMET had total assets of $333.8 million, which consisted of
$294.2 million of real estate held for investment, $3.3 million of real estate
held for sale, $3.4 million of notes and interest receivable, $30.7 million of
investments in marketable equity securities

26
<PAGE>

and other assets and $2.2 million in cash and cash equivalents. On September
25, 1998, CMET and TCI announced that they had reached an agreement for CMET
to be acquired by TCI. TCI will issue 1.181 shares of its common stock for
each share of CMET. The transaction is expected to be completed in the second
quarter of 1999.

CMET has paid quarterly distributions since the first quarter of 1993. The
Company received a total of $868,000 in distributions from CMET in 1998.

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 business is investing in real estate through
direct equity investments and partnerships. IORI holds equity investments in
apartments and commercial properties (office buildings) in the Pacific,
Southeast and Southwest regions of the continental United States. At December
31, 1998, IORI owned 14 income producing properties located in four states.
These properties consisted of four apartments comprising 654 units and ten
office buildings with an aggregate of 620,577 sq. ft.

IORI reported a net loss of $679,000 in 1998 as compared with net income of
$3.3 million in 1997. IORI's net income in 1997, is attributable to $4.0
million of gains on sale of real estate. IORI had no such gains in 1998.
IORI's cash flow from property operations increased to $7.9 million in 1998
from $6.5 million in 1997. At December 31, 1998, IORI had total assets of
$88.7 million, which consisted of $83.7 million in real estate held for
investment, $4.9 million in investments in partnerships and other assets and
$103,000 in cash and cash equivalents.

IORI has paid quarterly dividends since the first quarter of 1993. The
Company received a total of $264,000 in dividends from IORI in 1998.

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 apartments, commercial properties
(office buildings, industrial warehouses and shopping centers) and hotels
throughout the continental United States with a concentration in the Southeast
and Southwest regions. At December 31, 1998, TCI owned 72 income producing
properties located in 14 states. These properties consisted of 38 apartments
comprising 7,000 units, 19 office buildings with an aggregate of 1.6 million
sq. ft., six industrial warehouses with an aggregate of 1.5 million sq. ft.,
five shopping centers with an aggregate of 489,103 sq. ft. and four hotels
with a total of 209 rooms. TCI also holds mortgage notes receivable secured by
real estate located in the Southeast and Southwest regions of the continental
United States.

TCI reported net income of $6.9 million in 1998 as compared with net income
of $12.6 million in 1997. TCI's net income for 1998 included gains on the sale
of real estate of $12.6 million whereas its net income for 1997 included gains
on the sale of real estate of $21.4 million. TCI's cash flow from property
operations increased to $29.8 million in 1998 as compared to $16.2 million in
1997. At December 31, 1998, TCI had total assets of $382.2 million, which
consisted of $347.4 million in real estate held for investment, $1.4 million
in real estate held for sale, $3.4 million in investments in real estate
entities, $19.5 million in notes and interest receivable and other assets and
$10.5 million in cash and cash equivalents. At December 31, 1998, TCI owned
345,728 shares of IORI's common stock, approximately 22.7% of IORI's shares
then outstanding. On September 25, 1998, TCI and CMET announced that they had
reached agreement for TCI to acquire CMET. TCI will issue 1.181 shares of its
common stock for each share of CMET. The transaction is expected to be
completed in the second quarter of 1999.

TCI has paid quarterly dividends since the fourth quarter of 1995. In 1998,
the Company received a total of $1.9 million in dividends from TCI, including
$1.2 million accrued in December 31, 1997.

River Trails II. In January 1992, the Company entered into a partnership
agreement with an entity affiliated with a limited partner, at the time, in a
partnership that owned approximately 15.8% of the Company's

27
<PAGE>

outstanding shares of Common Stock, to acquire 287 developed residential lots
adjacent to the Company's other residential lots in Fort Worth, Texas. The
partnership agreement designates the Company as managing general partner. The
partnership agreement also provides each of the partners with a guaranteed 10%
return on their respective investments. Through December 31, 1997, 214
residential lots had been sold. In 1998, an additional 52 lots were sold and
at December 31, 1998, 21 lots remained to be sold. During 1998, each partner
received $418,000 in return of capital distributions and $493,000 in profit
distributions.

R. G. Bond, Ltd. In June 1995, the Company purchased a 1% general partner
interest in a limited partnership which owned an apartment in each of the
states of Illinois, Florida and Minnesota, with a total of 900 units. In
August 1998, in conjunction with the sale of the apartments, the Company sold
its general partner interest for $903,000 in cash. A gain of $27,000 was
recognized. In December 1998, a return of capital distribution of $100,000 was
received.

Campbell Center Associates, Ltd. In April 1996, the Company purchased a 28%
general partner interest in Campbell Center Associates, Ltd. ("Campbell
Associates"), which in turn had a 56.25% interest in Campbell Centre Joint
Venture, which owned at the time a 413,175 sq. ft. office building in Dallas,
Texas, for $550,000 in cash and a $500,000 note. In January 1997, the Company
exercised its option to purchase an additional 28% general partner interest in
Campbell Associates, for $300,000 in cash and a $750,000 note. In July 1997,
the Company purchased an additional 9% general partner interest in Campbell
Associates for $868,000 in cash. In March 1998, Consolidated Equity
Properties, Inc., a wholly-owned subsidiary of the Company, acquired a 30%
limited partner interest in Campbell Associates for $500,000 in cash. In June
1998, the Company purchased the remaining 5% general partner interest in
Campbell Associates for $1.1 million in cash. In June 1998, Campbell Centre
Joint Venture sold the office building for $32.2 million in cash. Campbell
Associates, as a partner, received net cash of $13.2 million from the sales
proceeds and escrowed an additional $190,000 for pending parking lot issues.
Campbell Associates recognized a gain of $8.2 million.

Highway 380/Preston Partners, Ltd. In June 1996, a newly formed limited
partnership, of which the Company is a 1% general partner, purchased 580 acres
of unimproved land in Collin County, Texas, of which 251.9 acres remained to
be sold at January 1, 1998. In January 1998, the partnership sold a 155.4 acre
tract for $2.9 million. The partnership received $600,000 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 financing bore interest at 12% per annum, required
monthly payments of interest only and matured in July 1998. The financing was
collected at maturity with the net proceeds being distributed; $1.1 million to
the limited partner and $1.1 million to the Company as general partner. The
partnership recognized a gain of $1.2 million on the sale. In September 1998,
the partnership sold the remaining 96.5 acres for $1.3 million in cash. Of the
net proceeds, $587,000 was distributed to the limited partner and $587,000 was
distributed to the Company as general partner. The partnership recognized a
gain of $128,000 on the sale.

Elm Fork Ranch, L.P. In September 1997, a newly formed limited partnership,
of which the Company is a 1% general partner and 21.5% limited partner,
purchased a 422.4 acre parcel of unimproved land in Denton County, Texas, for
$16.0 million in cash. The Company contributed $3.6 million in cash with the
remaining $12.4 million being contributed by the other limited partners. In
September 1997, the partnership obtained financing of $6.5 million secured by
the 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 a return of
$2.9 million of its initial investment. The partnership agreement also
provides that the limited partners receive a 12% preferred cumulative return
before any sharing of partnership profits occurs. One of the limited partners
in the partnership, was at the time, also a limited partner in a partnership
that owned approximately 15.8% of the outstanding shares of the Company's
Common Stock.

28
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

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

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

The Company held its annual meeting of stockholders on January 11, 1999, at
which meeting the Company's stockholders were asked to consider and vote upon
(1) the election of Directors and (2) the Director's Stock Option Plan. At
such meeting the stockholders elected the following individuals as Directors:

<TABLE>
<CAPTION>
Shares Voting
-------------------
Withheld
Director For Authority
-------- --------- ---------
<S> <C> <C>
Karl L. Blaha........................................... 8,174,063 40,531
Roy Bode................................................ 8,174,209 40,385
Al Gonzalez............................................. 8,173,461 41,133
Cliff Harris............................................ 8,174,381 40,213
</TABLE>

Also at such meeting the stockholders approved the Director's Stock Option
Plan with 8,120,072 votes for the proposal, 80,175 votes against and 14,345
votes abstaining.

PART II

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

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

<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ------- ------
<S> <C> <C>
March 31, 1999 (through March 5, 1999)....................... $17 3/8 $ 16

March 31, 1998............................................... 15 14
June 30, 1998................................................ 15 1/16 14 1/4
September 30, 1998........................................... 16 1/4 13 7/8
December 31, 1998............................................ 16 3/8 14 3/4

March 31, 1997............................................... 22 1/4 9 3/4
June 30, 1997................................................ 16 5/8 11 1/2
September 30, 1997........................................... 13 1/4 12 1/8
December 31, 1997............................................ 15 1/2 12 5/8
</TABLE>

As of March 5, 1999, the closing market price of the Company's Common Stock
on the New York Stock Exchange was $16.75 per share.

As of March 5, 1999, the Company's Common Stock was held by 1,845
stockholders of record.

In the second quarter of 1996, the Company resumed the payment of quarterly
dividends on its Common Stock. Future distributions to stockholders will be
dependent upon the Company's realized income, financial condition, capital
requirements and other factors deemed relevant by the Board of Directors.

29
<PAGE>

The Company declared quarterly dividends in 1998 and 1997 as follows:

<TABLE>
<CAPTION>
Amount
Date Declared Record Date Payment Date Per Share
------------- ------------------ ------------------ ---------
<S> <C> <C> <C>
March 5, 1998 March 16, 1998 March 31, 1998 $.05
May 27, 1998 June 4, 1998 June 19, 1998 .05
August 28, 1998 September 15, 1998 September 30, 1998 .05
December 10, 1998 December 21, 1998 January 4, 1999 .05

February 26, 1997 March 14, 1997 March 31, 1997 .05
June 5, 1997 June 13, 1997 June 30, 1997 .05
September 3, 1997 September 15, 1997 September 30, 1997 .05
December 1, 1997 December 15, 1997 December 31, 1997 .05
</TABLE>

The Company reported to the Internal Revenue Service that 100% of the
dividends paid in 1998 represented a return of capital and 100% of the
dividends paid in 1997 represented ordinary income.

In April 1996, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series B 10% Cumulative Convertible
Preferred Stock, par value $2.00 per share, with a liquidation preference of
$100.00 per share. The Series B Preferred Stock consisted of a maximum of
4,000 shares, all of which were outstanding at December 31, 1997. Dividends
were payable at the rate of $10.00 per year or $2.50 per quarter to
stockholders of record on the 15th day of each March, June, September and
December when and as declared by the Board of Directors. The Series B
Preferred Stock was convertible into Common Stock of the Company between
May 8, 1998 and June 8, 1998, at 90% of the average daily closing price of the
Common Stock on the prior 30 trading days. In June 1998, the 4,000 outstanding
shares of Series B Preferred Stock were converted into 30,211 shares of the
Company's Common Stock. On May 27, 1998, the Company filed Articles of
Amendment to its Articles of Incorporation reducing the number of shares of
Series B Preferred Stock to zero and eliminating such designation.

In June 1996, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series C 10% Cumulative Convertible
Preferred Stock, par value $2.00 per share, with a liquidation preference of
$100.00 per share. The Series C Preferred Stock consisted of a maximum of
16,681 shares, all of which were outstanding at December 31, 1997. Dividends
were payable at the rate of $10.00 per year or $2.50 per quarter to
stockholders of record on the 15th day of each March, June, September and
December when and as declared by the Board of Directors. The Series C
Preferred Stock was convertible into Common Stock of the Company between
November 25, 1998 and February 23, 1999, at 90% of the average daily closing
price of the Common Stock on the prior 30 trading days. In November 1998, the
16,681 outstanding shares of Series C Preferred Stock were redeemed at their
liquidation preference of $100.00 per share plus accrued and unpaid dividends.
On January 11, 1999, the Company filed Articles of Amendment to its Articles
of Incorporation reducing the number of shares of Series C Preferred Stock to
zero and eliminating such designation.

In August 1996, the Company filed Articles of Amendment to its Articles of
Incorporation, creating and designating a Series D 9.50% Cumulative Preferred
Stock, par value of $2.00 per share, with a liquidation preference of $20.00
per share. The Series D Preferred Stock consists of a maximum of 91,000
shares, none of which were outstanding at December 31, 1998. Dividends are
payable at the rate of $1.90 per year or $.475 per quarter to stockholders of
record on the last day of each March, June, September and December when and as
declared by the Board of Directors. The Series D Preferred Stock is reserved
for the conversion of the Class A limited partner units of Ocean Beach
Partners, L.P. The Class A units may be exchanged for Series D Preferred Stock
at the rate of 20 Class A units for each share of Series D Preferred Stock. No
more than one-third of the Class A units may be exchanged prior to May 31,
2001. Between June 1, 2001 and May 31, 2006 all unexchanged Class A units are
exchangeable.

In December 1996, the Company filed Articles of Amendment to its Articles
of Incorporation, creating and designating a Series E 10% Cumulative
Convertible Preferred Stock, par value $2.00 per share, with a liquidation
preference of $100.00 per share. The Series E Preferred Stock consists of a
maximum of 80,000 shares, none of which were outstanding at December 31, 1998.
Dividends are payable at the rate of $10.00 per

30
<PAGE>

year or $2.50 per quarter to stockholders of record on the last day of each
March, June, September and December when and as declared by the Board of
Directors, for periods prior to November 4, 1999 and $11.00 per year, $2.75
per quarter thereafter. The Series E Preferred Stock is reserved for the
conversion of the Class A limited partner units of Valley Ranch, L.P. The
Class A units may be exchanged for Series E Preferred Stock at the rate of 100
Class A units for each share of Series E Preferred Stock. The Series E
Preferred Stock is convertible into Common Stock of the Company at 80% of the
average daily closing price of the Company's Common Stock on the prior 20
trading days. Only 37.50% of the Series E Preferred Stock may be converted
prior to November 3, 1999. Between November 4, 1999 and November 3, 2001 an
additional 12.50% of the Series E Preferred Stock may be converted, and the
remainder can be converted on or after November 4, 2001.

In August 1997, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series F Cumulative Convertible
Preferred Stock, par value $2.00 per share, with a liquidation preference of
$10.00 per share. In October 1998, the Company filed Articles of Amendment to
its Articles of Incorporation increasing the number of authorized shares of
Series F Preferred Stock to 15,000,000. At December 31, 1998, 3,350,000 shares
were outstanding and 1,948,797 shares were reserved for issuance as future
consideration in various business transactions. Dividends are payable at the
rate of $1.00 per share or $.25 per quarter to stockholders of record on the
last day of each March, June, September and December when and as declared by
the Board of Directors. The Series F Preferred Stock may be converted, after
August 15, 2003, into Common Stock of the Company at 90% of the average daily
closing price of the Company's Common Stock for the prior 20 trading days.

In September 1997, the Company filed Articles of Amendment to its Articles
of Incorporation creating and designating a Series G 10% Cumulative
Convertible Preferred Stock; par value $2.00 per share, with a liquidation
preference of $100.00 per share. The Series G Preferred Stock consists of a
maximum of 11,000 shares, of which 1,000 shares were outstanding at December
31, 1998. Dividends are payable at the rate of $10.00 per year or $2.50 per
quarter to stockholders of record on the last day of each March, June,
September and December when and as declared by the Board of Directors. 10,000
shares of the Series G Preferred Stock are reserved for the conversion of the
Class A limited partner units of Grapevine American, L.P. The Class A units
may be exchanged for Series G Preferred Stock at the rate of 100 Class A units
for each share of Series G Preferred Stock after October 6, 1999 and after
October 6, 2000, into Common Stock of the Company at 90% of the average
closing price of the Company's Common Stock for the prior 20 trading days.

In June 1998, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series H 10% Cumulative Convertible
Preferred Stock; par value $2.00 per share, with a liquidation preference of
$10.00 per share. The Series H Preferred Stock consists of a maximum of
231,750 shares, none of which were outstanding at December 31, 1998. Dividends
are payable quarterly at the rate of $.70 per year until June 30, 1999, $.80
from July 1, 1999 through June 30, 2000, $.90 per year from July 1, 2000
through June 30, 2001 and $.10 per year July 1, 2001 and thereafter, to
stockholders of record on the last day of each March, June, September and
December when and as declared by the Board of Directors. The Series H
Preferred Stock is reserved for the conversion of the Class A limited partner
units of ART Palm, L.L.C. The Class A units may be exchanged for Series H
Preferred Stock at the rate of 100 Class A units for each share of Series H
Preferred Stock at any time after July 13, 1999. The Series H Preferred Stock
may be converted into 25,000 shares of the Company's Common Stock after
December 31, 2000, 25,000 shares on or after June 30, 2002, 25,000 shares on
or after June 30, 2003, 25,000 shares on or after December 31, 2005 and all
remaining outstanding shares on or after December 31, 2006 at 90% of the
average daily closing price of the Company's Common Stock for the prior 20
trading days.

31
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Revenue................. $ 87,086 $ 57,031 $ 41,522 $ 22,952 $ 23,070
Expense................. 165,111 90,252 52,601 28,314 26,490
----------- ----------- ----------- ----------- -----------
(Loss) from operations.. (78,025) (33,221) (11,079) (5,362) (3,420)
Equity in income (loss)
of investees........... 37,966 10,497 1,485 (851) 292
Gain on sale of real
estate................. 17,254 20,296 3,659 2,594 379
----------- ----------- ----------- ----------- -----------
(Loss) before
extraordinary gain..... (22,805) (2,428) (5,935) (3,619) (2,749)
Extraordinary gain...... -- -- 381 783 323
----------- ----------- ----------- ----------- -----------
Net (loss).............. (22,805) (2,428) (5,554) (2,836) (2,426)
Preferred dividend
requirement............ (1,177) (206) (113) -- --
----------- ----------- ----------- ----------- -----------
(Loss) applicable to
Common shares.......... $ (23,982) $ (2,634) $ (5,667) $ (2,836) $ (2,426)
=========== =========== =========== =========== ===========
PER SHARE DATA
(Loss) before
extraordinary gain..... $ (2.24) $ (.22) $ (.46) $ (.31) $ (.23)
Extraordinary gain...... -- -- .03 .07 .03
----------- ----------- ----------- ----------- -----------
Net (loss) applicable to
Common shares.......... $ (2.24) $ (.22) $ (.43) $ (.24) $ (.20)
=========== =========== =========== =========== ===========
Dividends per Common
share.................. $ .20 $ .20 $ .15 $ -- $ --
Weighted average shares
outstanding............ 10,695,388 11,710,013 12,765,082 11,716,656 12,208,876
<CAPTION>
December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Notes and interest
receivable, net........ $ 52,053 $ 25,526 $ 48,485 $ 49,741 $ 45,664
Real estate, net........ 734,907 302,453 119,035 59,424 47,526
Total assets............ 918,605 433,799 239,783 162,033 137,362
Notes and interest
payable................ 768,272 261,986 127,863 61,163 45,695
Margin borrowings....... 35,773 53,376 40,044 34,017 26,391
Stockholders' equity.... 38,272 63,453 47,786 53,058 55,894
Book value per share.... $ .44 $ 3.53 $ 3.74 $ 4.53 $ 4.77
</TABLE>

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

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

Introduction

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

Liquidity and Capital Resources

General. Cash and cash equivalents at December 31, 1998 aggregated $11.5
million, compared with $5.3 million at December 31, 1997. Although the Company
anticipates that during 1999 it will generate excess cash from operations, as
discussed below, such excess cash is not sufficient to discharge all of the
Company's debt

32
<PAGE>

obligations as they mature. The Company will therefore again rely on
externally generated funds, including aggressive land sales, selected property
sales, refinancing of properties and, to the extent necessary, borrowings to
meet its debt service obligations, pay taxes, interest and other non-property
related expenses.

Notes payable totaling $164.2 million are scheduled to mature during 1999.
During the first quarter of 1998, the Company either extended, refinanced,
paid down, paid off or received commitments from lenders to extend or
refinance $66.8 million of the debt scheduled to mature in 1999. See NOTE 5.
"REAL ESTATE," NOTE 9. "NOTES AND INTEREST PAYABLE" and NOTE 24. "SUBSEQUENT
EVENTS."

The Company expects an increase in cash from property operations in 1999.
The increase is expected to be derived from a full year of operations of the
36 apartments that it acquired during 1998. The Company is also expecting
substantial land sales and selected property sales to generate additional
cash.

Net cash from operating activities decreased to a deficit of $23.0 million
in 1998 from a deficit of $18.0 million in 1997. Fluctuations in the
components of cash from operating activities are discussed in the paragraphs
that follow.

Net cash from pizza operations (sales less cost of sales) decreased to $2.4
million in 1998 from $5.0 million in 1997. The decrease was due to higher
labor and pizza ingredient costs, primarily cheese.

Net cash from property operations (rents collected less payments for
expenses applicable to rental income) increased to $21.5 million in 1998 from
$5.4 million in 1997. This increase was primarily attributable to a full year
of operations of the five hotels and two shopping centers acquired in 1997 and
to the 36 apartments acquired in 1998. The increase was partially offset by
$1.3 million of costs related to the 16 land parcels purchased in 1998.

Interest collected decreased to $188,000 in 1998 from $2.6 million in 1997.
The decrease was attributable to the sale of two notes receivable and the
foreclosure of the collateral securing a third note receivable in 1997 and the
foreclosure of the collateral securing a wraparound mortgage note receivable
in 1998. See Note 3. "NOTES AND INTEREST RECEIVABLE."

Interest paid increased to $34.1 million in 1998 from $19.1 million in
1997. The increase was due to a full year of interest on the debt associated
with the five hotels, two shopping centers and 24 parcels of land acquired in
1997 and with 36 apartments and 16 land parcels acquired in 1998.

Advisory and servicing fees paid increased to $3.8 million in 1998 from
$2.7 million in 1997. The increase is due to an increase in the Company's
gross assets, the basis for such fee.

General and administrative expenses paid increased to $8.5 million in 1998
from $7.8 million in 1997. The increase was primarily attributable to the
general and administrative expenses of the Company's development subsidiary
established in 1998.

Other cash from operating activities decreased to a use of $5.5 million in
1998 from a use of $537,000 in 1997. The decrease was due to a decrease in
property prepaids, other miscellaneous property receivables and property
escrows.

Distributions from equity investees' increased to $10.3 million in 1998
from $5.7 million in 1997. Included in 1998 distributions, were special
distributions totaling of $6.7 million from two equity investees. The special
distributions were accrued at December 31, 1997, but were not paid until 1998.

Distributions to minority interest holders increased to $3.2 million in
1998 from $2.1 million in 1997. These distributions represented preferred
returns paid to limited partner unitholders of controlled consolidated
partnerships. See NOTE 5. "REAL ESTATE" and NOTE 13. "PREFERRED STOCK."

33
<PAGE>

Net cash of $2.2 million in 1998 and $4.6 million in 1997 was used in
marketable equity securities trading activities. See NOTE 7. "MARKETABLE
EQUITY SECURITIES--TRADING PORTFOLIO."

In 1998, the Company sold a total of 789.2 acres of land in Collin County,
Irving, Las Colinas, Lewisville and Plano, Texas, Denver, Colorado, Palm
Desert and Santa Clarita, California in 13 separate transactions for a total
of $51.6 million. The Company received net cash of $15.4 million, after paying
off or paying down $36.2 million in mortgage debt secured by such properties.

In 1998, the Company purchased a total of 2,497.1 acres of land in Palm
Desert, California and Carrollton, Dallas County, Farmers Branch, Fort Worth,
Houston, Irving, Lewisville, McKinney, Plano and Tarrant County, Texas, for a
total of $141.6 million. The Company paid $30.3 million in cash and obtained
mortgage or seller financing of $88.1 million and issued $23.2 million of
Class A limited partner units in controlled consolidated partnerships.

The Company expects that funds from existing cash resources, agressive
sales of land and selected property sales, refinancing of real estate, and
borrowings against its real estate and marketable equity securities 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 improved and unimproved land, continue making
additional investments in real estate entities and marketable equity
securities, and fund or acquire mortgage notes.

In February 1999, the Company purchased Frisco Bridges land, a 336.8 parcel
of unimproved land in Collin County, Texas, for $46.8 million. The Company
paid $7.8 million in cash and obtained mortgage financing totaling $39.0
million. The Company drew down $6.0 million under the line of credit described
below, for a portion of the cash requirement. See NOTE 24. "SUBSEQUENT
EVENTS."

The Company expects that it will be necessary for it to sell $120.0
million, $48.0 million and $17.0 million of its land holdings during each of
the next three years to satisfy the debt on such land as it matures. If the
Company is unable to sell at least the minimum amount of land to satisfy the
debt obligations on such land as it matures, the Company, if it was not able
to extend such debt, would either sell other of its assets to pay such debt or
return the property to the lender.

Notes Receivable. In June 1992, the Company sold the Continental Hotel and
Casino in Las Vegas, Nevada for, among other consideration, a $22.0 million
wraparound mortgage note. 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 March 1997, and an additional $2.0 million prior to December 1997. The
borrower stopped making the payments required by the note in April 1997, and
did not make the required improvements. In December 1997, the borrower filed
for bankruptcy protection. In February 1998, a hearing was held to allow
foreclosure of the hotel and casino. At the hearing, the bankruptcy court
allowed that the borrower 90 days to submit a reorganization plan and
beginning March 2, 1998, required the borrower to make monthly payments of
$175,000. The Company received only the first such payment. The wraparound
mortgage note had a principal balance of $21.0 million at March 31, 1998. In
April 1998, the bankruptcy court allowed the foreclosure of the hotel and
casino. No loss was incurred on foreclosure as the fair value of the property
exceeded the carrying value of the Company's mortgage note.

Loans Payable. The Company has margin arrangements with various brokerage
firms which provide for borrowings of up to 60% 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 $35.8 million (approximately 43.9% of
market value) at December 31, 1998, compared to $53.4 million at December 31,
1997. See NOTE 10. "MARGIN BORROWINGS."

In November 1998, the Company obtained a $95.0 million line of credit from
Garden Capital, L.P. ("GCLP"), a partnership controlled by National Operating,
L.P. ("NOLP"), the operating partnership of

34
<PAGE>

National Realty, L.P. ("NRLP") collectively the Partnership. The Company
received fundings of $18.9 million in November 1998, $31.1 million in December
1998, and an additional $26.7 million in the first quarter of 1999. The line
of credit is secured by second liens on the Company's Waters Edge III,
Edgewater Gardens, Chateau Bayou and Sunset Apartments, Rosedale Towers Office
Building, Katy Road land and the stock of its wholly-owned subsidiaries,
National Management Corp. ("NMC"), the general partner of NRLP and NOLP, and
ART Holdings, Inc., which owns 3,349,535 NRLP units of limited partner
interest. The loan bears interest at 12% per annum, requires monthly interest
only payments and matures in November 2003. The Company accounted for its
investment in the Partnership under the equity method until December 1998 when
NMC was elected general partner of the Partnership. As of December 31, 1998,
the accounts of the Partnership are consolidated with those of the Company.
Such line of credit is eliminated in consolidation. See Note 2. "SYNTEK ASSET
MANAGEMENT, L.P."

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

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

The Company's cash flow from these investments is dependent on the ability
of each of the entities to make distributions. In 1998, the Company received
total distributions from the REITs of $1.8 million and $1.8 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 $4.0 million from the REITs and $1.7 million from NRLP in 1999.

In June 1996, the Company resumed quarterly dividend payments on the
Company's Common Stock. The Company paid dividends totaling $2.3 million or
$.20 per share in 1998.

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

1998 Compared to 1997. The Company reported a net loss of $22.8 million in
1998 as compared to a net loss of $2.4 million in 1997. The primary factors
contributing to the Company's net loss are discussed in the following
paragraphs.

Sales and cost of sales were $28.9 million and $24.8 million in 1998 and
$25.0 million and $20.0 million, in 1997. These items of revenue and cost
relate to Pizza World Supreme, Inc. ("PWSI"). PWSI experienced

35
<PAGE>

lower profit margins in 1998 due to higher labor and pizza ingredient costs,
primarily cheese. Cheese prices have declined since January 1, 1999.

Rents increased to $63.5 million in 1998 from $29.1 million in 1997. Rent
from commercial properties increased to $16.5 million in 1998 from $13.9
million in 1997, rent from hotels increased to $32.2 million in 1998 from
$14.9 million in 1997 and rent from apartments was $14.2 million in 1998. The
increase in rent from hotels was primarily attributable to a full year of
operations of the five hotels acquired in 1997, the increase in rent from
commercial properties was primarily attributable to a full year of operations
of the two shopping centers acquired in 1997 and apartment rent was due to the
36 apartments acquired in 1998. The Company owned no apartments in 1997.
Rental income is expected to increase significantly in 1999 as a result of the
consolidation of the Partnership's operations subsequent to December 31, 1998.
See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P."

Property operations expense increased to $49.2 million in 1998 from $24.2
million in 1997. Property operations expense for commercial properties of $9.7
million in 1998 approximated the $10.0 million in 1997, for hotels such
expense increased to $24.4 million in 1998 from $11.2 million in 1997, for
land it increased to $6.3 million in 1998 from $3.0 million in 1997 and for
apartments was $8.8 million in 1998. The increase in hotel property operations
expense was primarily due to a full year of operations of the five hotels
acquired in 1997, the increase for land was primarily due to the 16 land
parcels acquired in 1998. Property operations expense for apartments was due
to the 36 apartments acquired in 1998. The Company owned no apartments in
1999. Property operations expense is expected to increase significantly in
1999 as a result of the consolidation of the Partnership's operation
subsequent to December 31, 1998. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P."

Interest income decreased to $188,000 in 1998 from $2.8 million in 1997.
The decrease was attributable to the sale of two notes receivable and the
foreclosure of the collateral securing a third note receivable in 1997 and the
foreclosure of the collateral securing a wraparound mortgage note receivable
in 1998. Interest income is expected to increase significantly in 1999 as
result of the consolidation of the Partnership's operations subsequent to
December 31, 1998. See "NOTE 2. SYNTEK ASSET MANAGEMENT, L.P."

Other income decreased to a loss of $5.5 million in 1998 from income of
$168,000 in 1997. This decrease was due to recognizing an unrealized loss on
marketable equity securities of $6.1 million in 1998, compared to an
unrealized loss of $850,000 in 1997. Also contributing to the decrease was a
decrease in dividend income and net gains on sales of marketable equity
securities of $15,000 and $260,000, respectively.

Interest expense increased to $51.6 million in 1998 from $30.2 million in
1997. Of this increase, $7.5 million was due to a full year of interest on the
debt secured by the five hotels, two shopping centers and 24 parcels of land
acquired in 1997 and an additional $10.4 million was due to debt secured by 36
apartments and 16 parcels of land acquired in 1998. Interest on margin debt
also increased by $1.5 million and deferred borrowing costs by $3.5 million.
Interest is expected to increase significantly in 1999 as a result of the
consolidation of the Partnership's operations subsequent to December 31, 1998.
See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P."

Advisory and mortgage servicing fees increased to $3.8 million in 1998 from
$2.7 million in 1997. The increase was 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 to $8.5 million in 1998 from
$7.8 million in 1997. The increase was primarily attributable to the general
and administrative expenses of a development subsidiary established in 1998.
General and administrative expenses are expected to increase significantly in
1999 as a result of the consolidation of the Partnership's operations
subsequent to December 31, 1998. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P."

36
<PAGE>

Depreciation and amortization increased to $7.0 million in 1998 from $3.5
million in 1997. The increase was due to a full year of depreciation on the
five hotels and two shopping centers acquired in 1997 and 36 apartments
acquired in 1998. Depreciation and amortization is expected to increase
significantly in 1999 as a result of the consolidation of the Partnership's
results subsequent to December 31, 1998. See NOTE 2. "SYNTEK ASSET MANAGEMENT,
L.P."

In the third and fourth quarters of 1998, provisions for loss of $3.0
million and $916,000 respectively, were recorded to write down the Valley
Ranch land to its estimated realizable value less estimated costs of sale.
Such write downs were necessitated by an increase in the acreage designated as
flood plain. The Company recorded no such provision in 1997.

In December 1998, upon the election of NMC, a wholly-owned subsidiary of
the Company, as general partner of the Partnership, NMC assumed liability for
certain legal settlement payments. Such obligation is included in litigation
expense in the accompanying Consolidated Statement of Operations. See NOTE 2.
"SYNTEK ASSET MANAGEMENT, L.P."

Minority interest increased to $3.2 million in 1998 from $1.4 million in
1997. Minority interest is the preferred return paid on limited partner units
of certain controlled limited partnerships. Minority interest in 1997 was
attributable to the preferred returns paid on a 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 Associations, L.P. In 1998
preferred returns paid on limited partner units for ART Florida Portfolio III
and ART Palm, L.L.C. also were included.

Equity in income of investees increased to $38.0 million in 1998 from $10.5
million in 1997. The increase in equity income was attributable to an increase
totaling $55.2 million in gains on sale of real estate in Income Opportunity
Realty Investors, Inc. ("IORI"), the Partnership and Transcontinental Realty
Investors, Inc. ("TCI") offset in part by a decrease of $1.2 million in
Continental Mortgage and Equity Trust ("CMET"). The Company's equity share of
such gains was $33.3 million. This net increase was offset by decreased
operating income totaling $7.5 million in IORI, the Partnership and CMET
offset in part by an increase in operating income of $3.1 million in TCI. The
Company's equity share of equity investees' net operating losses was $6.9
million. Equity in income of investees is expected to decrease significantly
in 1999 as a result of the consolidation of the Partnership's operations
subsequent to December 31, 1998. See NOTE 2 "SYNTEK ASSET MANAGEMENT, L.P."

Gains on sale of real estate decreased to $17.3 million in 1998 from $20.3
million in 1997. In 1998, the Company recognized gains of $663,000 on the sale
of three tracts totaling 78.5 acres of its Valley Ranch land in Irving, Texas;
$1.9 million on its Lewisville land in Lewisville, Texas; $714,000 on a 21.3
acre tract of its Parkfield land in Denver, Colorado; $848,000 on a 21.6 acre
tract of its Chase Oaks land in Plano, Texas; $789,000 on a 150.0 acre tract
of its Rasor land in Plano, Texas; $3.9 million on its Palm Desert land in
Palm Desert, California; $869,000 on a 2.5 acre tract of its Las Colinas I
land in Las Colinas, Texas; $898,000 on its Kamperman land in Collin County,
Texas; $3.4 million on its final 10.5 acre tract of BP Las Colinas land in Las
Colinas, Texas; $409,000 on a 1.1 acre tract of its Santa Clarita land in
Santa Clarita, California; $2.6 million on a 20.8 acre tract of its Mason
Goodrich land in Houston, Texas, and the Company recognized a $179,000
previously deferred gain on a sale of its Valley Ranch land in 1997. 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. See NOTE 5. "REAL ESTATE."

37
<PAGE>

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 $25.0 million and $20.0 million in 1997 and
$14.4 million and $11.0 million in 1996. The Company acquired 80% of the
outstanding common stock of PWSI in April 1996. The Company had no sales or
cost of sales prior to April 1996. These items of revenue and cost relate to
PWSI. In April 1996, a wholly-owned subsidiary of the Company acquired 80% of
the common stock of PWSI. See NOTE 8. "ACQUISITION OF PIZZA WORLD SUPREME,
INC."

Rents increased from $20.7 million in 1996 to $29.1 million in 1997. Rent
from hotels increased from $6.1 million in 1996 to $14.9 million in 1997 and
rent from commercial properties increased from $12.4 million in 1996 to $13.8
million in 1997. The increase in rent from hotels was due to the acquisition
of four hotels in October 1997 and the obtaining of a fifth hotel through
foreclosure in September 1997. The increase in rent from commercial properties
was due to the acquisition of a shopping center in September 1997.

Property operations expense increased from $15.9 million in 1996 to $24.2
million in 1997. Property operations expense for hotels increased from $4.8
million in 1996 to $11.2 million in 1997, for commercial properties it
decreased from $10.4 million in 1996 to $10.0 million in 1997 and for land
such expense increased from $735,000 in 1996 to $3.0 million in 1997. The
increase in hotel property operations expense was due to the acquisition of
the four hotels in October 1997 and the obtaining of a fifth hotel through
foreclosure in September 1997, the decrease for commercial properties was due
to control of property operations expenses, primarily at the Company's
merchandise mart and the increase for land was due to 24 land parcels acquired
in 1997.

Interest income decreased from $4.8 million in 1996 to $2.8 million in
1997. This decrease was primarily attributable to the sale of two notes
receivable and the collection of a third note receivable in 1997.

Other income decreased from $1.7 million in 1996 to $168,000 in 1997. This
decrease was 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 was 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 was 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 Road 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 due to additional
borrowings and a full year of interest on the loan secured by NRLP units and
$1.1 million due to refinancing the debt secured by the Kansas City Holiday
Inn and Denver Merchandise Mart.

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

General and administrative expenses, increased from $3.9 million in 1996 to
$7.8 million in 1997. The increase was 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 $1.3 million attributable to a full year of general and
administrative expenses of PWSI. See NOTE 8. "ACQUISITION OF PIZZA WORLD
SUPREME, INC."

Depreciation and amortization increased from $2.4 million in 1996 to $3.5
million in 1997 due to the acquisition of six properties in 1997.

38
<PAGE>

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

Equity in income of investees increased from $1.5 million in 1996 to $10.5
million in 1997. The increase in equity income was 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 was also attributable to an
improvement in income from property operations for the REITs and NRLP, from
increased rental rates and operating expense control.

Gains on the sale of real estate increased from $3.7 million in 1996 to
$20.3 million in 1997. In 1996, the Company recognized a $2.0 million gain on
the sale of a 32.3 acre tract of BP Las Colinas land in Las Colinas, Texas,
and a $1.1 million gain on the sale of a 4.6 acre tract of Las Colinas I land
also in Las Colinas, Texas. In 1997, the Company recognized gains of $5.9
million on the sale of a 49.7 acre tract of BP Las Colinas land in Las
Colinas, Texas; $3.5 million on the sale of tracts totaling 116.8 acres of
Valley Ranch land in Irving, Texas; $2.7 million on the sale of a 12.5 acre
tract of Las Colinas I land in Las Colinas, Texas; $3.6 million on the sale of
Pin Oak land in Houston, Texas; $216,000 on the sale of a 99.7 acre tract of
Kamperman land in Collin County, Texas; $371,000 on the sale of a 32.0 acre
tract of Parkfield land in Denver, Colorado; $211,000 on the sale of a 86.5
acre tract of Rasor land in Plano, Texas; $106,000 on the sale of Park Plaza
Shopping Center in Manitowoc, Wisconsin; $480,000 on the sale of the Mopac
Building in St. Louis, Missouri; and $172,000 on the sale of a mortgage note
receivable. The Company also recognized a previously deferred gain of $3.0
million on the sale of Porticos Apartments. See NOTE 5. "REAL ESTATE."

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

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 for personal injury associated with
such materials.

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 the ultimate gains to
be realized from property sales. To the extent that inflation affects interest
rates, earnings from short-term investments and the cost of new financings as
well as the cost of variable interest rate debt will be affected.

Year 2000

Basic Capital Management, Inc. ("BCM"), the Company's advisor, has informed
management that its computer hardware operating system and computer software
have been certified as year 2000 compliant.

Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM that
performs property management services for the Company's properties, has
informed management that effective January 1, 1999, it began using

39
<PAGE>

year 2000 compliant computer hardware and property management software for the
Company's commercial properties. With regard to the Company's apartments,
Carmel, Ltd. has informed management that its subcontractors either have in
place or will have in place in the first quarter of 1999, year 2000 compliant
computer hardware and property management software.

The Company has not incurred, nor does it expect to incur, any costs
related to its computer hardware and accounting and property management
software being modified, upgraded or replaced in order to make it year 2000
compliant. Such costs have been or will be borne by either BCM, Carmel, Ltd.
or the property management subcontractors of Carmel, Ltd.

Management has completed its evaluation of the Company's computer
controlled building systems, such as security, elevators, heating and cooling,
etc., to determine what systems are not year 2000 compliant. Management
believes that necessary modifications to such systems are insignificant and do
not require significant expenditures to make the affected system year 2000
compliant, as enhanced operating systems are readily available.

The Company has or will have in place the year 2000 compliant systems that
will allow it to operate. The risks the Company faces are that certain of its
vendors will not be able to supply goods or services and that financial
institutions and taxing authorities will not be able to accurately apply
payments made to them. Management believes that other vendors are readily
available and that financial institutions and taxing authorities will, if
necessary, apply monies received manually. The likelihood of the above having
a significant impact on the Company's operations is negligible.

40
<PAGE>

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants....................... 42

Consolidated Balance Sheets--December 31, 1998 and 1997.................. 43

Consolidated Statements of Operations--Years Ended December 31, 1998,
1997 and 1996........................................................... 44

Consolidated Statements of Stockholders' Equity--Years Ended December 31,
1998, 1997 and 1996..................................................... 45

Consolidated Statements of Cash Flows--Years Ended December 31, 1998,
1997 and 1996........................................................... 46

Notes to Consolidated Financial Statements............................... 47

Schedule III--Real Estate and Accumulated Depreciation................... 76

Schedule IV--Mortgage Loans on Real Estate............................... 85
</TABLE>

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

41
<PAGE>

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, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. We
have also audited the schedules listed in the accompanying index. These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of American Realty Trust, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.

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

BDO SEIDMAN, LLP

Dallas, Texas
March 30, 1999

42
<PAGE>

AMERICAN REALTY TRUST, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
(dollars in thousands,
except per share)
<S> <C> <C>
Assets
Notes and interest receivable
Performing ($594 in 1998 and $1,307 in 1997 from
affiliate)......................................... $ 47,823 $ 9,300
Nonperforming....................................... 6,807 18,624
----------- -----------
54,630 27,924
Less--allowance for estimated losses................. (2,577) (2,398)
----------- -----------
52,053 25,526
Real estate held for sale............................ 282,301 178,938
Real estate held for investment net of accumulated
depreciation ($208,396 in 1998 and $5,380 in 1997).. 452,606 123,515
Pizza parlor equipment, net of accumulated
depreciation ($1,464 in 1998 and $905 in 1997)...... 6,859 6,693
Marketable equity securities, at market value........ 2,899 6,205
Cash and cash equivalents............................ 11,523 5,347
Investments in equity investees...................... 34,433 45,851
Intangibles, net of accumulated amortization ($1,298
in 1998 and $704 in 1997)........................... 14,776 15,230
Other assets......................................... 61,155 26,494
----------- -----------
$ 918,605 $ 433,799
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable ($12,600 in 1998 and
$11,400 in 1997 to affiliates)...................... $ 768,272 $ 261,986
Margin borrowings.................................... 35,773 53,376
Accounts payable and other liabilities ($8,900 in
1998 and $22,900 in 1997 to affiliate).............. 38,321 34,442
----------- -----------
842,366 349,804
Minority interest.................................... 37,967 20,542
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..................... -- 8
Series C, 16,681 shares in 1997.................... -- 33
Series F, 3,350,000 shares in 1998 and 2,000,000 in
1997 (liquidation preference $33,500)............. 6,100 4,000
Series G, 1,000 shares in 1998 (liquidation
preference $100).................................. 2 --
Common Stock, $.01 par value, authorized 100,000,000
shares; issued 13,298,802 shares in 1998 and
13,479,348 in 1997.................................. 133 135
Paid-in capital...................................... 83,945 84,943
Accumulated (deficit)................................ (51,880) (25,638)
Treasury stock at cost, 2,737,216 shares in 1998 and
2,767,427 shares in 1997............................ (28) (28)
----------- -----------
38,272 63,453
----------- -----------
$ 918,605 $ 433,799
=========== ===========
</TABLE>

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

43
<PAGE>

AMERICAN REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Income
Sales............................ $ 28,883 $ 24,953 $ 14,386
Rents............................ 63,491 29,075 20,658
Interest ($39 in 1998, $230 in
1997 and $539 in 1996 from
affiliates)..................... 188 2,835 4,751
Other............................ (5,476) 168 1,727
------------- ------------- -------------
87,086 57,031 41,522
Expenses
Cost of sales.................... 24,839 19,964 11,036
Property operations ($1,752 in
1998, $865 in 1997 and $892 in
1996 to affiliates)............. 49,193 24,195 15,874
Interest ($1,082 in 1998, $433 in
1997 and $418 in 1996 to
affiliates)..................... 51,624 30,231 16,489
Advisory and servicing fees to
affiliate....................... 3,845 2,657 1,539
General and administrative
($1,832 in 1998, $1,809 in 1997
and $691 in 1996 to affiliate).. 8,521 7,779 3,930
Depreciation and amortization.... 6,990 3,542 2,367
Litigation settlement............ 13,026 -- --
Provision for loss on real
estate.......................... 3,916 -- --
Minority interest................ 3,157 1,884 1,366
------------- ------------- -------------
165,111 90,252 52,601
------------- ------------- -------------
(Loss) from operations............ (78,025) (33,221) (11,079)
Equity in income of investees..... 37,966 10,497 1,485
Gain on sale of real estate....... 17,254 20,296 3,659
------------- ------------- -------------
(Loss) before income taxes........ (22,805) (2,428) (5,935)
Income tax expense................ -- -- --
------------- ------------- -------------
(Loss) before extraordinary gain.. (22,805) (2,428) (5,935)
Extraordinary gain................ -- -- 381
------------- ------------- -------------
Net (loss)........................ (22,805) (2,428) (5,554)
Preferred dividend requirement.... (1,177) (206) (113)
------------- ------------- -------------
Net (loss) applicable to Common
shares........................... $ (23,982) $ (2,634) $ (5,667)
============= ============= =============
Earnings per share
(Loss) before extraordinary gain.. $ (2.24) $ (.22) $ (.46)
Extraordinary gain................ -- -- .03
------------- ------------- -------------
Net (loss) applicable to Common
shares........................... $ (2.24) $ (.22) $ (.43)
============= ============= =============
Weighted average Common shares
used in computing earnings per
share............................ 10,695,388 11,710,013 12,765,082
============= ============= =============
</TABLE>

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

44
<PAGE>

AMERICAN REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Series B Series C Series F Series G
Preferred Preferred Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Stock Stock Capital (Deficit) Equity
--------- --------- --------- --------- ------ -------- ------- ----------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... $-- $-- $ -- $-- $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 ($5.74
per share)............. -- 2 -- -- -- -- 85 (87) --
Treasury stock, at
cost................... -- -- -- -- -- (6) 6 -- --
Net (loss).............. -- -- -- -- -- -- -- (5,554) (5,554)
---- ---- ------ ---- ---- ---- ------- -------- --------
Balance, December 31,
1996................... 8 32 -- -- 135 (6) 68,595 (20,978) 47,786
Series F Preferred Stock
issued................. -- -- 4,000 -- -- -- 16,000 -- 20,000
Common Stock cash
dividend
($.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
($10.00 per share)..... -- 1 -- -- -- -- 81 (166) (84)
Sale of Common Stock.... -- -- -- -- -- -- 245 -- 245
Treasury stock, at
cost................... -- -- -- -- -- (22) 22 -- --
Net (loss).............. -- -- -- -- -- -- -- (2,428) (2,428)
---- ---- ------ ---- ---- ---- ------- -------- --------
Balance, December 31,
1997................... 8 33 4,000 -- 135 (28) 84,943 (25,638) 63,453
Repurchase of Common
Stock issued........... -- -- -- -- (2) -- (267) -- (269)
Series G Preferred Stock
issued................. -- -- -- 2 -- -- 98 -- 100
Series F Preferred Stock
issued................. -- -- 2,100 -- -- -- 529 -- 2,629
Common Stock cash
dividend
($.20 per share)....... -- -- -- -- -- -- -- (2,261) (2,261)
Series B Preferred Stock
cash dividend ($2.50
per share)............. -- -- -- -- -- -- -- (54) (54)
Series C Preferred Stock
cash dividend ($7.50
per share)............. -- -- -- -- -- -- -- (148) (148)
Series F Preferred Stock
cash dividend ($.625
per share)............. -- -- -- -- -- -- -- (966) (966)
Series G Preferred Stock
cash dividend ($7.50
per share)............. -- -- -- -- -- -- -- (8) (8)
Sale of Common Stock
under dividend
reinvestment plan...... -- -- -- -- -- -- 224 -- 224
Conversion of Series B
Preferred Stock to
Common Stock........... (8) -- -- -- -- -- 53 -- 45
Series C Preferred Stock
redeemed............... -- (33) -- -- -- -- (1,635) -- (1,668)
Net (loss).............. -- -- -- -- -- -- -- (22,805) (22,805)
---- ---- ------ ---- ---- ---- ------- -------- --------
Balance, December 31,
1998................... $-- $-- $6,100 $ 2 $133 $(28) $83,945 $(51,880) $ 38,272
==== ==== ====== ==== ==== ==== ======= ======== ========
</TABLE>

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

45
<PAGE>

AMERICAN REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
For The Years Ended December 31,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Pizza parlor sales collected............. $ 28,173 $ 24,953 $ 14,386
Rents collected.......................... 64,029 28,199 19,013
Interest collected ($262 in 1997 and $385
in 1996 from affiliates)................ 188 2,592 4,331
Distributions from equity investees'
operating activities.................... 10,274 5,689 9,054
Interest paid............................ (34,139) (19,092) (9,640)
Payments for property operations ($1,752
in 1998, $865 in 1997 and $892 in 1996
to affiliate)........................... (42,551) (22,821) (15,034)
Payments for pizza parlor operations..... (25,765) (19,964) (11,036)
Advisory fee paid to affiliate........... (3,845) (2,657) (1,539)
Distributions to minority interest
holders................................. (3,157) (2,088) (1,366)
Purchase of marketable equity
securities.............................. (7,670) (15,147) (22,613)
Proceeds from sale of marketable equity
securities.............................. 5,502 10,588 23,557
General and administrative expenses paid
($1,832 in 1998, $1,809 in 1997 and $691
in 1996 to affiliate)................... (8,489) (7,764) (4,313)
Other.................................... (5,538) (537) (642)
---------- ----------- ----------
Net cash provided by (used in) operating
activities.............................. (22,988) (18,049) 4,158
Cash Flows From Investing Activities
Collections on notes receivable ($3,503
in 1997 and $1,166 in 1996 from
affiliates)............................. 3,121 4,489 1,495
Proceeds from sale of notes receivable... 599 16,985 --
Notes receivable funded.................. (594) (8,716) (250)
Proceeds from sale of real estate........ 51,602 38,169 7,718
Contributions from minority interest
holders................................. -- 9,799 2,571
Distributions from equity investees
activities.............................. 14,429 -- --
Acquisitions of real estate.............. (106,884) (123,074) (41,636)
Real estate improvements................. (4,070) (10,993) (2,862)
Pizza parlor equipment purchased......... (166) (2,695) (2,942)
Earnest money deposits................... (577) (6,221) 577
Investment in real estate entities....... (6,116) (1,331) (15,471)
---------- ----------- ----------
Net cash (used in) investing
activities.............................. (48,656) (83,588) (50,800)
Cash Flows From Financing Activities
Proceeds from notes payable.............. 237,895 161,103 86,490
Margin borrowings (payments), net........ (21,908) 8,914 2,981
Proceeds from issuance of Preferred
Stock................................... -- -- 400
Payments on notes payable................ (120,394) (81,639) (30,003)
Deferred borrowing costs................. (10,156) (5,174) (5,028)
Net advances (payments) to/from
affiliates.............................. (2,913) 23,274 (4,979)
Redemption of Preferred Stock............ (1,668) -- --
Sale of Common Stock under dividend
reinvestment plan....................... 224 -- --
Dividends................................ (3,260) (2,150) (1,617)
---------- ----------- ----------
Net cash provided by financing
activities.............................. 77,820 104,328 48,244
---------- ----------- ----------
Net increase in cash and cash
equivalents.............................. 6,176 2,691 1,602
Cash and cash equivalents, beginning of
year..................................... 5,347 2,656 1,054
---------- ----------- ----------
Cash and cash equivalents, end of year $ 11,523 $ 5,347 $ 2,656
========== =========== ==========
</TABLE>

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

46
<PAGE>

AMERICAN REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

<TABLE>
<CAPTION>
For The Years Ended December 31,
------------------------------------
1998 1997 1996
----------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of net (loss) to net cash
provided by (used in) operating
activities
Net (loss)............................... $ (22,805) $ (2,428) $ (5,554)
Adjustments to reconcile net (loss) to
net cash provided by (used in) operating
activities Extraordinary gain........... -- -- (381)
Gain on sale of real estate............. (17,254) (20,296) (3,659)
Depreciation and amortization........... 6,990 3,542 2,367
Amortization of deferred borrowing
costs.................................. 8,916 4,042 2,692
Provision for loss...................... 3,916 -- --
Litigation settlement................... 13,076 -- --
Equity in (income) of investees......... (37,966) (10,497) (1,485)
Distributions from equity investees'
operating activities................... 10,274 5,689 9,054
Increase (decrease) in marketable equity
securities............................. (3,306) (4,559) 944
(Increase) decrease in accrued interest
receivable............................. (2,269) 66 (117)
(Increase) decrease in other assets..... 20,201 634 (4,103)
Increase in accrued interest payable.... 2,537 1,019 1,417
Increase in accounts payable and other
liabilities............................ (5,716) 4,978 2,908
Other................................... 418 (239) 75
----------- ----------- ----------
Net cash provided by (used in)
operating activities................. $ (22,988) $ (18,049) $ 4,158
=========== =========== ==========
Schedule of noncash investing and
financing activities
Notes payable from acquisition of real
estate................................. $ 45,632 $ 44,151 $ 9,099
Stock dividends on Series C Preferred
Stock.................................. -- 82 31
Issuance of Series G Preferred Stock.... 100 -- --
Series F Preferred Stock issued for real
estate................................. 2,100 20,000 --
Dividend obligation on conversion of
Series F Preferred Stock............... 134 -- --
Current value of property obtained
through foreclosure of note
receivable............................. 20,985 20,226 --
Note receivable cancelled on acquisition
of property............................ 1,300 2,737 --
Issuance of partnership units........... 24,474 -- --
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 --
Conversion of Series B Preferred Stock
into Common Stock...................... 45 -- --
Consolidation of National Realty, L.P.
Carrying value of notes receivable...... 52,168 -- --
Carrying value of real estate........... 228,042 -- --
Carrying value of investment in equity
investee eliminated.................... 41,182 -- --
Carrying value of other assets.......... 32,571 -- --
Carrying value of minority interest..... 15,600 -- --
Carrying value of the Company Common
Stock eliminated....................... 269 -- --
Carrying value of notes and interest
payable................................ 295,743 -- --
Carrying value of accounts payable and
other liabilities...................... 751 -- --
Acquisition of IGI properties -- --
Carrying value of real estate........... 51,820 -- --
Issuance of partnership units........... 6,568 -- --
Carrying value of other assets.......... (1,122) -- --
Carrying value of notes payable and
other liabilities...................... 43,713 -- --
Investment in partnerships.............. 1,980 -- --
Acquisition of Pizza World Supreme, Inc.
Carrying value of intangible............ -- -- 9,768
Carrying value of pizza parlor
equipment.............................. -- -- --
Carrying value of note receivable
retired................................ -- -- 10,286
Carrying value of accounts payable and
other liabilities...................... -- -- 2,834
</TABLE>

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

47
<PAGE>

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 1996 and 1997 have been reclassified to conform to the
1998 presentation. Shares and per share data have been restated for a 2 for 1
forward Common Stock split effected February 17, 1997.

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 controlled subsidiaries and partnerships other than
National Realty, L.P. ("NRLP") prior to December 31, 1998. The Company used
the equity method to account for its investment in NRLP prior to December 31,
1998, and prior to May 1997. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P.". All
significant intercompany transactions and balances have been eliminated.

Accounting estimates. In the preparation of the Company's Consolidated
Financial Statements in conformity with generally accepted accounting
principles it was necessary for 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 management'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.

48
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 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, they are accounted for by the
equity method. Under the equity method, the Company's initial investment,
recorded at cost, is increased by its proportionate share of the investee's
operating income and any additional investment and decreased by the Company's
proportionate share of the investee's operating losses and distributions
received.

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

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

Operating segments. Management has determined that the Company's reportable
operating segments are those that are based on the Company's method of
internal reporting, which disaggregates its operations by type of real estate.

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.

Loss per share. Loss per share is presented in accordance with 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 a two for one forward Common Stock
split effected February 17, 1997.

49
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 2. SYNTEK ASSET MANAGEMENT, L.P.

The Company owns a 96% limited partner interest in Syntek Asset Management,
L.P. ("SAMLP"). Until December 18, 1998, SAMLP was the general partner of
National Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP"), the
operating partnership of NRLP, (collectively the "Partnership"). 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 December 31, 1998, the
Company owned approximately 55.0% 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 named 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 provided that 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 NRLP partnership
agreement. Syntek Asset Management, Inc. ("SAMI"), the managing general
partner of SAMLP, 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.

Pursuant to the order, $11.4 million was deposited by NRLP into an escrow
account and then transferred to the control of an independent settlement
administrator. The distribution of the cash shall be made to the plaintiff
class members pro rata based upon the number of units originally issued to
each plaintiff class member upon the formation of NRLP in 1987. The
distribution of cash is under the control of the independent settlement
administrator. On March 10, 1999, the Court entered an order providing for the
initial distribution of the cash not later than March 31, 1999.

The proposal to elect NRLP Management Corp. ("NMC"), a wholly-owned
subsidiary of the Company, as the successor general partner was submitted to
the unitholders of NRLP for a vote at a special meeting of unitholders held on
December 18, 1998. All units of NRLP owned by the Company and affiliates of
SAMLP

50
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(approximately 61.5% of the outstanding units of NRLP as of the November 27,
1998 record date) were voted pro rata with the vote of the other limited
partners. NMC was elected by a majority of the NRLP unitholders. The
Settlement Agreement remained in effect until December 18, 1998, when SAMLP
resigned as general partner and NMC was elected successor general partner and
took office.

Under the Cash Distribution Agreement, SAMLP waived its right under the
Settlement Agreement to receive any payment from NRLP for its Redeemable
General Partner Interest and fees it was entitled to receive upon the election
of a successor general partner. As of December 31, 1997, the Redeemable
General Partner Interest was calculated to be $49.6 million. In addition,
pursuant to the Cash Distribution Agreement, the NRLP partnership agreement
was amended to provide that, upon voluntary resignation of the general
partner, the resigning general partner shall not be entitled to the repurchase
of its general partner interest under Paragraph 17.9 of the NRLP partnership
agreement.

Under the Cash Distribution Agreement, NMC assumed liability for SAMLP's
note for its original capital contribution to NRLP. In addition, NMC assumed
liability for the note which requires the repayment of the $11.4 million paid
by NRLP under the Cash Distribution Agreement, plus the $808,000 in court
ordered attorney's fees and $30,000 paid to Joseph B. Moorman. This note
requires repayment over a ten-year period, bears interest at a variable rate,
currently 7.0% per annum, and is guaranteed by the Company, the parent of NMC.
The liability assumed under the Cash Distribution Agreement was expensed as a
"litigation settlement" in the accompanying Consolidated Statement of
Operations.

As of December 31, 1998, the Company discontinued accounting for its
investment in the Partnership under the equity method upon the election of NMC
as general partner of the Partnership and the settlement of the class action
lawsuit. The Company began consolidation of the Partnership's accounts at that
date and its operations subsequent to that date. The consolidation of the
accounts of the Company with those of the Partnership (after intercompany
eliminations) resulted in an increase in the Partnership's net real estate of
$60.6 million. This amount was allocated to the individual real estate assets
based on their relative individual fair market value.

The Partnership's operating results for 1998 were as follows:

<TABLE>
<S> <C>
Revenues........................................................... $113,834

Property operating expenses........................................ 75,699
Interest........................................................... 26,722
Depreciation....................................................... 9,691
General and administrative expenses................................ 6,820
--------
118,932
--------

(Loss) from operations............................................. (5,098)
Gain on sales of real estate....................................... 52,589
--------

Net income......................................................... $ 47,491
========
</TABLE>

51
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 3. NOTES AND INTEREST RECEIVABLE

<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Notes Receivable
Performing (including $594 in 1998 and
$1,307 in 1997 from affiliates)........ $44,488 $45,310 $ 9,217 $ 9,340
Nonperforming........................... 9,200 9,200 26,344 23,212
------- ------- ------- -------
$53,688 54,510 $35,561 32,552
======= =======
Interest receivable..................... 2,648 380
Unamortized premiums/(discounts)........ (72) (124)
Deferred gains.......................... (2,456) (4,884)
------- -------
$54,630 $27,924
======= =======
</TABLE>

The Company recognizes interest income on nonperforming notes receivable on
a cash basis. For the years 1998, 1997 and 1996 unrecognized interest income
on such nonperforming notes receivable totaled $716,000, $2.2 million and $1.6
million, respectively.

Notes receivable at December 31, 1998, mature from 1999 to 2009 with
interest rates ranging from 7.2% to 18.0% per annum and a weighted average
rate of 11.9% per annum. Notes receivable are generally collateralized by real
estate or interests in real estate and personal guarantees of the borrower. A
majority of the notes receivable provide for interest to be paid at maturity.
Scheduled principal maturities of $37.0 million are due in 1999 of which $3.2
million is due on nonperforming notes receivable.

In June 1992, the Company sold the Continental Hotel and Casino in Las
Vegas, Nevada for, among other consideration, a $22.0 million wraparound
mortgage note. The Company recorded a deferred gain of $4.6 million on the
sale resulting from a disputed third lien mortgage being subordinated to the
Company's wraparound mortgage note. In March 1997, the wraparound note was
modified and extended in exchange for the borrower's commitment to invest $2.0
million in improvements to the hotel and casino within four months of March
1997, and an additional $2.0 million prior to December 1997. The borrower
stopped making the payments required by the note in April 1997, and did not
make the required improvements. In December 1997, the borrower filed for
bankruptcy protection. In February 1998, a hearing was held to allow
foreclosure of the hotel and casino. At the hearing, the bankruptcy 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. The
Company received only the first such payment. The wraparound mortgage note had
a principal balance of $22.7 million at March 31, 1998. In April 1998, the
bankruptcy court allowed the foreclosure of the hotel and casino. No loss was
incurred on foreclosure as the fair market value of the property exceeded the
carrying value of the mortgage note. The property is included in real estate
held for investment in the accompanying Consolidated Balance Sheet.

52
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

As of December 31, 1998, the Company sold to Basic Capital Management, Inc.
("BCM"), the Company's advisor, three matured mortgage notes at their carrying
value of $628,000. No gain or loss was recognized on the sale. See NOTE 11.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

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. In April 1995, the borrower filed for bankruptcy protection. In
August 1996, the bankruptcy court's stay was lifted allowing foreclosure to
proceed. In February 1997, the Company sold its mortgage note receivable for
$1.8 million in cash. A gain of $171,000 was recognized 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
paying off $9.2 million in underlying debt. No loss was incurred on the sale
in excess of the reserve previously established.

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. No loss was incurred 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.

NOTE 4. ALLOWANCE FOR ESTIMATED LOSSES

Activity in the allowance for estimated losses on notes and interest
receivable was as follows:

<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Balance January 1,.................................... $2,398 $ 3,926 $ 7,254
Partnership allowance................................ 1,910 -- --
Amounts charged off.................................. -- (1,528) --
Writedown of property................................ (1,731) -- (3,328)
------ ------- -------
Balance December 31,.................................. $2,577 $ 2,398 $ 3,926
====== ======= =======
</TABLE>

NOTE 5. REAL ESTATE

In January 1998, in separate transactions, the Company purchased (1) El
Dorado Parkway land, a 8.5 acre parcel of unimproved land in Collin County,
Texas, for $952,000, consisting of $307,000 in cash, assumption of the
existing mortgage of $164,000 which bears interest at 10% per annum, requires
semi-annual payments of principal and interest of $18,000 and matures in May
2005 and seller financing of the remaining $481,000 of the purchase price
which bears interest at 8% per annum, requires semi-annual payments of
principal and interest of $67,000 and matures in January 2000; (2) Valley
Ranch IV land, a 12.3 acre parcel of unimproved land in Irving, Texas, for
$2.0 million, consisting of $500,000 in cash and seller financing of the
remaining $1.5 million of the purchase price which bears interest at 10% per
annum, requires quarterly payments of interest only and matures in December
2000; and, (3) JHL Connell land, a 7.7 acre parcel of unimproved land in
Carrollton, Texas, for $1.3 million in cash.

In February 1998, in separate transactions, the Company purchased (1)
Scoggins land, a 314.5 acre parcel of unimproved land in Tarrant County,
Texas, for $3.0 million, consisting of $1.5 million in cash and mortgage
financing of $1.5 million which bore interest at 14% per annum, required
quarterly payments of interest only and matured in February 1999; and, (2)
Bonneau land, a 8.4 acre parcel of unimproved land in Dallas County, Texas,
for $1.0 million in mortgage financing which bore interest at 18.5% per annum
with principal and interest due at maturity in February 1999. The Scoggins
land was refinanced in May 1998 and the Bonneau land was refinanced in March
1999.

53
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In November 1994, the Company and an affiliate of BCM, sold five apartments
with a total of 880 units to a newly formed limited partnership in exchange
for $3.2 million in cash, a 27% limited partner interest and two mortgage
notes receivable, secured by one of the properties. The Company had the option
to reacquire the properties at any time after September 1997 for their
original sales prices. Accordingly, a deferred gain of $5.6 million was offset
against the Company's investment in the partnership. In February 1998, three
of the properties, one of which secured the two notes receivable, were
reacquired, for $7.7 million. The Company paid $4.0 million in cash and
assumed the existing mortgages of $3.7 million. Simultaneously, the Company
refinanced the three properties for a total of $7.8 million, receiving net
cash of $3.9 million after paying off $3.7 million in mortgage debt and the
payment of various costs. The new mortgage bears interest at 9.5% per annum,
require monthly principal and interest payments totaling $66,000 and mature in
February 2008. In June 1998, the remaining two properties were reacquired for
$8.6 million. The Company paid $2.1 million in cash and assumed the existing
mortgages totaling $6.5 million. The mortgages bear interest at 8.73% per
annum, require monthly principal and interest payments totaling $49,000 and
mature in January 2019.

In March 1998, the Company purchased Desert Wells land, a 420 acre parcel
of unimproved land in Palm Desert, California, for $12.0 million. The Company
paid $400,000 in cash, obtained mortgage financing of $10.0 million and
obtained seller financing of the remaining $1.6 million of the purchase price.
The mortgage bore interest at the prime rate plus 4.5%, currently 12.25% per
annum, required monthly payments of interest only and matured in March 1999.
The lender has agreed to an extension of its matured mortgage to March 2000.
All other terms would remain unchanged. The seller financing bore interest at
10% per annum, required monthly payments of interest only and matured in July
1998. The debt was paid in full at maturity.

In April 1998, the Company purchased Yorktown land, a 325.8 acre parcel of
unimproved land in Harris County, Texas, for $7.4 million. The Company paid
$3.0 million in cash and obtained seller financing of the remaining $4.4
million of the purchase price. The seller financing bore interest at 8.5% per
annum, required monthly interest only payments and matured in February 1999.
The Company has received a written commitment from a lender to refinance the
matured mortgage in the approximate amount of $5.0 million. The new mortgage
is scheduled to close on or about April 15, 1999.

Also in April 1998, the Company sold a 77.7 acre tract of its Lewisville
land parcel for $6.8 million, receiving net cash of $153,000 after paying off
first and second lien mortgages totaling $5.9 million and the payment of
various closing costs. A gain of $1.9 million was recognized on the sale.

In May 1998, but effective April 1, 1998, the Company purchased, in a
single transaction, twenty-nine apartments with a total of 2,441 units
(collectively the "IGI properties") in Florida and Georgia for $56.1 million.
The properties were acquired through three newly-formed controlled limited
partnerships. The partnerships paid a total of $6.1 million in cash, assumed
$43.4 million in mortgage debt and issued a total of $6.6 million in Class A
limited partner units in the acquiring partnerships, which have the Company as
the Class B Limited Partner and a wholly-owned subsidiary of the Company as
the Managing General Partner. The Class A limited partners were entitled to a
preferred return of $.08 per unit in 1998 and are entitled to an annual
preferred return of $.09 per unit in 1999 and $.10 per unit in 2000 and
thereafter. The Class A units are exchangeable after April 1, 1999 into shares
of Series F Preferred Stock on the basis of ten Class A units for each
preferred share. The assumed mortgages bear interest at rates ranging from
7.86% and 11.22% per annum, require monthly principal and interest payments
totaling $384,000 and mature between June 1, 2000 and September 2017. See NOTE
13. "PREFERRED STOCK."

Also in May 1998, the Company purchased the FRWM Cummings land, a 6.4 acre
parcel of unimproved land in Farmers Branch, Texas, for $1.2 million in cash.

Further in May 1998, in separate transactions, the Company sold (1) a 21.3
acre tract of the Parkfield land parcel, for $1.3 million, receiving no net
cash after paying down by $1.1 million the mortgage secured by such land
parcel and the payment of various costs and, (2) a 15.4 acre tract of the
Valley Ranch land parcel, for $1.2

54
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

million, receiving no net cash after paying down by $1.1 million the mortgage
secured by such land parcel and the payment of various closing costs. A gain
of $670,000 was recognized on the Parkfield sale and a gain of $663,000 was
recognized on the Valley Ranch sale.

In June 1998, in separate transactions, the Company sold (1) a 21.6 acre
tract of the Chase Oaks land parcel, for $3.3 million, receiving net cash of
$418,000 after paying down by $2.0 million the mortgage secured by such land
parcel and the payment of various closing costs; (2) a 150.0 acre tract of the
Rasor land parcel, for $6.8 million, receiving net cash of $1.4 million after
paying down by $5.3 million the mortgage secured by such land parcel and the
payment of various closing costs; and, (3) the entire 315.2 acre Palm Desert
land parcel, for $17.2 million, receiving net cash of $8.6 million after
paying off $7.2 million in mortgage debt and the payment of various closing
costs. A gain of $848,000 was recognized on the Chase Oaks sale, a gain of
$789,000 was recognized on the Rasor sale and a gain of $3.9 million was
recognized on the Palm Desert sale.

In July 1998, in separate transactions, the Company purchased (1) the
Thompson II land, a 3.5 acre parcel of unimproved land in Dallas County,
Texas, for $471,000 in cash; and (2) the Walker land, a 132.6 acre parcel of
unimproved land in Dallas County, Texas, for $12.6 million in cash.

Also in July 1998, the Company purchased the Katrina land, a 454.8 acre
parcel of undeveloped land in Palm Desert, California, for $38.2 million. The
purchase was made by a newly formed controlled partnership of which a wholly-
owned subsidiary of the Company is the general partner and Class B limited
partner. The partnership issued $23.2 million Class A limited partnership
units and obtained mortgage financing of $15.0 million. The mortgage bears
interest at 15.5% per annum, requires monthly payments of interest only and
matures in July 1999. The Class A limited partners were entitled to an annual
preferred return of $.07 per unit in 1998, and are entitled to an annual
preferred return of $.08 per unit in 1999, $.09 per unit in 2000 and $.10 per
unit in 2001 and thereafter. The Class A units may be converted into a total
of 231,750 shares of Series H Cumulative Convertible Preferred Stock after
July 13, 1999, on the basis of 100 Class A units for each preferred share. See
NOTE 13. "PREFERRED STOCK."

Also in September 1998, in separate transactions, the Company sold (1) a
60.0 acre tract of the Parkfield land parcel, for $1.5 million, receiving no
net cash after paying down by $1.4 million the mortgage secured by such land
parcel and the payment of various closing costs; (2) the remaining 10.5 acres
of the BP Las Colinas land parcel for $4.7 million, receiving net cash of $1.8
million after paying off the $2.7 million mortgage secured by such land parcel
and the payment of various closing costs; (3) the entire 30.0 acre Kamperman
land parcel for $2.4 million, receiving net cash of $584,000 after paying down
by $1.6 million the Las Colinas I term loan secured by such parcel and the
payment of various closing costs; and (4) a 1.1 acre tract of the Santa
Clarita land parcel for $543,000, receiving net cash of $146,000 after paying
down by $350,000 the Las Colinas I term loan secured by such land parcel and
the payment of various closing costs. A gain of $44,000 was recognized on the
Parkfield sale, a gain of $3.4 million was recognized on the BP Las Colinas
sale, a gain of $969,000 was recognized on the Kamperman sale and a gain of
$409,000 was recognized on the Santa Clarita sale.

55
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Further in September 1998, in separate transactions, the Company purchased
(1) the HSM land, a 6.2 acre parcel of unimproved land in Farmers Branch,
Texas, for $2.2 million in cash; (2) the Vista Ridge land, a 160.0 acre parcel
of unimproved land in Lewisville, Texas, for $15.6 million, consisting of $3.1
million in cash and mortgage financing of $12.5 million which bears interest
at 15.5% per annum, requires monthly interest only payments at a rate of 12.5%
per annum, with the deferred interest and principal due at maturity in July
1999; and (3) the Marine Creek land, a 54.2 acre parcel of unimproved land in
Fort Worth, Texas, for $2.2 million in cash.

In October 1998, in separate transactions, the Company purchased (1) Vista
Business Park land, a 41.8 acre parcel of unimproved land in Travis County,
Texas, for $3.0 million, consisting of $730,000 in cash and mortgage financing
of $2.3 million which bears interest at 8.9% per annum, requires monthly
payments of interest only and matures in September 2000; (2) Mendoza land, a
.35 acre parcel of unimproved land in Dallas, Texas, for $180,000, consisting
of $27,000 in cash and seller financing of the remaining $153,000 of the
purchase price which bears interest at 10% per annum, requires quarterly
payments of interest only and matures in October 2001; (3) Croslin land, a .8
acre parcel of unimproved land in Dallas, Texas, for $306,000, consisting of
$46,000 in cash and seller financing of the remaining $260,000 of the purchase
price which bears interest at 10% per annum, requires quarterly payments of
interest only and matures in October 2001; and (4) Stone Meadows land, a 13.5
acre parcel of unimproved land in Houston, Texas, for $1.6 million, consisting
of $491,000 in cash and seller financing of the remaining $1.1 million of the
purchase price, which bears interest at 10% per annum, requires quarterly
principal and interest payments of $100,000 and matures in October 1999.

In November 1998, the Company purchased Mason/Goodrich land, a 265.5 acre
parcel of unimproved land in Houston, Texas, for $10.9 million, consisting of
$3.7 million in cash and mortgage financing of $7.2 million. The mortgage bore
interest at 8.9% per annum, required monthly interest only payments and
matured in February 1999. The lender has agreed to extend its matured mortgage
to September 1999, for a $500,000 principal paydown. All other terms would
remain unchanged.

In November 1998, the Company purchased two apartments with a total of 423
units in Indianapolis, Indiana for $7.2 million. The properties were acquired
through a newly-formed controlled partnership. The partnership paid a total of
$14,000 in cash, assumed $5.9 million in mortgage debt and issued $1.3 million
in Class A limited partner units in the acquiring partnership, in which the
Company is the Class B limited partner and a wholly-owned subsidiary of the
Company is the Managing General Partner. The Class A limited partners are
entitled to a preferred return of $.07 per annum per unit. The Class A units
are exchangeable after November 18, 1999, into shares of Series F Cumulative
Convertible Preferred Stock on the basis of ten units for each preferred
share. The assumed mortgages bear interest at 9.95% per annum and 10.75% per
annum, one requires monthly payments of interest and principal of $25,000 and
matures October 2012 and the other requires monthly interest only payments and
matures in June 1999.

In December 1998, in separate transactions, the Company purchased (1) Plano
Parkway land, a 81.2 acre parcel of unimproved land in Plano, Texas, for $11.0
million, consisting of $2.2 million in cash and seller financing of the
remaining $8.9 million of the purchase price, which bore interest at 10% per
annum and required the payment of principal and interest at maturity in
January 1999; and, (2) Van Cattle land, a 126.6 acre parcel of unimproved land
in McKinney, Texas, for $2.0 million, consisting of $500,000 in cash and
seller financing of the remaining $1.5 million of the purchase price, which
bears interest at 10% per annum, requires interest only payments and matures
in December 2000.

Also in December 1998, the Company sold two tracts totaling 63.1 acres of
the Valley Ranch land parcel for a total of $4.2 million, receiving net cash
of $135,000 after paying down by $3.0 million the mortgage secured by such
land parcel and the payment of various closing costs. No gain or loss was
recognized on the sales.

At December 31, 1997, the Company had under construction One Hickory
Center, a 102,615 sq. ft office building in Farmers Branch, Texas.
Construction was completed in December 1998, at cost of $7.8 million.

56
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In the third and fourth quarters of 1998, provisions for loss of $3.0
million and $916,000, respectively, were recorded to write down the Valley
Ranch land to its estimated realizable value less estimated costs of sale.
Such write down was necessitated by an increase in the acreage designated as
flood plain.

In September 1997, the Company purchased the Collection, a 267,812 sq. ft.
retail and commercial center in Denver, Colorado, for $19.5 million. The
Company paid $791,000 in cash, assumed existing mortgages totaling $14.7
million and issued 400,000 shares of 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 the 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 Series F Cumulative Convertible
Preferred Stock at any time prior to 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 its 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 the 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 Series F Cumulative Convertible
Preferred Stock at any time prior to 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 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 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. The mortgage bears interest at 8.40% per annum, requires
monthly principal and interest payments of $158,000 and matures in November
2012.

In October 1997, a newly formed controlled partnership, of which the
Company is the general partner and Class B limited partner, purchased
Vineyards land, a 15.8 acre parcel of unimproved 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 of 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 may be exchanged for
shares of the Company's Common Stock. The assumed mortgage bore interest at
12.95% per annum required quarterly payments of interest only and matured in
June 1998. See NOTE 13. "PREFERRED STOCK."

57
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

Also in December 1997, the Company exchanged a 43.0 acre tract of its
Valley Ranch land parcel for Preston Square, a 35,508 sq. ft. shopping center
in Dallas, Texas. In accordance with the provisions of the term loan securing
the Valley Ranch land parcel, 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.

Also in 1997, the Company purchased 25 parcels of unimproved land; Scout,
546 acres in Tarrant County, Texas; Katy Road, 130.6 acres in Harris County,
Texas; McKinney Corners I, 30.4 acres in Collin County, Texas; McKinney
Corners II, 173.9 acres in Collin County, Texas; McKinney Corners III, 15.5
acres in Collin County, Texas; Lacy Longhorn, 17.1 acres in Farmers Branch,
Texas; Chase Oaks, 60.5 acres in Plano, Texas; Pioneer Crossing, 1,448 acres
in Austin, Texas; Kamperman, 129.6 acres in Collin County, Texas; Keller,
811.8 acres in Tarrant County, Texas; McKinney Corners IV, 31.3 acres in
Collin County, Texas; Pantex, 182.5 acres in Collin County, Texas;
Dowdy/McKinney V, 174.7 acres in Collin County, Texas; Perkins, 645.4 acres in
Collin County, Texas; LBJ, 10.4 acres in Dallas County, Texas; Palm Desert,
315.2 acres in Palm Desert, California; Thompson, 4 acres in Dallas County,
Texas; Santa Clarita, 20.6 acres in Santa Clarita, California; Tomlin, 9.2
acres in Dallas County, Texas; Rasor, 378.2 acres in Plano, Texas; Dalho, 3.4
acres in Farmers Branch, Texas; Hollywood Casino, 51.7 acres in Farmers
Branch, Texas; Valley Ranch III, 12.5 acres in Irving, Texas; and, Stagliano,
3.2 acres in Farmers Branch, Texas. The Company paid a total of $44.4 million
in cash and either obtained mortgage financing or assumed existing mortgage
debt for the remaining $77.2 million of the purchase prices. In conjunction
with the Rasor purchase, the Company transferred its Perkins land to the
seller as part of the purchase price.

In September 1997, the Company sold the Mopac Building, a 400,000 sq. ft.
office building, in St. Louis, Missouri, for $1.0 million, receiving net cash
of $1.0 million after the payment of various closing costs. 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. A gain of $481,000 was
recognized on the sale.

In December 1997, the Company sold Park Plaza, a 105,507 sq. ft. shopping
center in Manitowoc, Wisconsin, for $4.9 million, receiving net cash of $1.6
million, after paying off $3.1 million in mortgage debt and the payment of
various closing costs. A gain of $105,000 was recognized on the sale.

Also in 1997, the Company sold all or portions of six land parcels; 12.6
acres of Las Colinas I in Irving, Texas; 40.2 acres of BP Las Colinas in Las
Colinas, Texas; 73.8 acres of Valley Ranch in Irving, Texas; 86.5 acres of
Rasor in Plano, Texas; 32.0 acres of Parkfield in Denver, Colorado; and 567.6
acres of Pin Oak in Houston, Texas. The Company received $14.2 million in net
cash after paying off $15.7 million in mortgage debt and the payment of
various closing costs. Gains totaling $16.5 million were recognized on the
sales.

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, 1998, 197 of the residential lots had been sold.

58
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 6. INVESTMENTS IN EQUITY INVESTEES

The Company's investment in equity investees at December 31, 1998, included
(1) equity securities of three publicly traded real estate investment trusts,
Continental Mortgage and Equity Trust ("CMET"), Income Opportunity Realty
Investors, Inc. ("IORI") and Transcontinental Realty Investors, Inc. ("TCI")
(collectively the "REITs"); and (2) interests in real estate joint venture
partnerships. BCM, the Company's advisor, serves as advisor to the REITs, and
performs certain administrative and management functions for NRLP and NOLP on
behalf of NMC. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P."

The Company accounts for its investment in the REITs, the joint venture
partnerships and accounted for its investment in NRLP and NOLP prior to
December 31, 1998, using the equity method as more fully described in NOTE 1.
"SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Investments in equity investees."
As of December 31, 1998, the accounts of NRLP and NOLP are consolidated with
those of the Company. 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."

The Company's investment in equity investees accounted for using the equity
method, at December 31, 1998 was as follows:

The Company's investment in equity investees accounted for using the equity
method, at December 31, 1997 was as follows:

<TABLE>
<CAPTION>
Percentage Carrying Equivalent
of the Company's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee 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
------- --------
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.

59
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 1998, as its
liquidity has permitted.

In April 1996, the Company purchased a 28% general partner interest in
Campbell Center Associates, Ltd. ("Campbell Associates"), which in turn had a
56.25% interest in Campbell Centre Joint Venture, which owned a 413,175 sq.
ft. office building in Dallas, Texas, for $550,000 in cash and a $500,000
note. In January 1997, the Company exercised its option to purchase an
additional 28% general partner interest in Campbell Associates, for $300,000
in cash and a $750,000 note. In July 1997, the Company purchased an additional
9% general partner interest in Campbell Associates, for $868,000 in cash. In
March 1998, Consolidated Equity Properties, Inc., a wholly-owned subsidiary of
the Company, acquired a 30% limited partner interest in Campbell Associates
for $500,000 in cash. In June 1998, the Company purchased the remaining 5%
general partner interest in Campbell Associates for $1.1 million in cash. In
June 1998, Campbell Centre Joint Venture sold the office building for $32.2
million in cash. Campbell Associates, as a partner, received net cash of $13.2
million from the sales proceeds and escrowed an additional $190,000 for
pending parking lot issues. Campbell Associates recognized a gain of $8.2
million on the sale.

In June 1996, a newly formed limited partnership, of which the Company is a
1% general partner, purchased 580 acres of unimproved 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 provided 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. Net cash of $1.2 million was distributed to the
limited partner. 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. Net cash of
$545,000 was distributed to the limited partner. 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. No net cash was received. 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. Net cash of $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. Of the
net cash $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, receiving $721,000 in cash and providing financing of an additional
$2.2 million. Of the net cash, $300,000 was distributed to the limited partner
and $300,000 was distributed to the Company as general partner. The seller
financing was collected at maturity, in July 1998, with the net cash
distributed $1.1 million to the limited partner and $1.1 million to the
Company as general partner. The partnership recognized a gain of $1.2 million
on the sale. In September 1998, the partnership sold the remaining 96.59 acres
for $1.3 million. Of the net cash $587,000 was distributed to the limited
partner and $587,000 was distributed to the Company as general partner. The
partnership recognized a gain of $128,000 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 unimproved 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. In
September 1997, the partnership obtained financing of $6.5 million secured by
the 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 a return 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 was, at the time, a limited partner in
a partnership that owned approximately 15.8% of the Company's outstanding
shares of Common Stock. See NOTE 11. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."

60
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In January 1992, the Company entered into a partnership agreement with an
entity affiliated with, at the time, a limited partner in a partnership that
owned approximately 15.8% 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 also provides
each of the partners with a guaranteed 10% return on their respective
investments. Through December 31, 1997, 214 of the residential lots had been
sold. During 1998, an additional 52 lots were sold with 21 lots remaining to
be sold at December 31, 1998. During 1997 and 1998, each partner received
$21,000 and $418,000 in return of capital distributions and $12,000 and
$493,000 in profit distributions.

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

<TABLE>
<CAPTION>
1997
---------
<S> <C>
Property and notes receivable, net............................... $ 236,367
Other assets..................................................... 43,213
Notes payable.................................................... (339,102)
Other liabilities................................................ (17,311)
---------
Equity........................................................... $ (76,833)
=========
</TABLE>

The above table includes the accounts of NRLP in 1997. In 1998, NRLP's
accounts are included in the accompanying Consolidated Balance Sheet. See NOTE
2. "SYNTEK ASSET MANAGEMENT, L.P."

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues..................................... $113,834 $117,461 $109,501
Depreciation................................. (9,691) (10,214) (10,783)
Interest..................................... (26,722) (34,481) (34,601)
Operating expenses........................... (82,519) (74,195) (65,789)
-------- -------- --------
Income (loss) before gains on sale of real
estate and extraordinary gains.............. (5,098) (1,429) (1,672)
Gains on sale of real estate................. 52,589 8,356 61
-------- -------- --------
Net income................................... $ 47,491 $ 6,927 $ (1,611)
======== ======== ========
</TABLE>

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

The Company's equity share of:

<TABLE>
<CAPTION>
1998 1997 1996
------- ------ -----
<S> <C> <C> <C>
Income (loss) before gains on sale of real estate... $(2,794) $ 654 $(249)
Gains on sale of real estate........................ 34,055 3,022 --
------- ------ -----
Net income.......................................... $31,261 $3,676 $(249)
======= ====== =====
</TABLE>

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

<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Property and notes receivable, net..................... $ 734,857 $ 631,825
Other assets........................................... 69,829 80,789
Notes payable.......................................... (577,167) (483,064)
Other liabilities...................................... (25,474) (28,326)
--------- ---------
Equity................................................. $ 202,045 $ 201,224
========= =========
</TABLE>

61
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues..................................... $150,163 $129,531 $101,246
Depreciation................................. (20,954) (17,429) (14,408)
Provision for losses......................... 506 (1,337) 844
Interest..................................... (49,915) (38,537) (30,401)
Operating expenses........................... (91,868) (85,387) (69,698)
-------- -------- --------
(Loss) before gains on sale of real estate
and extraordinary gains..................... (12,068) (13,159) (12,417)
Gains on sale of real estate................. 18,642 34,297 11,701
Extraordinary gains.......................... -- -- 1,068
-------- -------- --------
Net income (loss)............................ $ 6,574 $ 21,138 $ 352
======== ======== ========
</TABLE>

The Company's equity share of:

<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
(Loss) before gains on sale of real estate and
extraordinary gains............................ $ (686) $(3,703) $(3,292)
Gains on sale of real estate.................... 7,391 -- 4,645
Extraordinary gains............................. -- 10,524 381
------ ------- -------
Net income (loss)............................... $6,705 $ 6,821 $ 1,734
====== ======= =======
</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 1998, the Company
received distributions totaling $3.0 million from the REITs and $7.2 million
from NRLP, including distributions accrued at December 31, 1997, but not
received until 1998. In 1997, the Company received total distributions from
the REITs of $1.4 million 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.

The Company's investments in the REITs and NRLP were initially acquired in
1989. In 1998, the Company purchased an additional $1.1 million of equity
securities of the REITs and NRLP.

NOTE 7. MARKETABLE EQUITY SECURITIES--TRADING PORTFOLIO

In 1994, the Company began purchasing equity securities of entities other
than those of the REITs and NRLP to diversify and increase the liquidity of
its margin accounts. In 1998, the Company purchased $15.1 million and sold
$5.2 million of such securities. These equity securities are considered a
trading portfolio and are carried at market value. At December 31, 1998, the
Company recognized an unrealized decline in the market value of the equity
securities in its trading portfolio of 6.1 million. In 1998, the Company
realized a net loss of $112,000 from the sale of trading portfolio securities
and received 79,000 in dividends. 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. 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, 1996, the Company recognized an unrealized decline in the market
value of the equity securities in its trading portfolio of $486,000.
Unrealized and realized gains and losses in the trading portfolio are included
in other income in the accompanying Consolidated Statements of Operations.

62
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 8. ACQUISITION OF PIZZA WORLD SUPREME, INC.

In April 1996, a wholly-owned subsidiary of the Company purchased, for
$10.7 million in cash, 80% of the common stock of Pizza World Supreme, Inc.
("PWSI"), which in turn had acquired 26 operating pizza parlors in various
communities in California's San Joaquin Valley. Concurrent with the purchase,
the Company granted to an individual an option to purchase 36.25% of the
Company's subsidiary at any time for the Company's net investment in such
subsidiary. In May 1997, the Company acquired the remaining 20% of PWSI for
$5.0 million, the sellers providing 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 9. NOTES AND INTEREST PAYABLE

Notes and interest payable consisted of the following:

<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Notes payable
Mortgage loans..................... $723,567 $736,320 $ 84,050 $ 96,654
Borrowings from financial
institutions...................... 17,546 17,074 170,491 153,369
Notes payable to affiliates........ 5,519 5,049 7,342 4,570
-------- -------- -------- --------
$746,632 758,443 $261,883 254,593
======== ========
Interest payable ($5,440 in 1998
and $4,836 in 1997 to
affiliates)...................... 9,829 7,393
-------- --------
$768,272 $261,986
======== ========
</TABLE>

Scheduled principal payments on notes payable are due as follows:

<TABLE>
<S> <C>
1999................................................................ $164,246
2000................................................................ 65,928
2001................................................................ 44,499
2002................................................................ 15,269
2003................................................................ 145,364
Thereafter.......................................................... 323,137
--------
$758,443
========
</TABLE>

Stated interest rates on notes payable ranged from 6.2% to 18.5% per annum
at December 31, 1998, and mature in varying installments between 1999 and
2017. At December 31, 1998, 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 $636.3 million. Excluded
from interest expense in the accompanying Consolidated Statement of Operations
is capitalized interest of $67,000 in 1997.

In February 1998, the Company financed its unencumbered Kamperman land in
the amount of $1.6 million, receiving net cash of $1.5 million after the
payment of various closing costs. The mortgage bears interest at 9.0% per
annum, requires monthly payments of interest only and matures in February
2000.

63
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Also in February 1998, the Company refinanced its Vineyards land in the
amount of $3.4 million, receiving net cash of $2.3 million, after paying off
$540,000 in mortgage debt and the payment of various closing costs. The new
mortgage bears interest at 9% per annum, requires monthly payments of interest
only and matures in February 2000.

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

In March 1998, the Company financed its unencumbered Stagliano and Dalho
land in the amount of $800,000, receiving net cash of $790,000 after the
payment of various closing costs. The mortgage bore interest at 18.5% per
annum, with principal and interest due at maturity in February 1999. The JHL
Connell land was pledged as additional collateral for this loan. In March
1999, the Company refinanced the mortgage debt secured by these properties
along with the mortgage debt secured by its Bonneau land parcel under the Las
Colinas I term loan in the amount of $703,000. The Company paid an additional
$1.5 million in cash to pay off the $2.1 million in mortgage debt and accrued
but unpaid interest.

Also in March 1998, the Company refinanced the mortgage debt secured by its
McKinney Corners I, II, III, IV and V and Dowdy land in the amount of $20.7
million, receiving net cash of $5.9 million after paying off $2.5 million in
mortgage debt, the paydown of $10.2 million on the Las Colinas I term loan and
the payment of various closing costs. The mortgage bore interest at 12.0% per
annum, required monthly payments of interest only and matured in March 1999.
The lender has agreed to extend its mature mortgage to January 2000, for a 2%
fee and a paydown of any net refinancing proceeds received by the Company from
refinancing the Williamsburg Hospitality House. All other terms would remain
unchanged.

In April 1998, the Company obtained a second lien mortgage of $2.0 million
secured by its BP Las Colinas land from the limited partner, at the time, in a
partnership that owned approximately 15.8% of the outstanding shares of the
Company's Common Stock. The second lien mortgage bore interest at 12% per
annum with principal and interest paid at maturity in October 1998. See NOTE
11. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

Also in April 1998, the Company refinanced the mortgage debt secured by its
Parkfield land in the amount of $7.3 million, receiving net cash of $1.2
million after paying off $5.0 million in mortgage debt and the payment of
various closing costs. The new mortgage bears interest at 9.5% per annum,
requires monthly payments of interest only and matures in April 2000.

In July, the Company financed its unencumbered Walker land in the amount of
$13.3 million, receiving net cash of $12.8 million after the payment of
various closing costs. The mortgage bears interest at 15.5% per annum,
requires monthly payments of interest only and matures in July 1999. The
mortgage is also secured by the FRWM Cummings land.

64
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In September 1998, the Company obtained second lien financing of $5.0
million secured by its Katy Road land from the limited partner, at the time,
in a partnership that owned approximately 15.8% of the outstanding shares of
the Company's Common Stock. The second lien mortgage bears interest at 12.5%
per annum, compounded monthly, with principal and interest due at maturity in
April 1999. See NOTE 11. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

In October 1998, the Company financed its unencumbered Rasor land in the
amount of $15.0 million, receiving net cash of $13.5 million after the payment
of various closing costs. Portions of the Company's Las Colinas and Valwood
land parcels are included as additional collateral. The Company used the
proceeds from this loan along with an additional $1.8 million to payoff the
$15.8 million in mortgage debt secured by its Las Colinas I and Valwood land
parcels. The new mortgage bears interst at 14% per annum, required a principal
reduction payment of $3.0 million in November 1998, requires monthly interest
only payments and matures in September 1999.

Also in October 1998, the Company financed its unencumbered Marine Creek
and HSM land in the amount of $2.8 million under the Las Colinas I term loan,
receiving net cash of $2.7 million after the payment of various closing costs.

In December 1998, the Company financed its unencumbered Valwood land in the
amount of $12.0 million, receiving net cash of $4.7 million after paying down
by $5.5 million the Rasor land mortgage and the payment of various closing
costs. The mortgage bears interest at 13% per annum, requires monthly interest
only payments and matures in December 2000.

Notes payable to affiliates at December 31, 1997 included a $4.2 million
note due to NRLP as payment for the general partner interest in NRLP. The note
bears interest at 10% per annum compounded semi-annually and matures in
September 2007. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P."

In 1997, the Company financed six unencumbered properties and refinanced an
additional four properties in the total amount of $80.5 million, receiving net
cash of $32.7 million after paying off $42.7 million in debt. The mortgages
bore interest at rates ranging from 9.0% to 18.5% per annum and matured from
February 1999 to December 2000.

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 marketable equity
securities. The borrowings under such margin arrangements are secured by
equity securities of the REITs, NRLP and the Company's trading portfolio of
marketable equity securities and bear interest rates ranging from 7.0% to
11.0% per annum. Margin borrowings were $35.8 million at December 31, 1998,
and $53.4 million at December 31, 1997, 43.9% and 39.7%, 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 was secured by the Company's NRLP units with a market
value of at least 50% of the principal balance of the loan. The Company paid
down the loan by $14.0 million in September 1998 and an additional $5.0
million in October 1998. At December 31, 1998, the loan had a principal
balance of $5.0 million. In February 1999, the loan was paid off.

65
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In November 1998, the Company obtained a $95.0 million line of credit from
Garden Capital, L.P. ("GCLP"), which is a partnership controlled by NOLP. The
Company received fundings of $18.9 million in November 1998, $31.1 million in
December 1998, and an additional $26.7 million in the first quarter of 1999.
The line of credit is secured by second liens on the Company's Waters Edge
III, Edgewater Gardens, Chateau Bayou, and Sunset Apartments, its Rosedale
Towers Office Building, Katy Road land and the stock of its wholly-owned
subsidiaries, NMC, the general partner of Partnership, and ART Holdings, Inc.,
which owns 3,349,535 NRLP units of limited partner interest. The loan bears
interest at 12% per annum, requires monthly interest only payments and matures
in November 2003. The Company accounted for its investment in the Partnership
under the equity method until December 1998 when NMC was elected general
partner of the Partnership. As of December 31, 1998, the accounts of the
Partnership are consolidated with those of the Company. The line of credit is
eliminated in consolidation. See NOTE 2 "SYNTEK ASSET MANAGEMENT, L.P."

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 net cash of $2.0 million after
the payment of various closing costs. The loan was paid in full from 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 net cash of $2.0 million after paying off the
$2.0 million loan. In January 1998, the lender made an additional $2.0 million
loan. This loan is also secured by a pledge of Common Stock of the Company
owned by BCM with a market value at the time of $4.7 million. The Company
received net cash of $2.0 million. The loans mature in February 2000.

In September 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 $9.1 million. The Company received net cash of
$2.0 million after the payment of various closing costs. In October 1998, the
lender advanced an additional $1.0 million, increasing the loan balance to
$3.0 million. The loan matures in January 2000.

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,
at the time, in a partnership that owned approximately 15.8% 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 off
and in April 1998, a second loan in the amount of $3.0 million was also paid
off. In April 1998, the Company obtained an additional $2.0 million loan from
such entities. In July 1998, the third loan of $3.0 million loan was paid off.
In September 1998, the Company obtained a $5.0 million loan from such
entities. In October 1998, the April $2.0 million loan was paid off. In
December 1998, the Company obtained a $2.0 million loan from such entities. At
December 31, 1998, loans with a principal balance of $7.0 million were
outstanding, they bear interest at 12.5% per annum compounded monthly and
mature in April 1999 and May 1999. See NOTE 9. "NOTES AND INTEREST PAYABLE."

As of December 31, 1998, the Company sold to BCM three matured mortgage
notes, at their carrying value of $628,000. No gain or loss was recognized on
the sale. See NOTE 3. "NOTES AND INTEREST RECEIVABLE."

NOTE 12. DIVIDENDS

In June 1996, the Board of Directors resumed the payment of quarterly
dividends on the Company's Common Stock. Common dividends totaling $2.3
million or $.20 per share were declared in 1998, $2.0 million

66
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

or $.20 per share in 1997 and $1.5 million or $.15 per share in 1996. The
Company reported to the Internal Revenue Service that 100% of the dividends
paid in 1998 and 1996 represented a return of capital and 100% of the
dividends paid in 1997 represented ordinary income.

NOTE 13. PREFERRED STOCK

The Company's Series B 10% Cumulative Convertible Preferred Stock consisted
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 were payable at the
rate of $10.00 per year or $2.50 per quarter to stockholders of record on the
15th day of each March, June, September and December when and as declared by
the Board of Directors. The Series B Preferred Stock was convertible between
May 8, 1998 and June 8, 1998, into Common Stock of the Company at 90% of the
average daily closing price of the Company's Common Stock on the prior 30
trading days. In May 1998, the 4,000 shares of Series B Preferred Stock
outstanding were converted into 30,211 shares of the Company's Common Stock.

The Company's Series C 10% Cumulative Convertible Preferred Stock consisted
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 were payable at the
rate of $10.00 per year or $2.50 per quarter to stockholders of record on the
15th day of each March, June, September and December when and as declared by
the Board of Directors. The Series C Preferred Stock was convertible between
November 25, 1998 and February 23, 1999, into Common Stock of the Company at
90% of the average daily closing price of the Company's Common Stock on the
prior 30 trading days. In November 1998, the 16,681 outstanding shares of
Series C Preferred Stock were redeemed at their liquidation preference of
$100.00 per share plus accrued and unpaid dividends.

The Company's Series D 9.5% 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 or $.475 per quarter to stockholders of record on the last day of each
March, June, September and December when and as declared by the Board of
Directors. The Series D Preferred Stock is reserved for the conversion of the
Class A limited partner units of Ocean Beach Partners, L.P. The Class A units
may be exchanged for Series D Preferred Stock at the rate of 20 Class A units
for each share of Series D Preferred Stock. No more than one-third of the
Class A units 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,
1998, 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 last
day of each March, June, September and December when and as declared by the
Board of Directors, for periods prior to November 4, 1999 and $11.00 per year
or $2.75 per quarter thereafter. The Series E Preferred Stock is reserved for
the conversion of the Class A limited partner units of Valley Ranch, L.P. The
Class A units may be exchanged for Series E Preferred Stock at the rate of 100
Class A units for each share of Series E Preferred Stock. The Series E
Preferred Stock is convertible into Common Stock of the Company at 80% of the
average daily closing price of the Company's Common Stock on the prior 20
trading days. Only 37.50% of the Series E Preferred Stock may be converted
prior to November 3, 1999. Between November 4, 1999 and November 3, 2001 an
additional 12.50% of the Series E Preferred Stock may be converted, and the
remainder may be converted on or after November 4, 2001. At December 31, 1998,
none of the Series E Preferred Stock was issued.

The Company's Series F 10% Cumulative Convertible Preferred Stock consists
of a maximum of 15,000,000 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 last
day of each

67
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

March, June, September and December when and as declared by the Board of
Directors. The Series F Preferred Stock may be converted, after August 15,
2003, into Common Stock of the Company at 90% of the average daily closing
price of the Company's Common Stock for the prior 20 trading days. At December
31, 1998, 3,350,000 shares of Series F Preferred Stock were issued and
outstanding and 1,948,797 shares were reserved for issuance as future
consideration in various business transactions.

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 last
day of each March, June, September and December when and as declared by the
Board of Directors. 10,000 shares of the Series G Preferred Stock are 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 average daily
closing price of the Company's Common Stock for the 20 prior trading days. At
December 31, 1998, 1,000 shares of the Series G Preferred Stock was issued.

The Company's Series H 10% Cumulative Convertible Preferred Stock consists
of a maximum of 231,750 shares with a par value of $2.00 per share, and a
liquidation preference of $10.00 per share. Dividends are payable quarterly at
the rate of $.70 per year until June 30, 1999, $.80 from July 1, 1999 through
June 30, 2000, $.90 per year from July 1, 2000 through June 30, 2001 and $.10
per year from July 1, 2001 and thereafter, to stockholders of record on the
last day of each March, June, September and December when and as declared by
the Board of Directors. The Series H Preferred Stock is reserved for the
conversion of the Class A limited partner units of ART Palm, L.L.C. The
Class A units may be exchanged for Series H Preferred Stock at the rate of 100
Class A units for each share of Series H Preferred Stock at any time after
July 13, 1999. The Series H Preferred Stock may be converted into 25,000
shares of the Company's Common Stock after December 31, 2000, 25,000 shares on
or after June 30, 20002, 25,000 shares on or after June 30, 2003, 25,000
shares on or after December 31, 2005 and all remaining outstanding shares on
or after December 31, 2006 at 90% of the average daily closing price of the
Company's Common Stock for the 20 prior trading days. At December 31, 1998,
none of the Series H Preferred Stock was issued.

NOTE 14. STOCK OPTIONS

In January 1998, the Company's shareholders approved the 1997 Stock Plan
("Option Plan"). Under the Option Plan, options have been granted to certain
Company officers and key employees of BCM and its affiliates. The Option Plan
provides for options to purchase up to 300,000 shares of the Company's Common
Stock. All grants are determined by the Option Committee of the Board of
Directors. Options granted pursuant to the Option Plan are exercisable
beginning one year after the date of grant and expire the earlier of three
months after termination of employment or ten years from the date of grant.

The following table summarizes stock option activity:

<TABLE>
<CAPTION>
Options
Exercise -----------------------
Price Outstanding Exercisable
-------- ----------- -----------
<S> <C> <C> <C>
January 1, 1998............................. $ -- -- --
Options granted............................. 15.00 293,750 --
Options forfeited........................... 15.00 ( 17,000) --
------- -------- ---
December 31, 1998........................... $ 15.00 276,750 --
======= ======== ===
</TABLE>

In January 1999, the Company's stockholders approved the Director's Stock
Option Plan ("Director's Plan") which provides for options to purchase up to
40,000 shares of the Company's Common Stock. Options

68
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

granted pursuant to the Director's Plan are immediately exercisable and expire
on the earlier of the first anniversary of the date on which a Director ceases
to be a Director or ten years from the date of grant. Each Independent
Director was granted an option to purchase 1,000 shares at an exercise price
of $16.25 per share on January 11, 1999, the date stockholders approved the
plan. Each Independent Director will be awarded an option to purchase an
additional 1,000 shares on January 1 of each year.

The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its Option Plans. All share options issued by the Company have exercise prices
equal to the market price of the shares at the dates of grant. Accordingly, no
compensation cost has been recognized for its option plans. Had compensation
cost for the Company's option plans been determined based on the fair value at
the grant dates consistent with the method of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation,", the
Company's net loss and loss per share would have been increased to the pro
forma amounts indicated below.

<TABLE>
<CAPTION>
1998
---------------------
As Reported Pro Forma
----------- ---------
<S> <C> <C>
Net (loss) applicable to common shares............... $(23,982) $(24,374)
Net (loss) applicable to common shares, per share ... (2.24) (2.38)
</TABLE>

The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
1998
----
<S> <C>
Dividend yield......................................................... 1.25%
Expected volatility.................................................... 30%
Risk-free interest rate................................................ 5.35%
Expected lives (in years).............................................. 7
Forfeitures............................................................ 10%
</TABLE>

The weighted average fair value per share of options granted in 1998 was
$5.67.

NOTE 15. ADVISORY AGREEMENT

Although the 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 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. BCM as advisor also serves as a
consultant in connection with the Company's business plan and investment
policy decisions made by the 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. Karl L. Blaha, President and
a Director of the Company serves as Executive Vice President--Commercial Asset
Management of BCM.

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

69
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

on the recommendation of BCM, the 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 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. 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 16. 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 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 (1) First Equity Properties, Inc.
("First Equity"), which is 50% owned by a subsidiary of BCM, (2) Gene E.
Phillips and (3) a trust for the benefit of the children of Mr. Phillips.
Carmel, Ltd. subcontracts the property-level management of 15 of the Company's
commercial properties (office buildings, shopping centers and a merchandise
mart) and its hotels 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.

70
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 17. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.

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

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Fees
Advisory and mortgage servicing.................... $ 3,845 $ 2,657 $1,539
Loan arrangement................................... 804 592 806
Brokerage commissions.............................. 7,450 7,586 1,889
Property and construction management and leasing
commissions*...................................... 1,752 865 892
------- ------- ------
$13,851 $11,700 $5,126
======= ======= ======
Cost reimbursements................................. $ 1,832 $ 1,809 $ 691
======= ======= ======
</TABLE>
- --------
*Net of property management fees paid to subcontractors, other than Carmel
Realty.

71
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 18. OPERATING SEGMENTS

Significant differences among the accounting policies of the segments as
compared to the Company's consolidated financial statements principally
involve the calculation and allocation of administrative expenses. Management
evaluates the performance of its operating segments and allocates resources to
them based on net operating income and cash flow. The Company based
reconciliation of expenses that are not reflected in the segments is $8.2
million of administrative expenses. There are no intersegment revenues and
expenses and the Company conducts all of its business within the United
States.

The table below presents information about the reported operating income of
the Company for 1998 and 1997. Asset information by operating segment is also
presented below.

<TABLE>
<CAPTION>
Commercial
Properties Apartments Hotels Land PWSI Receivables Other Total
---------- ---------- ------- -------- ------- ----------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998
- ----
Operating revenue....... $16,539 $ 14,230 $32,221 $ 501 $28,883 $ -- $-- $ 92,374
Operating expenses...... 9,727 8,755 24,361 6,349 24,840 -- -- 74,032
Interest income......... -- -- -- -- -- 188 -- 188
------- -------- ------- -------- ------- ------ ----- --------
Net operating income
(loss)................. 6,812 5,475 7,860 (5,848) 4,043 188 -- 18,530
Depreciation and
amortization........... 1,574 1,412 2,320 -- 1,273 -- 411 6,990
Interest on debt........ 3,803 4,396 7,560 29,058 579 -- 6,228 51,624
Capital expenditures.... 110 -- 1,383 2,577 166 -- -- 4,236
Segment assets.......... 87,581 286,317 78,455 282,300 24,449 52,053 253 811,408
</TABLE>

<TABLE>
<CAPTION>
Land
-------
<S> <C> <C>
Property sales:
Sales price..................................................... $51,602
Cost of sales................................................... 34,348
-------
Gain on sale.................................................... $17,254
=======
</TABLE>

<TABLE>
<CAPTION>
Commercial
Properties Hotels Land PWSI Receivables Other Total
---------- ------- ------- ------- ----------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
- ----
Operating revenue....... $13,842 $14,944 $ 289 $24,953 $ -- $ -- $54,028
Operating expenses...... 10,006 11,232 2,957 19,964 -- -- 44,159
Interest income......... -- -- -- -- 2,835 -- 2,835
------- ------- ------- ------- ------ ----- -------
Net operating income
(loss)................. 3,836 3,712 (2,668) 4,989 2,835 -- 12,704
Depreciation and
amortization........... 1,266 973 -- 677 626 3,542
Interest on debt........ 3,252 2,698 20,573 935 -- 2,773 30,231
Capital expenditures.... 8,855 1,568 570 2,695 -- -- 13,688
Segment assets.......... 50,185 73,072 178,938 18,271 25,526 258 346,250
</TABLE>

<TABLE>
<CAPTION>
Commercial
Properties Land
---------- -------
<S> <C> <C>
Property sales:
Sales price.................................................. $10,986 $52,970
Cost of sales................................................ 10,400 36,427
------- -------
Gain on sale................................................. $ 586 $16,543
======= =======
</TABLE>

72
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 19. INCOME TAXES

Financial statement loss varies from federal tax return loss, 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 the difference in the allowance for estimated losses.
At December 31, 1998, the Company had tax net operating loss carryforwards of
$29.0 million expiring through 2018.

At December 31, 1998, the Company had 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.

NOTE 20. EXTRAORDINARY GAIN

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

NOTE 21. RENTS UNDER OPERATING LEASES

The Company's operations include the leasing of commercial properties
(office buildings, shopping centers and a merchandise mart). The leases
thereon expire at various dates through 2013. The following is a schedule of
minimum future rents under non-cancelable operating leases as of December 31,
1998:

<TABLE>
<S> <C>
1999................................................................. $11,248
2000................................................................. 9,390
2001................................................................. 7,273
2002................................................................. 6,518
2003................................................................. 5,833
Thereafter........................................................... 16,294
-------
$56,556
=======
</TABLE>

PWSI conducts its operations from leased facilities which includes an
office, warehouse, and 57 pizza parlor locations for which a lease was signed
and the pizza parlor was either open at December 31, 1998 or scheduled to open
thereafter. The leases expire over the next 14 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, 1998:

<TABLE>
<S> <C>
1999................................................................. $ 2,318
2000................................................................. 2,271
2001................................................................. 2,130
2002................................................................. 2,039
2003................................................................. 1,922
Thereafter........................................................... 9,187
-------
$19,867
=======
</TABLE>

Total facilities and automobile rent expense relating to these leases was
$2.7 million in 1998 and $1.3 million in 1997.

73
<PAGE>

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 1998 and 1997 (unaudited):

<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1998
Revenue....................... $ 18,249 $ 22,690 $ 23,291 $ 22,856
Expense....................... 29,744 35,830 38,676 60,861
-------- -------- -------- ---------
(Loss) from operations........ (11,495) (13,140) (15,385) (38,005)
Equity in income of
investees.................... 2,387 18,943 6,099 10,537
Gains on sale of real estate.. -- 8,974 5,718 2,562
-------- -------- -------- ---------
Net income (loss)............. (9,108) 14,777 (3,568) (24,906)
Preferred dividend
requirement.................. (51) (84) (502) (540)
-------- -------- -------- ---------
Net income (loss) applicable
to Common shares............. $ (9,159) $ 14,693 $ (4,070) $ (25,446)
======== ======== ======== =========
Earnings per share
Net income (loss)............. $ (.86) $ 1.38 $ (.38) $ (2.38)
======== ======== ======== =========

<CAPTION>
Three Months Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1997
Revenue....................... $ 12,126 $ 12,100 $ 15,039 $ 17,766
Expense....................... 16,288 18,364 24,296 31,304
-------- -------- -------- ---------
(Loss) from operations........ (4,162) (6,264) (9,257) (13,538)
Equity in income of
investees.................... 146 4,941 (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) applicable
to Common shares............. $ 221 $ 2,491 $ (6,246) $ 900
======== ======== ======== =========
Earnings per share
Net income (loss)............. $ .02 $ .21 $ (.52) $ .07
======== ======== ======== =========
</TABLE>

NOTE 23. COMMITMENTS AND CONTINGENCIES

Liquidity. Although the Company anticipated that it would generate excess
cash from operations in 1998, such excess cash did not materialize and,
therefore, was not sufficient to discharge all of the Company's debt
obligations as they became due. The Company relied on additional borrowings
and, to a lesser extent, land sales to meet its cash requirements. In 1999,
the Company expects that it will generate excess cash from operations, due to
increased rental rates and occupancy at its properties, however, such excess
will not be sufficient to discharge all of the Company's debt obligations as
they mature. The Company will also rely on aggressive land sales, selected
property sales and, to the extent necessary, additional borrowings to meet its
cash requirements.

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

74
<PAGE>

AMERICAN REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 24. SUBSEQUENT EVENTS

In February 1999, the Company purchased Frisco Bridges land, a 336.8 parcel
of unimproved land in Collin County, Texas, for $46.8 million. The Company
paid $7.8 million in cash and obtained mortgage financing totaling $39.0
million. Seller financing in the amount of $22.0 million, secured by 191.5
acres of the parcel, bears interest at 14% per annum, requires monthly
interest only payment, and matures in January 2000. A mortgage in the amount
of $15.0 million, secured by 125.0 acres of the parcel, bears interest at the
prime rate plus 4.5%, currently 12.25% per annum, requires three quarterly
principal reduction payments of $3.0 million on each of May 1, August 1 and
November 1, 1999 in addition to monthly interest payments and matures in
February 2000. Another mortgage in the amount of $2.0 million, secured by 13.5
acres of the parcel, bears interest at 14% per annum, requires monthly
interest only payments and matures in January 2000. The Company's Double O
land in Las Colinas, Texas and its Desert Wells land in Palm Desert,
California are pledged as additional collateral for these loans. The Company
drew down $6.0 million under its line of credit with the CCLP, for a portion
of the cash requirement.

Also in February 1999, the Company sold a 4.6 acre tract of its Plano
Parkway land parcel, for $1.2 million. Simultaneously with the sale, the
mortgage debt secured by such land parcel was refinanced in the amount of $7.1
million. The new mortgage bears interest at the prime rate plus 4.5%,
currently 12.25% per annum, requires monthly interest only payments and
matures in January 2000. The net cash from the sale and refinancing along with
an additional $921,000 were used to payoff the $8.9 million mortgage secured
by the land parcel.

Further in February 1999, the Partnership sold the 225 unit Santa Fe
Apartments in Kansas City, Missouri, for $4.6 million, receiving net cash of
$4.3 million after the payment of various closing costs. A gain will be
recognized on the sale.

In February 1999, the Partnership sold the 480 unit Mesa Ridge Apartments
in Mesa, Arizona, for $19.5 million, receiving net cash of $793,000 after the
payment of various closing costs and remitting $17.8 million to the lender to
hold in escrow pending a substitution of collateral. Such funds will be
released when substitute collateral is approved. If substitute collateral is
not provided by August 1999, $13.0 million of the escrow will be applied
against the mortgage's principal balance, approximately $885,000 will be
retained by the lender as a prepayment penalty and the remaining $3.9 million
will be returned to the Partnership. A gain will be recognized on the sale.

Also in February 1999, GCLP funded a $5.0 million unsecured loan to
Davister Corp., which at December 31, 1998, owned approximately 15.8% of the
outstanding shares of the Company's Common Stock. The loan bears interest at
12.0% per annum and matures in February 2000. All principal and interest are
due at maturity. The loan is guaranteed by BCM.

In March 1999, the Company sold two tracts totaling 9.9 acres of its
Mason/Goodrich land parcel, for $956,000, receiving net cash of $33,000 after
paying down by $860,000 the mortgage secured by such land parcel and the
payment of various closing costs. A gain will be recognized on the sale.

Also in March 1999, the Company sold a 13.7 acre tract of its McKinney
Corners II and IV land parcels, for $7.7 million, receiving no net cash after
paying down by $5.5 million the mortgage debt secured by such land parcels,
the funding of required escrows and the payment of various closing costs. A
gain will be recognized on the sale.

75
<PAGE>

SCHEDULE III

AMERICAN REALTY TRUST, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998

Chalet II,
Topeka, KS...... 1,590 440 1,322 -- 226/(5)/ 440 1,548 1,988
Chateau,
Bellevue, NE.... 3,455 130 1,723 126 485/(5)/ 130 2,334 2,464
Chateau Bayou,
Ocean Springs,
MS.............. 3,033 591 2,364 -- -- 591 2,364 2,955
Club Mar,
Sarasota, FL.... 6,370 1,248 4,993 253 917/(5)/ 1,248 6,163 7,411
Confederate
Point,
Jacksonville,
FL.............. 5,465 246 3,736 709 998/(5)/ 246 5,443 5,689
Concord,
Indianapolis,
IN.............. 3,734 352 3,167 -- -- 352 3,167 3,519
Conradi House,
Tallahassee,
FL.............. 1,096 128 1,150 -- -- 128 1,150 1,278
Country Place,
Round Rock, TX.. 4,380 246 3,268 70 599/(5)/ 246 3,937 4,183
Country Squire,
Indianapolis,
IN.............. 2,126 377 3,394 -- -- 377 3,394 3,771
Covered Bridge,
Gainesville,
FL.............. 4,513 219 3,425 129 833/(5)/ 219 4,387 4,606
Crossing Church,
Tampa, FL....... 977 123 1,111 -- -- 123 1,111 1,234
Daluce,
Tallahassee,
FL.............. 2,611 221 2,619 -- -- 221 2,619 2,840
Edgewater
Gardens, Biloxi,
MS.............. 2,655 397 1,590 -- -- 397 1,590 1,987
Fair Oaks,
Euless, TX...... 4,928 470 2,661 174 744/(5)/ 470 3,579 4,049
Falcon House,
Ft. Walton, FL.. 2,064 219 1,966 -- -- 219 1,966 2,185
Four Seasons,
Denver, CO...... 9,468 1,264 8,447 813 1,797/(5)/ 1,264 11,057 12,321
Fox Club,
Indianapolis,
IN.............. 7,194 902 7,294 970 1,170/(5)/ 902 9,434 10,336
Foxwood,
Memphis, TN..... 6,076 218 3,188 509 795/(5)/ 218 4,492 4,710
<CAPTION>

Life on
Which
Depreciation
Accumu- In Latest
lated Date of Statement
Depreci- Construc- Date of Operation
Property/Location ation tion Acquired is Computed
- ----------------- -------- --------- -------- ------------
<S> <C> <C> <C> <C>
(dollars in thousands)
Properties Held
for Investment
Apartments
Arlington Place,
Pasadena, TX.... $2,886 1973 11/76 7-40 years
Ashford, Tampa,
FL.............. 52 1967 1998 10-40 years
Barcelona,
Tampa, FL....... 1,321 1971 09/90 7-40 years
Bavarian Woods,
Middletown, OH.. 2,929 1972 01/84 5-40 years
Bay Anchor,
Panama City,
FL.............. 3 1979 1998 10-40 years
Bent Tree,
Addison, TX..... 4,506 1980 06/80 7-40 years
Blackhawk, Ft.
Wayne, IN....... 2,955 1972 12/78 7-40 years
Bridgestone,
Friendswood,
TX.............. 1,132 1979 06/82 7-40 years
Candlelight
Square, Lenexa,
KS.............. 1,416 1971 11/77 7-40 years
Carriage Park,
Tampa, FL....... 28 1966 1998 10-40 years
Chalet, I
Topeka, KS...... 1,752 1964/ 04/82 7-40 years
74/78
Chalet II,
Topeka, KS...... 124 1986 03/95 7-40 years
Chateau,
Bellevue, NE.... 1,086 1968 02/81 7-40 years
Chateau Bayou,
Ocean Springs,
MS.............. 49 1973 1998 10-40 years
Club Mar,
Sarasota, FL.... 764 1973 07/93 7-40 years
Confederate
Point,
Jacksonville,
FL.............. 2,967 1969 05/79 7-40 years
Concord,
Indianapolis,
IN.............. 7 1998 10-40 years
Conradi House,
Tallahassee,
FL.............. 29 1968 1998 10-40 years
Country Place,
Round Rock, TX.. 1,852 1980 07/82 7-40 years
Country Squire,
Indianapolis,
IN.............. 7 1998 10-40 years
Covered Bridge,
Gainesville,
FL.............. 2,884 1972 10/79 7-40 years
Crossing Church,
Tampa, FL....... 28 1967 1998 10-40 years
Daluce,
Tallahassee,
FL.............. 65 1974 1998 10-40 years
Edgewater
Gardens, Biloxi,
MS.............. 20 1966 1998 10-40 years
Fair Oaks,
Euless, TX...... 768 1978 07/89 7-40 years
Falcon House,
Ft. Walton, FL.. 49 1969 1998 10-40 years
Four Seasons,
Denver, CO...... 4,258 1970 07/84 7-40 years
Fox Club,
Indianapolis,
IN.............. 4,238 1972 11/83 7-40 years
Foxwood,
Memphis, TN..... 2,467 1974 08/79 7-40 years
</TABLE>

76
<PAGE>

SCHEDULE III
(Continued)
AMERICAN REALTY TRUST, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998

<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent to Gross Amounts of Which
Initial Cost Acquisition Carried at End of Year
------------------- ------------------- ---------------------------
Encum- Building & Building & (1)
Property/Location brances Land Improvements Improvements Other Land Improvements Total
- ----------------- --------------- ------------ ------------ ------ ------ ------------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Properties Held for
Investment--(Continued)
Apartments--
(Continued)
Georgetown,
Panama City, FL.. $ 850 $ 114 $ 1,025 $ -- $ -- $ 114 $ 1,025 $ 1,139
Governor Square,
Tallahassee, FL.. 3,289 519 4,724 -- -- 519 4,724 5,243
Grand Lagoon,
Panama City, FL.. 1,245 165 1,498 -- -- 165 1,498 1,663
Greenbriar,
Tallahassee, FL.. 1,017 122 1,094 -- -- 122 1,094 1,216
Hidden Valley,
Grand Rapids,
MI............... 8,171 274 3,636 362 1,089/(5)/ 274 5,087 5,361
Horizon East,
Dallas, TX....... 2,600 592 2,628 498 485/(5)/ 592 3,611 4,203
Kimberly Woods,
Tucson, AZ....... 6,336 571 3,802 1,190 861/(5)/ 571 5,853 6,424
La Mirada,
Jacksonville,
FL............... 7,673 392 5,454 1,558 1,074/(5)/ 392 8,086 8,478
Lake Chateau,
Thomasville, GA.. 1,159 153 1,379 -- -- 153 1,379 1,532
Lake Nora Arms,
Indianapolis,
IN............... 12,818 737 10,774 830 1,972/(5)/ 737 13,576 14,313
Landings/Marina,
Pensacola, FL.... 1,216 139 1,256 -- -- 139 1,256 1,395
Lantern Ridge,
Richmond, VA..... 2,436 130 1,721 129 353/(5)/ 130 2,203 2,333
Lee Hills,
Tallahassee, FL.. 157 26 236 -- -- 26 236 262
Mallard Lake,
Greensboro, NC... 7,827 534 7,099 768 1,477/(5)/ 534 9,344 9,878
Manchester
Commons,
Manchester,
MO............... 9,141 635 4,654 1,113 1,435/(5)/ 635 7,202 7,837
Med Villas, San
Antonio, TX...... 2,928 712 2,848 -- 712 2,848 3,560
Mesa Ridge, Mesa,
AZ............... 12,987 1,447 5,788 618 2,128/(5)/ 1,447 8,534 9,981
Morning Star,
Tallahassee, FL.. 1,255 149 1,346 -- -- 149 1,346 1,495
Nora Pines,
Indianapolis,
IN............... 5,881 221 3,872 440 1,061/(5)/ 221 5,373 5,594
Northside Villas,
Tallahassee, FL.. 2,955 414 3,758 -- -- 414 3,758 4,172
Oak Hill,
Tallahassee, FL.. 1,939 233 2,101 -- -- 233 2,101 2,334
Oak Hollow,
Austin, TX....... 11,327 745 6,118 765 1,860/(5)/ 745 8,743 9,488
Oak Tree,
Grandview, MO.... 4,233 304 3,543 246 606/(5)/ 304 4,395 4,699
Olde Towne,
Middletown, OH... -- 209 3,272 397 514/(5)/ 209 4,183 4,392
Park Avenue,
Tallahassee, FL.. 2,967 369 3,347 -- -- 369 3,347 3,716
Pheasant Ridge,
Bellevue, NE..... 6,501 231 4,682 1,099 1,135/(5)/ 231 6,916 7,147
Pinecrest,
Tallahassee, FL.. 989 99 890 -- -- 99 890 989
Pines, Little
Rock, AR......... -- 278 3,490 317 520/(5)/ 278 4,327 4,605
Place One, Tulsa,
OK............... 7,393 784 5,186 1,007 1,349/(5)/ 784 7,542 8,326
Quail Point,
Huntsville, AL... 3,831 184 2,716 249 550/(5)/ 184 3,515 3,699
<CAPTION>
Life on
Which
Depreciation
Accumu- In Latest
lated Date of Statement
Depreci- Construc- Date of Operation
Property/Location ation tion Acquired is Computed
- ----------------- -------- --------- -------- ------------
<S> <C> <C> <C> <C>
(dollars in thousands)
Properties Held for
Investment--(Continued)
Apartments--
(Continued)
Georgetown,
Panama City, FL.. $ 26 1974 1998 10-40 years
Governor Square,
Tallahassee, FL.. 118 1974 1998 10-40 years
Grand Lagoon,
Panama City, FL.. 37 1979 1998 10-40 years
Greenbriar,
Tallahassee, FL.. 27 1985 1998 10-40 years
Hidden Valley,
Grand Rapids,
MI............... 2,305 1973 07/81 7-40 years
Horizon East,
Dallas, TX....... 2,201 1972 05/78 7-40 years
Kimberly Woods,
Tucson, AZ....... 3,496 1973 12/77 7-40 years
La Mirada,
Jacksonville,
FL............... 4,628 1971 01/79 7-40 years
Lake Chateau,
Thomasville, GA.. 34 1972 1998 10-40 years
Lake Nora Arms,
Indianapolis,
IN............... 7,871 1973 06/78 7-40 years
Landings/Marina,
Pensacola, FL.... 31 1979 1998 10-40 years
Lantern Ridge,
Richmond, VA..... 1,435 1974 03/79 7-40 years
Lee Hills,
Tallahassee, FL.. 6 1974 1998 10-40 years
Mallard Lake,
Greensboro, NC... 5,083 1974 05/79 7-40 years
Manchester
Commons,
Manchester,
MO............... 3,884 1972 06/78 7-40 years
Med Villas, San
Antonio, TX...... 59 1967 1998 10-40 years
Mesa Ridge, Mesa,
AZ............... 1,516 1972 05/90 7-40 years
Morning Star,
Tallahassee, FL.. 34 1970 1998 10-40 years
Nora Pines,
Indianapolis,
IN............... 2,925 1970 05/78 5-40 years
Northside Villas,
Tallahassee, FL.. 70 1973 1998 10-40 years
Oak Hill,
Tallahassee, FL.. 53 1974 1998 10-40 years
Oak Hollow,
Austin, TX....... 4,674 1974 05/78 7-40 years
Oak Tree,
Grandview, MO.... 1,942 1968 03/82 7-40 years
Olde Towne,
Middletown, OH... 2,209 1968 03/81 7-40 years
Park Avenue,
Tallahassee, FL.. 84 1985 1998 10-40 years
Pheasant Ridge,
Bellevue, NE..... 3,587 1974 10/78 5-40 years
Pinecrest,
Tallahassee, FL.. 22 1978 1998 10-40 years
Pines, Little
Rock, AR......... 2,492 1977 11/77 7-40 years
Place One, Tulsa,
OK............... 4,498 1970 04/77 7-40 years
Quail Point,
Huntsville, AL... 2,180 1960 08/75 7-40 years
</TABLE>

77
<PAGE>

SCHEDULE III
(Continued)
AMERICAN REALTY TRUST, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998

<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent to Gross Amounts of Which
Initial Cost Acquisition Carried at End of Year
------------------- ------------------- --------------------------
Encum- Building & Building & (1)
Property/Location brances Land Improvements Improvements Other Land Improvements Total
- ----------------- --------------- ------------ ------------ ------ ----- ------------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Properties Held for
Investment--(Continued)
Apartments--
(Continued)
Regency, Lincoln,
NE............... $ 3,343 $ 304 $ 1,865 $ 412 $ 595 /(5)/ $ 304 $ 2,872 $ 3,176
Regency, Tampa,
FL............... 1,773 450 4,052 -- -- 450 4,052 4,502
Regency Falls,
San Antonio, TX.. 5,600 888 7,261 1,565 (100)/(3)/ 888 9,861 10,749
1,135 /(5)/
Rockborough,
Denver, CO....... 10,224 702 4,495 1,004 1,471 /(5)/ 702 6,970 7,672
Rolling Hills,
Tallahassee, FL.. 3,002 335 3,012 -- -- 335 3,012 3,347
Santa Fe, Kansas
City, MO......... -- 529 5,351 266 572 /(5)/ 529 6,189 6,718
Seville,
Tallahassee, FL.. 1,335 187 1,686 -- -- 187 1,686 1,873
Shadowood,
Addison, TX...... 4,849 477 3,208 207 736 /(5)/ 477 4,151 4,628
Sherwood Glen,
Urbandale, IA.... 4,700 352 2,550 532 687 /(5)/ 352 3,769 4,121
Stonebridge,
Florissant, MO... -- 193 2,076 247 482 /(5)/ 193 2,805 2,998
Stonegate,
Tallahassee, FL.. 1,078 188 1,693 -- -- 188 1,693 1,881
Summerwind,
Reseda, CA....... 5,631 493 2,990 138 757 /(5)/ 493 3,885 4,378
Sun Hollow, El
Paso, TX......... 4,713 385 4,159 75 695 /(5)/ 385 4,929 5,314
Sunset, Odessa,
TX............... 1,856 345 1,382 -- -- 345 1,382 1,727
Tanglewood,
Arlington
Heights, IL...... 28,537 5,682 18,340 3,797 4,384 /(5)/ 5,682 26,521 32,203
Timber Creek,
Omaha, NE........ 4,786 154 2,327 673 937 /(5)/ 154 3,937 4,091
Valley Hi,
Tallahassee, FL.. 913 92 834 -- -- 92 834 926
Villa Del Mar,
Wichita, KS...... 3,794 387 3,134 116 527 /(5)/ 387 3,777 4,164
Villager, Ft.
Walton, FL....... 553 125 1,122 -- -- 125 1,122 1,247
Villas, Plano,
TX............... 5,634 516 3,948 607 824 /(5)/ 516 5,379 5,895
Waters Edge III,
Gulfport, MS..... 3,866 331 1,324 -- -- 331 1,324 1,655
Westwood, Mary
Ester, FL........ 2,562 318 2,876 -- -- 318 2,876 3,194
Westwood Parc,
Tallahassee, FL.. 1,419 165 1,483 -- -- 165 1,483 1,648
Whispering Pines,
Canoga Park, CA.. 2,273 311 1,255 163 437 /(5)/ 311 1,855 2,166
Whispering Pines,
Topeka, KS....... 6,131 228 4,330 1,097 1,060 /(5)/ 228 6,487 6,715
White Pines,
Tallahassee, FL.. 405 75 671 -- -- 75 671 746
Windridge,
Austin, TX....... 11,149 711 5,812 1,665 1,851 /(5)/ 711 9,328 10,039
Windsor Tower,
Ocala, FL........ 1,168 225 2,031 -- -- 225 2,031 2,256
<CAPTION>
Life on
Which
Depreciation
Accumu- In Latest
lated Date of Statement
Depreci- Construc- Date of Operation
Property/Location ation tion Acquired is Computed
- ----------------- -------- --------- -------- -------------
<S> <C> <C> <C> <C>
(dollars in thousands)
Properties Held for
Investment-- (Continued)
Apartments--
(Continued)
Regency, Lincoln,
NE............... $ 1,169 1973 05/82 7-40 years
Regency, Tampa,
FL............... 76 1967 1998 10-40 years
Regency Falls,
San Antonio, TX.. 6,154 1974 11/78 7-40 years
Rockborough,
Denver, CO....... 3,655 1973 01/78 7-40 years
Rolling Hills,
Tallahassee, FL.. 75 1972 1998 10-40 years
Santa Fe, Kansas
City, MO......... 3,000 1964/67 04/83 7-40 years
Seville,
Tallahassee, FL.. 42 1972 1998 10-40 years
Shadowood,
Addison, TX...... 2,170 1976 02/79 7-40 years
Sherwood Glen,
Urbandale, IA.... 2,279 1970 12/77 7-40 years
Stonebridge,
Florissant, MO... 1,549 1975 10/77 7-40 years
Stonegate,
Tallahassee, FL.. 32 1972 1998 10-40 years
Summerwind,
Reseda, CA....... 2,383 1976 02/77 7-40 years
Sun Hollow, El
Paso, TX......... 2,591 1977 09/79 7-40 years
Sunset, Odessa,
TX............... 29 1981 1998 10-40 years
Tanglewood,
Arlington
Heights, IL...... 15,166 1974 03/78 7-40 years
Timber Creek,
Omaha, NE........ 2,135 1974 10/78 5-40 years
Valley Hi,
Tallahassee, FL.. 21 1980 1998 10-40 years
Villa Del Mar,
Wichita, KS...... 1,877 1971 10/81 7-40 years
Villager, Ft.
Walton, FL....... 21 1972 1998 10-40 years
Villas, Plano,
TX............... 2,873 1977 04/79 7-40 years
Waters Edge III,
Gulfport, MS..... 17 1968 1998 10-40 years
Westwood, Mary
Ester, FL........ 72 1972 1998 10-40 years
Westwood Parc,
Tallahassee, FL.. 37 1974 1998 10-40 years
Whispering Pines,
Canoga Park, CA.. 217 1977 12/93 7-40 years
Whispering Pines,
Topeka, KS....... 3,411 1972 02/78 7-40 years
White Pines,
Tallahassee, FL.. 13 1974 1998 10-40 years
Windridge,
Austin, TX....... 5,299 1974 09/78 7-40 years
Windsor Tower,
Ocala, FL........ 38 1982 1998 10-40 years
</TABLE>

78
<PAGE>

SCHEDULE III
(Continued)
AMERICAN REALTY TRUST, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998

Office Building
56 Expressway,
Oklahoma City,
OK............... -- 406 3,976 627 (2,386)/(3)/ 406 2,454 2,860
237 /(5)/
Executive Court,
Memphis, TN...... -- 271 2,099 732 232 /(5)/ 271 3,063 3,334
Marina Playa,
Santa Clara CA... 7,970 1,237 4,339 5,303 2,421 /(5)/ 1,237 12,063 13,300
Melrose Business
Park, Oklahoma
City, OK......... -- 367 2,674 240 (1,000)/(3)/ 367 2,105 2,472
191 /(5)/
One Hickory
Center, Farmers
Branch, TX....... 5,348 335 -- 7,815 -- 335 7,815 8,150
Rosedale Towers,
Roseville, MN.... 2,726 665 3,769 1,116 -- 665 4,885 5,550
University
Square,
Anchorage, AK.... -- 562 3,276 186 (1,875)/(3)/ 562 1,695 2,257
108 /(5)/
Shopping Centers
Collection,
Denver, CO....... 15,161 -- 20,210 64 -- -- 20,274 20,274
Cross County
Mall, Mattoon,
IL............... 7,031 608 6,468 6,130 1,103 /(5)/ 608 13,701 14,309
Cullman, Cullman,
AL............... 496 400 1,830 160 290 /(5)/ 400 2,280 2,680
Harbor Plaza,
Aurora, CO....... 1,781 817 2,587 380 167 /(5)/ 817 3,134 3,951
Katella Plaza,
Orange, CA....... 1,257 -- 2,844 504 274 /(5)/ -- 3,622 3,622
Oaktree Shopping
Village, Lubbock,
TX............... 1,507 192 1,431 7 -- 192 1,438 1,630
Preston Square,
Dallas, TX....... 2,538 389 1,555 1,559 -- 389 3,114 3,503
Regency Point,
Jacksonville,
FL............... 2,045 647 5,156 2,391 660 /(5)/ 1,792 7,062 8,854
Westwood,
Tallahassee,
FL............... 450 -- 5,424 1,017 522 /(5)/ 522 7,377 7,899
936 /(5)/

Office Building
56 Expressway,
Oklahoma City,
OK............... 1,934 1981 03/82 7-40 years

Executive Court,
Memphis, TN...... 1,643 1980 09/82 5-40 years
Marina Playa,
Santa Clara CA... 6,360 1972 12/76 5-40 years
Melrose Business
Park, Oklahoma
City, OK......... 1,372 1980 03/82 5-40 years

One Hickory
Center, Farmers
Branch, TX....... 15 1998 -- 10-40 years
Rosedale Towers,
Roseville, MN.... 1,374 1974 1990 10-40 years
University
Square,
Anchorage, AK.... 1,398 1981 12/81 5-40 years

Shopping Centers
Collection,
Denver, CO....... 682 -- 1997 10-40 years
Cross County
Mall, Mattoon,
IL............... 7,899 1971 08/79 5-40 years
Cullman, Cullman,
AL............... 1,203 1979 02/79 7-40 years
Harbor Plaza,
Aurora, CO....... 1,787 1979 09/81 7-40 years
Katella Plaza,
Orange, CA....... 2,203 1971 12/80 7-40 years
Oaktree Shopping
Village, Lubbock,
TX............... 115 1981 1995 10-40 years
Preston Square,
Dallas, TX....... 70 -- 1997 10-40 years
Regency Point,
Jacksonville,
FL............... 2,785 1982 06/84 5-40 years
Westwood,
Tallahassee,
FL............... 3,056 1980 10/83 5-40 years

</TABLE>

79
<PAGE>

SCHEDULE III
(Continued)
AMERICAN REALTY TRUST, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998

Hotels
Best Western
Hotel,
Virginia Beach,
VA............... 4,902 1,521 6,082 865 -- 1,521 8,468 6,947
Continental
Hotel, Las Vegas,
NV............... 14,551 8,169 8,850 -- -- 8,169 17,019 8,850
AKC Holiday Inn,
Kansas City, MO.. 8,808 1,110 4,535 2,437 -- 1,110 8,082 6,972
Piccadilly
Airport, Fresno,
CA............... 5,258 -- 7,834 161 -- -- 7,995 7,995
Piccadilly
Chateau, Fresno,
CA............... 2,213 -- 3,906 -- (33) -- 3,873 3,873
Piccadilly Shaws,
Fresno, CA....... 6,106 2,392 9,567 430 -- 2,392 9,997 12,389
Piccadilly
University,
Fresno, CA....... 5,938 -- 12,011 -- (163) -- 11,848 11,848
Quality Inn,
Denver, CO....... 3,946 -- 302 2,313 -- -- 2,615 2,615
Williamsburg
Hospitality
House,
Williamsburg,
VA............... 12,366 4,049 16,195 1,206 -- 4,049 17,401 21,450

Single Family
Residence
Tavel Circle,
Dallas, TX....... 139 53 214 -- -- 53 214 267
-------- ------- -------- ------- ------- ------- -------- --------
527,646 70,290 452,672 82,440 55,600 71,957 589,045 661,002

Properties Held
for Sale
Land
Atlanta, Atlanta,
GA............... 2,250 11,052 -- -- (3,329) 7,723 -- 7,723
Bad Lands,
Duchesne, UT..... -- 25 -- -- -- 25 -- 25
Bonneau, Dallas
County, TX....... 1,005 1,102 -- -- -- 1,102 -- 1,102
Chase Oaks,
Plano, TX........ 2,000 4,511 -- -- (1,607) 2,904 -- 2,904
Croslin, Dallas,
TX............... 260 327 -- -- -- 327 -- 327
Dalho, Farmers
Branch, TX....... 300 331 -- -- -- 331 -- 331
Desert Wells,
Palm Desert, CA.. 10,000 12,846 -- -- -- 12,846 -- 12,846
Dowdy, Collin
County, TX....... -- /(7)/ 1,949 -- -- -- 1,949 -- 1,949

Single Family
Residence
Tavel Circle,
Dallas, TX....... 14
--------
208,396

Properties Held
for Sale
Land
Atlanta, Atlanta,
GA............... -- N/A 1990 --
Bad Lands,
Duchesne, UT..... -- N/A 1992 --
Bonneau, Dallas
County, TX....... -- N/A 1998 --
Chase Oaks,
Plano, TX........ -- N/A 1997 --
Croslin, Dallas,
TX............... -- N/A
Dalho, Farmers
Branch, TX....... -- N/A 1997 --
Desert Wells,
Palm Desert, CA.. -- N/A 1998 --
Dowdy, Collin
County, TX....... -- N/A 1997 --
</TABLE>

80
<PAGE>

SCHEDULE III
(Continued)
AMERICAN REALTY TRUST, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998

<CAPTION>
Life on
Which
Depreciation
Accumu- In Latest
lated Date of Statement
Depreci- Construc- Date of Operation
Property/Location ation tion Acquired is Computed
- ----------------- -------- --------- -------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Properties Held for
Sale--(Continued)
Land--
(Continued)
Eldorado
Parkway, Collin
County, TX...... $-- N/A 1998 --
FRWM Cummings,
Farmers Branch,
TX.............. -- N/A 1998 --
Hollywood
Casino, Farmers
Branch, Texas... -- N/A 1997 --
HSM, Farmers
Branch, TX...... -- N/A 1998 --
Jeffries Ranch,
Oceanside, CA... -- N/A 1996 --
JHL Connell,
Carrollton, TX.. -- N/A 1998 --
Katrina, Palm
Desert, CA...... -- N/A 1998 --
Katy Road,
Harris County,
TX.............. -- N/A 1997 --
Keller, Tarrant
County, TX...... -- N/A 1997 --
Lacy Longhorn,
Farmers Branch,
TX.............. -- N/A 1997 --
Las Colinas I,
Las Colinas,
TX.............. -- N/A 1995 --
Lewisville,
Lewisville, TX.. -- N/A 1996 --
Marine Creek,
Fort Worth, TX.. -- N/A 1998 --
McKinney Corners
I,
Collin County,
TX.............. -- N/A 1997 --
McKinney Corners
II,
Collin County,
TX.............. -- N/A 1997 --
McKinney Corners
III,
Collin County,
TX.............. -- N/A 1997 --
McKinney Corners
IV,
Collin County,
TX.............. -- N/A 1997 --
McKinney Corners
V,
Collin County,
TX.............. -- N/A 1997 --
Mason/Goodrich,
Houston, TX..... --
Mendoza, Dallas,
TX.............. --
Messick, Palm
Springs, CA..... -- N/A 1998 --
Pantex, Collin
County, TX...... -- N/A 1997 --
Parkfield,
Denver, CO...... -- N/A 1996 --
</TABLE>

81
<PAGE>

SCHEDULE III
(Continued)
AMERICAN REALTY TRUST, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998

<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent to Gross Amounts of Which
Initial Cost Acquisition Carried at End of Year
--------------------- --------------------- ------------------------------
Encum- Building & Building & (1)
Property/Location brances Land Improvements Improvements Other Land Improvements Total
- ----------------- -------- -------- ------------ ------------ -------- -------- ------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Properties Held for
Sale--(Continued)
Land--
(Continued)
Palm Desert,
Palm Desert,
CA.............. $ -- $ 12,592 $ -- $ -- $(12,592)/(4)/ $ -- $ -- $ --
Pioneer
Crossing,
Austin, TX...... 13,823 23,255 -- -- -- 23,255 -- 23,255
Plano Parkway,
Plano, TX....... 8,918 11,493 -- -- -- 11,493 -- 11,493
Rasor, Plano,
TX.............. 9,500 15,316 -- -- (9,181)/(4)/ 6,135 -- 6,135
Rivertrails I,
Ft. Worth, TX... -- 1,139 -- -- (1,126) 13 -- 13
Santa Clarita,
Santa Clarita,
CA.............. 1,075 1,488 -- -- (82)/(4)/ 1,406 -- 1,406
Scoggins,
Tarrant County,
TX.............. 1,698 3,439 -- -- -- 3,439 -- 3,439
Scout, Tarrant
County, TX ..... 3,208 2,388 -- -- -- 2,388 -- 2,388
Stagliano,
Farmers Branch,
TX.............. 500 566 -- -- -- 566 -- 566
Stone Meadows,
Houston, TX..... 1,120 1,916 -- 195 -- 1,916 195 2,111
Thompson,
Farmers Branch,
TX.............. 1,350 948 -- -- -- 948 -- 948
Thompson II,
Dallas County,
TX.............. -- 505 -- -- -- 505 -- 505
Tomlin, Farmers
Branch, TX...... 1,350 1,878 -- -- -- 1,878 -- 1,878
Treefarm--LBJ,
Dallas County,
TX.............. -- /(7)/ 2,568 -- -- -- 2,568 -- 2,568
Valley Ranch,
Irving, TX...... -- /(7)/ 16,592 -- -- (10,133)/(4)/ 2,543 -- 2,543
(3,916)/(3)/
Valley Ranch
III, Irving,
TX.............. 1,330 2,248 -- -- -- 2,248 -- 2,248
Valley Ranch IV,
Irving, TX...... 1,533 2,187 -- -- -- 2,187 -- 2,187
Valwood, Dallas,
TX.............. 13,350 13,969 -- -- (335)/(4)/ 13,634 -- 13,634
Van Cattle,
McKinney, TX.... 1,471 2,092 -- -- -- 2,092 -- 2,092
Vineyards,
Grapevine, TX... 3,430 4,982 -- -- -- 4,982 -- 4,982
Vista Business
Park,
Travis County,
TX.............. 2,261 3,281 -- -- -- 3,281 -- 3,281
Vista Ridge,
Lewisville, TX.. 12,592 16,322 -- -- -- 16,322 -- 16,322
Walker, Dallas
County, TX...... 14,827 13,534 -- -- -- 13,534 -- 13,534
<CAPTION>
Life on
Which
Depreciation
Accumu- In Latest
lated Date of Statement
Depreci- Construc- Date of Operation
Property/Location ation tion Acquired is Computed
- ----------------- -------- --------- -------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Properties Held for
Sale--(Continued)
Land--
(Continued)
Palm Desert,
Palm Desert,
CA.............. $ -- N/A 1997 --
Pioneer
Crossing,
Austin, TX...... -- N/A 1997 --
Plano Parkway,
Plano, TX....... --
Rasor, Plano,
TX.............. -- N/A 1997 --
Rivertrails I,
Ft. Worth, TX... -- N/A 1991 --
Santa Clarita,
Santa Clarita,
CA.............. -- N/A 1997 --
Scoggins,
Tarrant County,
TX.............. -- N/A 1998 --
Scout, Tarrant
County, TX ..... -- N/A 1997 --
Stagliano,
Farmers Branch,
TX.............. -- N/A 1997 --
Stone Meadows,
Houston, TX..... --
Thompson,
Farmers Branch,
TX.............. -- N/A 1997 --
Thompson II,
Dallas County,
TX.............. -- N/A 1998 --
Tomlin, Farmers
Branch, TX...... -- N/A 1997 --
Treefarm--LBJ,
Dallas County,
TX.............. -- N/A 1997 --
Valley Ranch,
Irving, TX...... -- N/A 1996 --
Valley Ranch
III, Irving,
TX.............. -- N/A 1997 --
Valley Ranch IV,
Irving, TX...... -- N/A 1998 --
Valwood, Dallas,
TX.............. -- N/A 1996 --
Van Cattle,
McKinney, TX.... --
Vineyards,
Grapevine, TX... -- N/A 1997 --
Vista Business
Park,
Travis County,
TX.............. -- N/A 1998
Vista Ridge,
Lewisville, TX.. -- N/A 1998 --
Walker, Dallas
County, TX...... -- N/A 1998 --
</TABLE>

82
<PAGE>

SCHEDULE III
(Continued)
AMERICAN REALTY TRUST, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998

83
<PAGE>

SCHEDULE III
(Continued)
AMERICAN REALTY TRUST, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of Real Estate
Balance at January 1,............................. $307,833 $128,366 $ 70,495
Additions
Partnership properties........................ 425,813 -- --
Acquisitions and improvements................. 230,549 201,955 61,649
Foreclosures.................................. 17,019 20,226 --
Deductions
Sales of real estate.......................... (37,911) (42,714) (3,778)
-------- -------- --------
Balance at December 31,........................... $943,303 $307,833 $128,366
======== ======== ========
Reconciliation of Accumulated Depreciation
Balance at January 1,............................. $ 5,380 $ 9,331 $ 7,744
Additions
Depreciation.................................. 5,246 2,244 1,587
Partnership properties........................ 197,770 -- --
Deductions
Sales of real estate.......................... -- (6,195) --
-------- -------- --------
Balance at December 31,........................... $208,396 $ 5,380 $ 9,331
======== ======== ========
</TABLE>

84
<PAGE>

SCHEDULE IV

AMERICAN REALTY TRUST, INC.

MORTGAGE LOANS ON REAL ESTATE
December 31, 1998

<TABLE>
<CAPTION>
Principal Amount of
Periodic Face Carrying Loan Subject to
Interest Maturity Payment Prior Amount of Amount of Delinquent Principal
Description Rate (1) Date (1) Terms Liens Mortgages Mortgages or Interest
- ----------- -------- -------- ------------------------ ------ --------- --------- --------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
FIRST MORTGAGE LOANS

Banc Boston............ 8.75% 02/14 Principal and interest $ -- $ 63 $ 17 $ --
monthly.
Secured by a
condominium in
Fort Lauderdale, FL.

Centura Holdings, 15.00% 08/00 All principal and -- 6,020 6,020 --
LLC(/3/)............... interest due
Secured by 6.4 acres of at maturity.
developed land in
Dallas, TX.

Centura Tower, Ltd. ... 12.00% 01/03 Payments based on net -- 23,796 7,975 --
revenues
Secured by 2.244 acres after the land is
of undeveloped land in developed.
Dallas, TX, on which an
office building is
being built.

Cuchara Partners, Ltd. 16.00% 06/99 All principal and -- 4,163 4,163 --
and Ski Rio Partners, interest due
Ltd.(3)................
Secured by at maturity.
approximately 1,000
acres of land in
Huerfano County, CO and
a promissory note
secured by 2,623 acres
of land in Taos, NM.

Dallas Parkway 14.00% 08/99 Monthly interest only. -- 2,800 2,950 2,950
Properties, Inc........
Secured by an office
building in Addison,
TX.

Ellis Development 14.00% 08/99 All principal and -- 946 942 --
Company, Inc........... interest are due
Secured by 4.5 acres of at maturity.
land in Abilene, TX;
collateral assignment
of a $220,000 note; and
the guarantees of the
borrowers.

Highway 544 Partners, 18.00% 04/99 Quarterly interest only -- 1,500 1,450 --
L.P.(/3/).............. at 12% per
Secured by 49 acres of annum, with deferred
undeveloped land in interest paid annually
Plano, TX, a pledge of in April.
100% of the partnership
interest and the
personal guarantee of
the owner of Highway
Partner's general
partner.

Stratford & Graham 15.00% 07/99 All principal and -- 3,450 3,820 --
Developers, interest due
L.L.C.(/3/)............
Secured by 1,485 acres at maturity or upon
of undeveloped land in sale.
Riverside County, CA.

Varner Road Partners, 15.00% 11/99 All principal and -- 2,150 2,112 --
L.L.C.(/3/)............ interest due
Secured by 129.77 acres at maturity or upon
of land in Riverside sale.
County, CA.

WRAPAROUND MORTGAGE
LOAN

Bridgeview............. 9.00% 02/00 Monthly interest only. 2,472 5,500 5,391 5,500
May prepay
Secured by shopping to up to 25% of the wrap
center in La Crosse, 9.50% equity upon 60 days
WI. written notice without penalty.

</TABLE>

85
<PAGE>

SCHEDULE IV
(Continued)
AMERICAN REALTY TRUST, INC.

MORTGAGE LOANS ON REAL ESTATE
December 31, 1998

<TABLE>
<CAPTION>
Principal Amount of
Periodic Face Carrying Loan Subject to
Interest Maturity Payment Prior Amount of Amount of Delinquent Principal
Description Rate (1) Date (1) Terms Liens Mortgages Mortgages or Interest
- ----------- -------- ---------- ------------------------ ------ --------- --------- --------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
JUNIOR MORTGAGE LOANS

JNC Enterprises, Ltd.-- 14.00% 10/99 All principal and $ -- $ 1,045 $ 1,045 $ --
Field St.(/2/).......... interest are due
Secured by a second lien at maturity.
on 3.5 acres of land in
Dallas, TX.

JNC Enterprises, Ltd.-- 14.00% 10/99 All principal and -- 2,100 2,083 --
Frisco Panther Partners, interest are due
Ltd.(/2/)...............
Secured by a second lien at maturity.
on 408.23 acres of land
in Frisco, TX.

JNC Enterprises, Ltd.-- 12.00% 12/99 All principal and -- 5,000 3,250 --
Line of Credit(/2/)..... interest are due
Secured by a second lien at maturity.
on 1,791 acres of land
in Denton County, TX and
a second lien on 220
acres of land in Tarrant
County, TX.

JNC Enterprises, Ltd.-- 14.00% 10/99 All principal and -- 1,045 1,042 --
Summer St.(/2/)......... interest are due
Secured by a second lien at maturity.
on 2.92 acres of land in
Dallas, TX.

Warwick Summit, Inc. ... 14.00% 12/99 All principal and -- 1,765 1,777 --
interest are due
Secured by and a second at maturity.
lien on a shopping
center in Warwick, RI
and a pledge of stock.

OTHER

14875 Landmark(/3/)..... 12.00% 12/99 Monthly interest only. -- 1,152 1,152 --
Secured by a pledge of
partnership interest in
Landmark which owns
commercial real estate
in Addison, TX.

Bordeaux Investments.... 14.00% 12/99 All principal and -- 1,591 1,541 --
interest are due
Secured by (i) a 100% at maturity.
limited partnership
interest in Bordeaux,
which owns a shopping
center in Oklahoma City,
OK; (ii) 100% of the
stock of Bordeaux
Investments One, Inc.,
which owns 6.5 acres of
undeveloped land in
Oklahoma City, OK; and
(iii) the personal
guarantees of the
Bordeaux partners.

D.C. Carter(/4/)........ 13.50% On Demand. On demand. -- 594 594 --
Secured by partnership
interest.

JNC Enterprises, Ltd.-- 12.00% 02/99 All principal and -- 3,700 3,680 --
Frisco Bridges(/2/)..... interest are due
Secured by a pledge of a at maturity.
contract to purchase 387
acres of land in Collin
County, TX(2).

</TABLE>

86
<PAGE>

SCHEDULE IV
(Continued)
AMERICAN REALTY TRUST, INC.

MORTGAGE LOANS ON REAL ESTATE
December 31, 1998

La Quinta Land Partners, 10.00% 11/98 All principal and $ -- $ 635 $ 385 $ 385
LLC..................... interest are due
Secured by interest at maturity.
bearing accounts held by
escrow agent pending
purchase of land in CA.

Mangione................ 15.00% 02/99 All principal and -- 360 360 --
interest are due
Secured by 1,100,000 at maturity.
Class A limited
partnership units in a
company; which are
convertible into
preferred stock of a
publicly traded company.

Preston/Lomo Alto, 12.00% 11/99 Monthly interest only. -- 1,656 1,656 --
L.L.C...................
Secured by a pledge of
partnership interests in
two partnerships which
own commercial property
in Dallas and Plano, TX.

RB Land and Cattle, 10.00% 12/98 All principal and -- 350 365 365
LLC..................... interest are due
Secured by pledge of a at maturity.
note secured by a 7,200
acre ranch in Foard
County, TX

Tanglewood Partnership.. Variable 09/03 Interest only monthly. -- 3,400 -- --
Secured by a partnership
interest.

Ward(/3/)............... 12.00% 09/98 All principal and -- 700 740 --
interest are due
Secured by a first lien at maturity.
on an oil, gas and
mineral lease in
Anderson County, TX and
by a second lien on a
ranch in Henderson
County, TX.
------ ------- ------- ------
$2,472 $75,481 54,510 $9,200
====== ======= ======
Interest receivable..... 2,648
Deferred gains.......... (2,456)
Discounts............... (72)
Allowance for estimated (2,577)
losses..................
-------
$52,053
=======
</TABLE>
- ----
(1) Interest rates and maturity dates shown are as stipulated in the loan
documents at December 31, 1998. Where applicable, these rates have been
adjusted at issuance to yield between 8% and 12%.
(2) Cross-collateralized and cross-defaulted.
(3) Cross-collateral securing a $6.1 million note payable.
(4) Receivable from a partner in a partnership in which the Company is a 27%
limited partner.

87
<PAGE>

SCHEDULE IV
(Continued)
AMERICAN REALTY TRUST, INC.

MORTGAGE LOANS ON REAL ESTATE

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
(dollars in thousands)
<S> <C> <C> <C>
Balance at January 1,.............................. $ 32,552 $ 56,745 $58,119

Additions
New mortgage loans............................... 594 8,567 100
Compounding of interest.......................... -- 8 --
Funding on existing loans........................ 150 150
Partnership mortgage loans....................... 53,899

Deductions
Collections of principal......................... (7,923) (4,489) (1,495)
Note cancelled on repurchase of property......... (1,300) -- --
Sale of notes receivable......................... (599) (16,985) --
Write-off of principal........................... -- (2,723) (129)
Foreclosures..................................... (22,713) (8,721) --
-------- -------- -------
Balance at December 31,............................ $ 54,510 $ 32,552 $56,745
======== ======== =======
</TABLE>

88
<PAGE>

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

Not applicable.

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

PART III

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

Directors

The affairs of American Realty Trust, Inc. (the "Company" or the
"Registrant") are managed by a Board of Directors. The Directors are elected
at the annual meeting of stockholders or are appointed by the incumbent Board
of Directors and serve until the next annual meeting of stockholders or until
a successor has been elected or appointed.

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

KARL L. BLAHA: Age 51, Director (Affiliated) (since June 1996). President
(since October 1993) and Executive Vice President and Director of Commercial
Management (April 1992 to October 1993).

Executive Vice President--Commercial Asset Management (since July 1997)
and Executive Vice President and Director of Commercial Management (April
1992 to August 1995) of BCM, Syntek Asset Management, Inc. ("SAMI"),
Continental Mortgage and Equity Trust ("CMET"), Income Opportunity Realty
Investors, Inc. ("IORI") and Transcontinental Realty Investors, Inc.
("TCI"); Director (since November 1998) of SAMI and (since October 1998) of
Garden National Realty, Inc.; Director (since December 1998) and Executive
Vice President and Director of Commercial Asset Management (since January
1998) of NRLP Management Corp. ("NMC"), the general partner of National
Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP") and a wholly-
owned subsidiary of the Company; Executive Vice President (October 1992 to
July 1997) of Carmel Realty, Inc. ("Carmel Realty"), a company owned by
First Equity Properties, Inc. ("First Equity"), which is 50% owned by a
subsidiary of BCM; Director and President (since 1996) of First Equity;
Executive Vice President and Director of Commercial Management (April 1992
to February 1994) of National Income Realty Trust ("NIRT") and Vinland
Property Trust ("VPT"); Partner--Director of National Real Estate
Operations (August 1988 to March 1992) of First Winthrop Corporation; and
Vice President (April 1984 to August 1988) of Southmark Corporation
("Southmark").

ROY E. BODE: Age 51, Director (Independent) (since September 1996).

Vice President of Public Affairs (since May 1992) of University of Texas
Southwestern Medical Center; Editor (June 1988 to December 1991) of Dallas
Times Herald; and Executive Board Member (since October 1996) of Yellow
Rose Foundation for Multiple Sclerosis Research.

COLLENE C. CURRIE: Age 50, Director (Independent) (since February 1999).

Vice President and Senior Relationship Manager (since February 1996) of
NationsBank Private Client Group of Dallas; Director (since April 1998) of
NMC; Director of Marketing and Communications (October

89
<PAGE>

1993 to January 1999) of the Dallas Opera; and Business Transformation
Consultant (August 1988 to October 1993) for IBM.

AL GONZALEZ: Age 62, Director (Independent) (since 1989).

President (since March 1991) of AGE Refining, Inc.; President (January
1988 to March 1991) of Moody-Day Inc.; owner and President of Gulf-Tex
Construction Company ("Gulf-Tex"); owner and lessor of two restaurant sites
in Dallas, Texas; Director (since April 1990) of Avacelle, Inc.
("Avacelle"), which is 53% owned by the Company and 47% owned by BCM;
Director (1988 to 1992) of Greenbriar Corp.; and member (1987 to 1989) of
the Dallas City Council.

CLIFF HARRIS: Age 50, Director (Independent) (since 1997).

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

On March 18, 1992, Avacelle filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code and an Order confirming its plan of
Reorganization was entered October 18, 1993 by the United States Bankruptcy
Court, Northern Division of Oklahoma. On April 21, 1997, Avacelle again filed
a voluntary petition under Chapter 11 of the United States Bankruptcy Code.
Avacelle voluntarily dismissed the petition in 1998.

Board Meetings and Committees

The Board of Directors held 17 meetings during 1998. For such year, no
incumbent Director attended fewer than 75% of (1) the total number of meetings
held by the Board during the period for which he or she had been a Director
and (2) the total number of meetings held by all committees of the Board on
which he or she served during the periods that he or she served.

The Board of Directors has an Audit Committee the function of which is to
review the Company's operating and accounting procedures. The members of the
Audit Committee are Messrs. Gonzalez (Chairman) and Bode. The Audit Committee
met two times during 1998.

The Board of Directors has a Stock Option Committee the function of which
is to administer the Company's stock option plan. The members of the Stock
Option Committee are Messrs. Bode, Gonzalez and Harris. The Stock Option
Committee met once in 1998.

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

Executive Officers

The following persons, in addition to Karl L. Blaha, currently serve as
executive officers of the Company: Bruce A. Endendyk, Executive Vice
President; Thomas A. Holland, Executive Vice President and Chief Financial
Officer, Steven K. Johnson, Executive Vice President--Residential Asset
Management and Randall M. Paulson, Executive Vice President. Their positions
with the Company are not subject to a vote of stockholders. The age, terms of
service, all positions and offices with the Company or BCM, other principal
occupations, business experience and directorships with other companies during
the last five years or more of Messrs. Endendyk, Holland, Johnson and Paulson
is set forth below.

BRUCE A. ENDENDYK: Age 50, Executive Vice President (since January 1995).

President (since January 1995) of Carmel Realty; Executive Vice
President (since January 1995) of BCM, SAMI, CMET, IORI and TCI; Executive
Vice President (since January 1998) of NMC; Management Consultant (November
1990 to December 1994); Executive Vice President (January 1989 to November
1990) of Southmark; and President and Chief Executive Officer (March 1988
to January 1989) of Southmark Equities Corporation.

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THOMAS A. HOLLAND: Age 56, Executive Vice President and Chief Financial
Officer (since August 1995) and Senior Vice President and Chief Accounting
Officer (July 1990 to August 1995).

Executive Vice President and Chief Financial Officer (since August 1995)
and Senior Vice President and Chief Accounting Officer (July 1990 to August
1995) of BCM, SAMI, CMET, IORI and TCI; Secretary (since February 1997) of
CMET, IORI and TCI; Executive Vice President and Chief Financial Officer
(since January 1998) of NMC; and Senior Vice President and Chief Accounting
Officer (July 1990 to February 1994) of NIRT and VPT.

STEVEN K. JOHNSON: Age 41, Executive Vice President--Residential Asset
Management (since August 1998).

Executive Vice President--Residential Asset Management (since August
1998) and Vice President (August 1990 to August 1991) of BCM, SAMI, CMET,
IORI and TCI; Executive Vice President--Residential Asset Management (since
August 1998) of NMC; Chief Operating Officer (January 1993 to August 1998)
of Garden Capital, Inc.; Executive Vice President (December 1994 to August
1998) of Garden Capital Management, Inc.; and Vice President (August 1991
to January 1993) of SHL Properties Realty Advisors, Inc. and SHL
Acquisition Corporation II and III.

RANDALL M. PAULSON: Age 52, Executive Vice President (since January 1995).

President (since August 1995) and Executive Vice President (January 1995
to August 1995) of SAMI, CMET, IORI and TCI and (October 1994 to August
1995) of BCM; Director (August 1995 to November 1998) of SAMI; President
(since January 1998) of NMC; Vice President (1993 to 1994) of GSSW, LP, a
joint venture of Great Southern Life and Southwestern Life; Vice President
(1990 to 1993) of Property Company of America Realty, Inc.; and President
(1990) of Paulson Realty Group.

Officers

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

ROBERT A. WALDMAN: Age 46, Senior Vice President and General Counsel (since
January 1995), Vice President (January 1993 to January 1995) and Secretary
(since December 1989).

Senior Vice President and General Counsel (since January 1995); Vice
President (December 1990 to January 1995) and Secretary (December 1993 to
February 1997) of CMET, IORI and TCI; Senior Vice President and General
Counsel (since November 1994), Vice President and Corporate Counsel
(November 1989 to November 1994) and Secretary (since November 1989) of
BCM; Senior Vice President and General Counsel (since January 1995), Vice
President (April 1990 to January 1995) and Secretary (since December 1990)
of SAMI; and Senior Vice President, Secretary and General Counsel (since
January 1998) of NMC.

DREW D. POTERA: Age 39, Vice President (since December 1996), Treasurer
(since August 1991) and Assistant Treasurer (December 1990 to August 1991).

Vice President (since December 1996) and Treasurer (since December 1990)
of CMET, IORI and TCI; Treasurer (December 1990 to February 1994) of NIRT
and VPT; Vice President, Treasurer and Securities Manager (since July 1990)
of BCM; Vice President and Treasurer (since February 1992) of SAMI; Vice
President and Treasurer (since January 1998) of NMC; and Financial
Consultant with Merrill Lynch, Pierce, Fenner & Smith, Incorporated (June
1985 to June 1990).

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

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

Under the securities laws of the United States, the Company's Directors,
executive officers, and any persons holding more than ten percent of the
Company's shares of Common Stock are required to report their ownership and
any changes in that ownership to the Securities and Exchange Commission (the
"Commission"). Specific due dates for these reports have been established and
the Company is required to report any failure to file by these dates during
1998. All of these filing requirements were satisfied by the Company's
Directors and executive officers and ten percent holders. In making these
statements, the Company has relied on the written representations of its
incumbent Directors and executive officers and its ten percent holders and
copies of the reports that they have filed with the Commission.

The Advisor

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

BCM has served as advisor 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,
who served as Chairman of the Board and a Director of the Company until
November 16, 1992 and who also served as a director of BCM until December 22,
1989 and as Chief Executive Officer of BCM until September 1, 1992. Mr. Blaha,
President and a Director of the Company, serves as Executive Vice President--
Commercial Asset Management of BCM. Mr. Paulson, an Executive Vice President
of the Company, also serves as President of BCM, SAMI, NMC, CMET, IORI and
TCI. Gene E. Phillips serves as a representative of the trust for the benefit
of his children which owns BCM and, in such capacity, has substantial contact
with the management of BCM and input with respect to BCM's performance of
advisory services to the Company. As of March 5, 1999, BCM owned 5,738,472
shares of the Company's Common Stock, approximately 54.3% of the shares then
outstanding.

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

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

(1) an acquisition fee for locating, leasing or purchasing real estate
for the Company in an amount equal to the lesser of (i) the amount of
compensation customarily charged in similar arm's-length transactions or
(ii) up to 6% of the costs of acquisition, inclusive of commissions, if
any, paid to non-affiliated brokers;

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

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

(4) an incentive fee equal to 10% of net income for the year in excess
of a 10% return on stockholders' equity, and 10% of the excess of net
capital gains over net capital losses, if any, realized from sales of
assets made under contracts entered into after April 15, 1989; and

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<PAGE>

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

The Advisory Agreement further provides that BCM shall bear the cost of
certain expenses of its employees, excluding fees paid to the Company's
Directors; rent and other office expenses of both BCM and the Company (unless
the Company maintains office space separate from that of BCM); costs not
directly identifiable to the Company's assets, liabilities, operations,
business or financial affairs; and miscellaneous administrative expenses
relating to the performance by BCM of its duties under the Advisory Agreement.

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.

Pursuant to the Advisory Agreement, BCM serves as the loan
administration/servicing agent for the Company, under an agreement dated as of
October 4, 1989, and terminable by either party upon thirty days' notice,
under which BCM services most of the Company's mortgage notes and receives as
compensation a monthly fee of 0.125% of the month-end outstanding principal
balances of the mortgage loans serviced.

Situations may develop in which the interests of the Company are in
conflict with those of one or more Directors or officers in their individual
capacities or of BCM, or of their respective affiliates. In addition to
services performed for the Company, as described above, BCM actively provides
similar services as agent for, and advisor to, other real estate enterprises,
including persons and entities involved in real estate development and
financing, including CMET, IORI and TCI. BCM also performs certain
administrative services for NRLP and NOLP, the operating partnership of NRLP,
on behalf of NRLP's and NOLP's general partner, NMC, a wholly-owned subsidiary
of the Company. The Advisory Agreement provides that BCM may also serve as
advisor to other entities.

As advisor, BCM is a fiduciary of the Company's public investors. In
determining to which entity a particular investment opportunity will be
allocated, BCM will consider the respective investment objectives of each
entity and the appropriateness of a particular investment in light of each
such entity's existing mortgage note and real estate portfolios and business
plan. To the extent any particular investment opportunity is appropriate to
more than one such entity, such investment opportunity will be allocated to
the entity that has had funds available for investment for the longest period
of time, or, if appropriate, the investment may be shared among various
entities. See ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--
Certain Business Relationships."

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<PAGE>

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

<TABLE>
<C> <S>
Mickey N. Phillips: Director

Ryan T. Phillips: Director

Randall M. Paulson: President

Karl L. Blaha: Executive Vice President--Commercial Asset
Management

Bruce A. Endendyk: Executive Vice President

Thomas A. Holland: Executive Vice President and Chief Financial
Officer

A. Cal Rossi, Jr.: Executive Vice President

Cooper B. Stuart: Executive Vice President

Clifford C. Towns, Jr.: Executive Vice President--Finance

Dan S. Allred: Senior Vice President--Land Development

James D. Canon, III: Senior Vice President--Portfolio Manager

Robert A. Waldman: Senior Vice President, General Counsel and
Secretary

Drew D. Potera: Vice President, Treasurer and Securities Manager
</TABLE>

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

Property Management

Since February 1, 1990, affiliates of BCM have provided property management
services to the Company. Currently, Carmel Realty Services, Ltd. ("Carmel,
Ltd.") provides such property management services for a fee of 5% or less of
the monthly gross rents collected on the properties under management. Carmel,
Ltd. subcontracts with other entities for the provision of the property-level
management services to the Company at various rates. The general partner of
Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (1) First
Equity, which is 50% owned by a subsidiary of BCM, (2) Gene E. Phillips and
(3) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd.
subcontracts the property-level management of the Company's hotels, commercial
properties and a merchandise mart to Carmel Realty, which is company owned by
First Equity. Carmel Realty is entitled to receive property and construction
management fees and leasing commissions in accordance with terms of its
property-level management agreement with Carmel, Ltd.

Real Estate Brokerage

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

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<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

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

The only direct remuneration paid by the Company is to those Directors who
are not officers or employees of BCM or its affiliated companies. Until April
1, 1998, the Company compensated such Independent Directors at the rate of
$5,000 per year, plus $500 per Board of Directors meeting attended and $300
per Audit Committee meeting attended. Effective April 1, 1998, the Company
compensates Independent Directors at the rate of $20,000 per year, plus $300
per Audit Committee meeting attended. In addition, the Chairman of the Audit
Committee receives an annual fee of $500. During 1998, $65,600 was paid to
Independent Directors in total Directors' fees for all meetings as follows:
Roy E. Bode, $21,900; Al Gonzalez, $22,400; and Cliff Harris, $21,300.

The Company's 1997 Stock Option Plan (the "Plan") was approved by
stockholders at the annual meeting of stockholders held on January 19, 1998.
At December 31, 1998, there were 276,750 options outstanding under the Plan.

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<PAGE>

Performance Graph

The following graph compares the cumulative total stockholder return on the
Company's shares of Common Stock with the Dow Jones Equity Market Index ("DJ
Equity Index") and the Dow Jones Real Estate Investment Index ("DJ Real Estate
Index"). The comparison assumes that $100 was invested on December 31, 1993 in
shares of the Company's Common Stock and in each of the indices and further
assumes the reinvestment of all dividends. Past performance is not necessarily
an indicator of future performance.
[PERFORMANCE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
The Company 100.00 107.21 121.64 220.57 247.41 284.66
DJ Equity Index 100.00 100.70 138.69 170.63 228.57 294.05
DJ Real Estate Index 100.00 95.11 117.54 157.80 188.75 147.02
</TABLE>

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners. The following table sets
forth the ownership of the Company's Common Stock both beneficially and of
record, both individually and in the aggregate, for those persons or entities
known by the Company to be the owner of more than 5% of the shares of the
Company's Common Stock as of the close of business on March 5, 1999.

<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership Class (1)
------------------------------------ -------------------- ----------
<S> <C> <C>
Basic Capital Management, Inc. ........ 5,738,472(/2/) 54.3%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231

Davister Corp. ........................ 1,670,299(/3/) 15.8%
10670 N. Central Expressway
Suite 410
Dallas, TX 75231

Continental Mortgage and Equity Trust.. 820,850(/4/) 7.8%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231

Ryan T. Phillips....................... 5,836,804(/2/)(/5/) 55.3%
10670 N. Central Expressway
Suite 600
Dallas, Texas 75231
</TABLE>
--------
(1) Percentages are based upon 10,561,586 shares outstanding as of March 5,
1999.
(2) Includes 5,738,472 shares owned by BCM over which Ryan T. Phillips, a
director of BCM, may be deemed to be a beneficial owner by virtue of
his position as a director of BCM. Ryan T. Phillips disclaims
beneficial ownership of such shares.
(3) Each of the directors of Davister Corp., Ronald F. Akin and Ronald F.
Bruce, may be deemed to be the beneficial owners by virtue of their
positions as directors of Davister Corp. Messrs. Akins and Bruce
disclaim beneficial ownership of such shares.
(4) Each of the Trustees of CMET, Richard W. Douglas, Larry E. Harley, R.
Douglas Leonhard, Murray Shaw, Ted P. Stokely, Martin L. White and
Edward G. Zampa, may be deemed to be the beneficial owners by virtue of
their positions as Trustees of CMET. The Trustees of CMET disclaim such
beneficial ownership.
(5) Includes 98,332 shares owned by the Gene E. Phillips' Children's Trust.
Ryan T. Phillips is a beneficiary of such trust.

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<PAGE>

Security Ownership of Management. The following table sets forth the
ownership of shares of the Company's Common Stock, both beneficially and of
record, both individually in the aggregate, for the Directors and executive
officers of the Company, as of the close of business on March 5, 1999.

<TABLE>
<CAPTION>
Number of Shares Percent of
Name of Beneficial Owner Beneficially Owned Class (1)
------------------------ ----------------------------- ----------
<S> <C> <C>
All Directors and Executive
Officers as a group
(9 persons)...................... 7,062,086(/2/)(/3/)(/4/)(/5/) 66.9%
</TABLE>
--------
(1) Percentage is based upon 10,561,586 shares outstanding as of March 5,
1999.
(2) Includes 820,850 shares owned by CMET over which the executive officers
of the Company may be deemed to be beneficial owners by virtue of their
positions as executive officers of CMET. Also includes 195,732 shares
owned by NOLP over which the executive officers of the Company may be
deemed to be beneficial owners by virtue of their positions as
executive officers of NMC, the general partner of NOLP. The executive
officers of the Company disclaim beneficial ownership of such shares.
(3) Includes 5,738,472 shares owned by BCM over which the executive
officers of the Company may be deemed to be the beneficial owners by
virtue of their positions as executive officers of BCM. The executive
officers of the Company disclaim beneficial ownership of such shares.
(4) Includes 2,432 shares owned directly over which Thomas A. Holland and
his wife jointly hold voting and dispositive power and an additional
332 shares held by Mr. Holland in an individual retirement account.
(5) Includes 500,000 shares owned by ND Investments, Inc., a wholly-owned
subsidiary of the Company. Such shares are pledged as additional
collateral for loans to the Company.

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<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Policies with Respect to Certain Activities

The By-laws of the Company as amended, provide, in accordance with Georgia
law, that no contract or transaction between the Company and one or more of
its Directors or officers, or between the Company and any other corporation,
partnership, association or other organization in which one or more of its
Directors or officers are directors or officers, or have a financial interest,
shall be void or voidable solely for that reason, or solely because the
Director or officer is present at or participates in the meeting of the Board
of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or her votes are counted for such purpose,
if one or more of the following three conditions are met: (1) the material
facts as to his or her interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and Board
or committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested Directors, even though the
disinterested Directors constitute less than a quorum; (2) the material facts
as to his or her interest and as to the contract or transaction are disclosed
or are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved or ratified in good faith by vote of such
stockholders; or (3) the contract or transaction is fair to the Company as of
the time it is authorized, approved or ratified by the Board of Directors, a
committee thereof, or the stockholders.

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

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

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

Certain Business Relationships

BCM, the Company's advisor, is a company of which Messrs. Blaha, Endendyk,
Holland, Johnson and Paulson serve as executive officers. BCM is a company
owned by a trust for the benefit of the children of Gene E. Phillips.

Mr. Paulson, an Executive Vice President of the Company, is the President
of CMET, IORI and TCI, and owes fiduciary duties to such entities as well as
to BCM under applicable law. CMET, IORI and TCI have the same relationship
with BCM as does the Company. In addition, BCM has been engaged to perform
certain administrative functions for NRLP and NOLP. Mr. Blaha, the President
and a Director of the Company, is a director and Executive Vice President of
NMC, the general partner of NRLP and NOLP.

Since February 1, 1990, the Company has contracted with affiliates of BCM
for property management services. Currently, Carmel, Ltd. provides such
property management services. The general partner of Carmel, Ltd. is BCM. The
limited partners of Carmel, Ltd. are (1) First Equity, which is 50% owned by a
subsidiary of BCM, (2) Gene E. Phillips and (3) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management of 15 of the Company's commercial properties (office buildings,
shopping centers and a merchandise mart) and its hotels to Carmel Realty,
which is a company owned by First Equity.

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

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<PAGE>

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

Related Party Transactions

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

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

BCM has entered into put agreements with the holders of the Class A units
of ART Palm, L.L.C. Such Class A units are convertible into Series H
Cumulative Convertible Preferred Stock of the Company. The put price for the
Class A units is $1.00 per unit and the put price for either the Series H
Preferred Stock or the Company's Common Stock is 90% of the average daily
closing price of the Company's Common Stock for the prior 20 trading days.

In August 1996, the Company obtained a $2.0 million loan from a financial
institution secured by a pledge of equity securities of CMET, IORI and TCI
owned by the Company and Common Stock of the Company owned by BCM with a
market value at the time of $4.0 million. The Company received $2.0 million in
net cash after the payment of various closing costs associated with the loan.
The loan was paid in full from the proceeds of a new $4.0 million loan from
another financial institution secured by a pledge of equity securities of
CMET, IORI and TCI owned by the Company and Common Stock of the Company owned
by BCM with a market value at the time of $10.4 million. The Company received
$2.0 million in net cash after the payoff of the $2.0 million loan. In January
1998, lender made a second $2.0 million loan. This loan is also secured by a
pledge Common Stock of the Company owned by BCM with a market value at the
time of $4.7 million. The Company received $2.0 million in net cash. The loans
mature in February 2000.

In September 1996, the Company obtained a $2.0 million loan from a
financial institution secured by a pledge of equity securities of CMET, IORI
and TCI owned by the Company and Common Stock of the Company owned by BCM with
a market value, at the time, of $9.1 million. The Company received $2.0
million in net cash after the payment of various closing costs. In October
1998, the lender advanced an additional $1.0 million, increasing the loan
balance to $3.0 million. The loan matures in January 2000.

In October 1997, the Company entered into leases with BCM and Carmel Realty
for space at the One Hickory Center office building, construction of which was
completed in December 1998. A certificate of occupancy is expected to be
received in second quarter of 1999. The BCM lease, effective upon the
completion of the building, is for 50,574 sq. ft. (approximately 50% of the
building), has a term of ten years and provides for annual base rent of
$974,000 per year for the first year or $19.25 per sq. ft. increasing to $1.3
million in the tenth year or $24.90 per sq. ft. The Carmel Realty lease, also
effective upon completion of the building, is for 25,278 sq. ft.
(approximately 25% of the building) has a term of 15 years, and provides for
annual base rent of $487,050 per year for the first year or $19.25 per sq. ft.
increasing to $964,000 in the fifteenth year or $38.15 per sq. ft. Rent under
the lease has not commenced.

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

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<PAGE>

In November 1998, the Company obtained a $95.0 million line of credit from
Garden Capital, L.P. ("GCLP"), a partnership controlled by NOLP. The Company
received fundings of $18.9 million in November 1998, $31.1 million in December
1998, and an additional $26.7 million in the first quarter of 1999. The line
of credit is secured by second liens on the Company's Waters Edge III,
Edgewater Gardens, Chateau Bayou and Sunset Apartments, Rosedale Towers Office
Building, Katy Road land and the stock of its wholly-owned subsidiaries, NMC,
the general partner of NRLP and NOLP, and ART Holdings, Inc., which owns
3,349,535 NRLP units of limited partner interest. The loan bears interest at
12% per annum, requires monthly interest only payments and matures in November
2003. The Company accounted for its investment in NRLP and NOLP under the
equity method until December 1998 when NMC was elected general partner of NRLP
and NOLP. As of December 31, 1998, the accounts of NRLP and NOLP are
consolidated with those of the Company. The line of credit is eliminated in
consolidation.

In 1998, the Company paid BCM and its affiliates $3.8 million in advisory
and mortgage servicing fees; $7.5 million in real estate brokerage
commissions; $804,000 in loan arrangement fees and $1.6 million in property
and construction management fees and leasing commissions, net of property
management fees paid to subcontractors, other than Carmel Realty. In addition,
as provided in the Advisory Agreement, in 1998 BCM received cost
reimbursements from the Company of $1.8 million.

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<PAGE>

PART IV

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

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

1. Consolidated Financial Statements

Report of Independent Certified Public Accountants

Consolidated Balance Sheets--December 31, 1998 and 1997

Consolidated Statements of Operations--Years Ended December 31, 1998,
1997 and 1996

Consolidated Statements of Stockholders' Equity--Years Ended December
31, 1998, 1997 and 1996

Consolidated Statements of Cash Flows--Years Ended December 31, 1998,
1997 and 1996

Notes to Consolidated Financial Statements

2. Financial Statement Schedules

Schedule III--Real Estate and Accumulated Depreciation

Schedule IV--Mortgage Loans on Real Estate

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

3. Incorporated Financial Statements

Consolidated Financial Statements of National Realty, L.P.
(Incorporated by reference to Item 8 of National Realty, L.P.'s Annual
Report on Form 10-K for the year ended December 31, 1998).

Consolidated Financial Statements of Continental Mortgage and Equity
Trust (Incorporated by reference to Item 8 of Continental Mortgage and
Equity Trust's Annual Report on Form 10-K for the year ended December
31, 1998).

Consolidated Financial Statements of Income Opportunity Realty
Investors, Inc. (Incorporated by reference to Item 8 of Income
Opportunity Realty Investors, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).

Consolidated Financial Statements of Transcontinental Realty
Investors, Inc. (Incorporated by reference to Item 8 of Transcontinental
Realty Investors, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998).

4. Exhibits

The following documents are filed as Exhibits to this Report:

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.0 Articles of Incorporation dated November 24, 1987 and By-laws dated
December 30, 1987 of American Realty Trust, Inc. (incorporated by
reference to Exhibits No. 3.1 and No. 3.1(a), respectively, to the
Registrant's Registration Statement No. 33-19636 on Form S-4).

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

</TABLE>

102
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.2 Articles of Amendment dated December 10, 1990 to Articles of
Incorporation of American Realty Trust, Inc. (incorporated by
reference to Exhibit No. 3.4 to the Registrant's Current Report on
Form 8-K dated December 5, 1990).

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

3.4 Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other Special
Rights, and Qualifications, Limitations on Restrictions thereof of
Special Stock of Series C 10% Cumulative Convertible Preferred
Stock, dated as of June 4, 1996 (incorporated by Reference to
Exhibit 3.7 to the Registrant's Registration Statement No. 333-
21591, dated February 11, 1997).

3.5 Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions thereof of
Special Stock of Series D 9.5% Cumulative Preferred Stock, dated as
of August 2, 1996 (incorporated by Reference to Exhibit 3.8 to the
Registrant's Registration Statement No. 333-21591, dated February
11, 1997).

3.6 Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions thereof of
Special Stock of Series E 10% Cumulative Convertible Preferred
Stock, dated as of December 3, 1996 (incorporated by Reference to
Exhibit 3.9 to the Registrant's Registration Statement No. 333-
21591, dated February 11, 1997).

3.7 Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions thereof of
Special Stock of Series F 10% Cumulative Convertible Preferred
Stock, dated as of August 13, 1997, (incorporated by reference to
Exhibit No. 3.0 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997).

3.8 Restated Articles of Amendment of the Articles of Incorporation of
American Realty Trust, Inc. setting forth the Certificate of
Designations, Preferences and Relative Participating or Optional or
Other Special Rights, and Qualifications, Limitations or
Restrictions thereof of Special Stock of Series G 10% Cumulative
Convertible Preferred Stock, dated as of September 18, 1997
(incorporated by reference to Exhibit No. 3.12 to the Registrant's
Registration Statement No. 333-43777, dated January 6, 1998).

3.9 Article of Amendment to the Articles of Incorporation of American
Realty Trust, Inc. increasing the number of authorized shares of
Common Stock to 100,000,000 shares, dated as of March 26, 1998
(incorporated by reference to Exhibit 3.11 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997).

3.10 Articles of Amendment to the Articles of Incorporation of American
Realty Trust, Inc. increasing the number of authorized shares of
Series G 10% Cumulative Convertible Preferred Stock to 12,000
shares, dated as of May 27, 1998 (incorporated by reference to the
Registrant's Current Report on Form 8-K, dated May 1, 1998 as filed
June 25, 1998).

</TABLE>

103
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.11 Article of Amendment of the Articles of incorporation of American
Realty Trust, Inc. setting forth the Certificate of Designations,
Preferences and Relative Participating or Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions thereof of
Special Stock of Series H 10% Cumulative Convertible Preferred
stock, dated as of June 24, 1998 (incorporated by Reference to
Exhibit 3.2 to the Registrant's Current Report on Form 8-K/A, dated
May 1, 1998 as filed July 16, 1998).

3.12 Amended and Restated Articles of Amendment of the Articles of
Incorporation of American Realty Trust, Inc. setting forth the
Certificate of Designations, Preferences and Relative Participating
or Optional or Other Special Rights, and Qualifications, Limitations
or Restrictions thereof of Special Stock of Series F 10% Cumulative
Convertible Preferred Stock, increasing the number of authorized
shares, dated as of October 23, 1998 (incorporated by reference to
Exhibit No. 3.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).

3.13 Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. deleting Certificate of Designation of special
Stock of Series C 10% Cumulative Convertible Preferred Stock dated
January 11, 1999, filed herewith.

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

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

21.0 Subsidiaries of the Registrant, filed herewith.

27.0 Financial Data Schedule, filed herewith.
</TABLE>

(b) Reports on Form 8-K:

None

104
<PAGE>

SIGNATURES

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

American Realty Trust, Inc.

/s/ Karl L. Blaha
By: _________________________________
Karl L. Blaha
Director and President

Dated: April 19, 1999

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

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Karl L. Blaha Director and President April 19, 1999
______________________________________
Karl L. Blaha

/s/ Roy E. Bode Director April 19, 1999
______________________________________
Roy E. Bode

/s/ Collene C. Currie Director April 19, 1999
______________________________________
Collene C. Currie

/s/ Al Gonzalez Director April 19, 1999
______________________________________
Al Gonzalez

/s/ Cliff Harris Director April 19, 1999
______________________________________
Cliff Harris

/s/ Thomas A. Holland Executive Vice President April 19, 1999
______________________________________ and Chief Financial
Thomas A. Holland Officer (Principal
Financial and Accounting
Officer)
</TABLE>

105
<PAGE>

ANNUAL REPORT ON FORM 10-K

EXHIBIT INDEX

For the Year Ended December 31, 1998

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.12 Articles of Amendment of the Articles of Incorporation of American
Realty Trust, Inc. deleting the Series C 10% Cumulative Convertible
Preferred Stock.

21.0 Subsidiaries of Registrant.

27.0 Financial Data Schedule.
</TABLE>