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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2006



| ̈ | Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 000-50727



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ARC CORPORATE REALTY TRUST, INC.

(Exact name of registrant as specified in its charter)



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|                                         |  |                                        
|---------------------------------------- |  | ---------------------------------------
|Maryland                                 |  | 22-3247622                             
|(State of Organization)                  |  | (I.R.S. Employer Identification Number)
|                                         | 
|1401 Broad Street Clifton, New Jersey    |  | 07013                                  
|(Address of principal executive offices) |  | (Zip Code)                             

Registrants telephone number, including area code: (973) 249-1000



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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 the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the Registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.):    Yes ̈No  x

As of November 14, 2006, there were 3,181,540 Class A Common Shares of Beneficial Interest outstanding, par value
$0.001 per share.



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

Form 10-Q

Index



|                                                                                                                            |  |                                                                                       |  |   
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|Item 1.                                                                                                                     |  | Financial Statements                                                                  |  |   
|Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005                                      |  | 2                                                                                    
|                                                                                                                            | 
|Consolidated Statements of Income (Loss) for the three months and nine months ended September 30, 2006 and 2005 (unaudited) |  | 3                                                                                    
|                                                                                                                            | 
|Consolidated Statements of Shareholders Equity for the nine months ended September 30, 2006 (unaudited)                    |  | 4                                                                                    
|                                                                                                                            | 
|Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 (unaudited)                     |  | 5                                                                                    
|                                                                                                                            | 
|Notes to Consolidated Financial Statements (unaudited)                                                                      |  | 6                                                                                    
|                                                                                                                            |  |                                                                                      
|Item 2.                                                                                                                     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17
|                                                                                                                            |  |                                                                                      
|Item 3.                                                                                                                     |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 23
|                                                                                                                            |  |                                                                                      
|Item 4.                                                                                                                     |  | Controls and Procedures                                                               |  | 23
|                                                                                                                            | 
|PART II: OTHER INFORMATION                                                                                                  |  |                                                                                      
|                                                                                                                            |  |                                                                                      
|Item 1.                                                                                                                     |  | Legal Proceedings                                                                     |  | 24
|                                                                                                                            |  |                                                                                      
|Item 1A.                                                                                                                    |  | Risk Factors                                                                          |  | 24
|                                                                                                                            |  |                                                                                      
|Item 2.                                                                                                                     |  | Changes in Securities, Use of Proceeds and Issuers Purchases of Equity Securities     |  | 24
|                                                                                                                            |  |                                                                                      
|Item 3.                                                                                                                     |  | Defaults Upon Senior Securities                                                       |  | 24
|                                                                                                                            |  |                                                                                      
|Item 4.                                                                                                                     |  | Submission of Matters to a Vote of Security Holders                                   |  | 24
|                                                                                                                            |  |                                                                                      
|Item 5.                                                                                                                     |  | Other Information                                                                     |  | 24
|                                                                                                                            |  |                                                                                      
|Item 6.                                                                                                                     |  | Exhibits and Reports                                                                  |  | 24
|                                                                                                                            | 
|SIGNATURES                                                                                                                  |  | 25                                                                                   





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##### Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ARC CORPORATE REALTY TRUST, INC.

Consolidated Balance Sheets

September 30, 2006 (Unaudited) and December 31, 2005



|                                                                                                                            |  |      |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                            |  | 2006 |            |   | 2005 |  
|Assets                                                                                                                      |  |      |            |   |      |   |            |  
|                                                                                                                            |  |     
|Property:                                                                                                                   |  |      |            |   |      |   |            |  
|Land                                                                                                                        |  | $    | 7,730,966  |   |      | $ | 12,412,227 |  
|Building and improvements                                                                                                   |  |      | 25,306,313 |   |      |   | 36,653,540 |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|                                                                                                                            |  |      | 33,037,279 |   |      |   | 49,065,767 |  
|Less: accumulated depreciation                                                                                              |  |      | 5,498,749  |   |      |   | 7,151,201  |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|                                                                                                                            |  |      | 27,538,530 |   |      |   | 41,914,566 |  
|                                                                                                                            |  |     
|Investment in unconsolidated subsidiaries and undivided interests                                                           |  |      | 6,850,814  |   |      |   | 7,693,231  |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total property and investments                                                                                              |  |      | 34,389,344 |   |      |   | 49,607,797 |  
|                                                                                                                            |  |     
|Assets held for sale                                                                                                        |  |      | 7,426,924  |   |      |   |           |  
|                                                                                                                            |  |     
|Cash and cash equivalents                                                                                                   |  |      | 5,795,321  |   |      |   | 711,853    |  
|                                                                                                                            |  |     
|Restricted cash                                                                                                             |  |      | 429,853    |   |      |   | 517,707    |  
|                                                                                                                            |  |     
|Deferred rent receivable                                                                                                    |  |      | 465,067    |   |      |   | 1,198,693  |  
|                                                                                                                            |  |     
|Rent receivable                                                                                                             |  |      | 223,790    |   |      |   | 195,088    |  
|                                                                                                                            |  |     
|Notes receivable-tenants                                                                                                    |  |      |           |   |      |   | 322,923    |  
|                                                                                                                            |  |     
|Prepaid expenses and other assets, net                                                                                      |  |      | 260,216    |   |      |   | 270,002    |  
|                                                                                                                            |  |     
|Deferred financing and other fees, net of accumulated amortization of $599,310 and $729,927 for 2006 and 2005,
respectively |  |      | 152,970    |   |      |   | 271,389    |  
|                                                                                                                            |  |     
|Deferred leasing costs, net of accumulated amortization of $61,092 and $130,518 for 2006 and 2005, respectively             |  |      | 32,895     |   |      |   | 81,949     |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total assets                                                                                                                |  | $    | 49,176,380 |   |      | $ | 53,177,401 |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Liabilities and Shareholders Equity                                                                                        |  |      |            |   |      |   |            |  
|                                                                                                                            |  |     
|Liabilities:                                                                                                                |  |      |            |   |      |   |            |  
|Mortgage notes payable                                                                                                      |  | $    | 13,629,542 |   |      | $ | 26,395,027 |  
|Liabilities related to assets held for sale                                                                                 |  |      | 4,065,572  |   |      |   |           |  
|Dividends payable-Class B                                                                                                   |  |      | 162,776    |   |      |   |           |  
|Due to related parties                                                                                                      |  |      | 135,184    |   |      |   | 45,061     |  
|Due to joint venture partners                                                                                               |  |      | 384,046    |   |      |   |           |  
|Unearned rental revenue                                                                                                     |  |      | 70,106     |   |      |   | 31,250     |  
|Accounts payable and accrued expenses                                                                                       |  |      | 440,709    |   |      |   | 580,567    |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total liabilities                                                                                                           |  |      | 18,887,935 |   |      |   | 27,051,905 |  
|                                                                                                                            |  |     
|Minority interest                                                                                                           |  |      | 37,559     |   |      |   | 32,072     |  
|                                                                                                                            |  |     
|Shareholders Equity:                                                                                                       |  |      |            |   |      |   |            |  
|Common shares: $.001 par value per share; authorized, 40,000,000 shares                                                     |  |      |            |   |      |   |            |  
|Class A shares-5,000,000 authorized; 3,181,540 issued and outstanding                                                       |  |      | 3,182      |   |      |   | 3,182      |  
|Class B shares-5,000,000 authorized; 166,397 issued and outstanding                                                         |  |      | 166        |   |      |   | 166        |  
|Additional paid-in capital                                                                                                  |  |      | 32,106,429 |   |      |   | 32,106,429 |  
|Deferred compensation plans                                                                                                 |  |      | 1,822,686  |   |      |   | 747,930    |  
|Accumulated distributions in excess of net income                                                                           |  |      | (3,681,577 | ) |      |   | (6,764,283 | )
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total shareholders equity                                                                                                  |  |      | 30,250,886 |   |      |   | 26,093,424 |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total liabilities and shareholders equity                                                                                  |  | $    | 49,176,380 |   |      | $ | 53,177,401 |  
|                                                                                                                            |  |      |            |   |      |   |            |  

The accompanying notes to consolidated financial statements are an integral part
of these statements.



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

Consolidated Statements of Income (Loss)

Unaudited



|                                                                               |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|------------------------------------------------------------------------------ |  | ------------------------------- | --------- | - | ------------------------------ | - | --------- | ---- |  | ---- | --------- |  | - | ---------
|                                                                               |  | Three Months Ended September 30 |           |   | Nine Months Ended September 30
|                                                                               |  | 2006                            |           |   | 2005                           |   |           | 2006 |  | 2005
|Revenues:                                                                      |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Rental revenues                                                                |  | $                               | 902,105   |   |                                | $ | 899,116   |      |  | $    | 2,703,560 |  | $ | 2,854,331
|Real estate tax reimbursements                                                 |  |                                 | 113,603   |   |                                |   | 133,130   |      |  |      | 336,565   |  |   | 405,348  
|Interest income                                                                |  |                                 | 58,985    |   |                                |   | 603       |      |  |      | 107,845   |  |   | 22,154   
|                                                                               |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Total revenues                                                                 |  |                                 | 1,074,693 |   |                                |   | 1,032,849 |      |  |      | 3,147,970 |  |   | 3,281,833
|                                                                               |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Expenses:                                                                      |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Interest expense                                                               |  |                                 | 290,741   |   |                                |   | 314,910   |      |  |      | 938,115   |  |   | 953,459  
|Depreciation and amortization                                                  |  |                                 | 179,989   |   |                                |   | 190,633   |      |  |      | 547,972   |  |   | 567,440  
|Asset management fees-affiliate                                                |  |                                 | 152,793   |   |                                |   | 169,679   |      |  |      | 482,549   |  |   | 518,917  
|Real estate taxes                                                              |  |                                 | 110,679   |   |                                |   | 132,519   |      |  |      | 331,289   |  |   | 405,348  
|Property operating expenses                                                    |  |                                 | 30,910    |   |                                |   | 35,689    |      |  |      | 103,612   |  |   | 116,671  
|General and administrative expenses                                            |  |                                 | 18,325    |   |                                |   | 19,975    |      |  |      | 82,717    |  |   | 88,691   
|Stock based compensation                                                       |  |                                 | 188,553   |   |                                |   | 112,189   |      |  |      | 1,074,756 |  |   | 336,568  
|Professional expenses                                                          |  |                                 | 196,485   |   |                                |   | 172,570   |      |  |      | 486,219   |  |   | 422,000  
|Loss (gain) on interest rate cap, net                                          |  |                                 | 11,470    |   |                                |   | (3,016    | )    |  |      | 2,900     |  |   | 3,135    
|Other expenses                                                                 |  |                                 | 43,177    |   |                                |   |          |      |  |      | 43,177    |  |   |         
|State and local taxes                                                          |  |                                 | 6,789     |   |                                |   | 6,573     |      |  |      | 11,618    |  |   | 17,096   
|                                                                               |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Total expenses                                                                 |  |                                 | 1,229,911 |   |                                |   | 1,151,721 |      |  |      | 4,104,924 |  |   | 3,429,325
|                                                                               |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Minority interests in earnings from subsidiaries                               |  |                                 | 17,043    |   |                                |   | 16,324    |      |  |      | 48,437    |  |   | 45,630   
|Equity in (loss) income of unconsolidated subsidiaries and undivided interests |  |                                 | (182,721  | ) |                                |   | 305,876   |      |  |      | 339,316   |  |   | 854,383  
|Gain on sale of investment in unconsolidated subsidiaries                      |  |                                 |          |   |                                |   |          |      |  |      | 1,546,204 |  |   | 400,000  
|                                                                               |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|(Loss) income from continuing operations                                       |  |                                 | (354,982  | ) |                                |   | 170,680   |      |  |      | 880,129   |  |   | 1,061,261
|                                                                               |  |                                 |           |  
|(Loss) income from discontinued operations                                     |  |                                 | (36,873   | ) |                                |   | 78,111    |      |  |      | 3,128,930 |  |   | 298,258  
|                                                                               |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Net (loss) income allocable to Class A and Class B common shareholders         |  | $                               | (391,855  | ) |                                | $ | 248,791   |      |  | $    | 4,009,059 |  | $ | 1,359,519
|                                                                               |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Basic:                                                                         |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Net (loss) income per share from continuing operations                         |  | $                               | (0.11     | ) |                                | $ | 0.05      |      |  | $    | 0.26      |  | $ | 0.32     
|Net (loss) income per share from discontinued operations                       |  |                                 | (0.01     | ) |                                |   | 0.02      |      |  |      | 0.94      |  |   | 0.09     
|                                                                               |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Net (loss) income per share                                                    |  |                                 | (0.12     | ) |                                |   | 0.07      |      |  |      | 1.20      |  |   | 0.41     
|                                                                               |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Diluted:                                                                       |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Net (loss) income per share from continuing operations                         |  |                                 | (0.11     | ) |                                |   | 0.04      |      |  |      | 0.22      |  |   | 0.26     
|Net (loss) income per share from discontinued operations                       |  |                                 | (0.01     | ) |                                |   | 0.02      |      |  |      | 0.77      |  |   | 0.08     
|                                                                               |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Net (loss) income per share                                                    |  |                                 | (0.12     | ) |                                |   | 0.06      |      |  |      | 0.99      |  |   | 0.34     
|                                                                               |  |                                 |           |   |                                |   |           |      |  |      |           |  |   |          
|Weighted average shares outstanding-basic                                      |  |                                 | 3,348,000 |   |                                |   | 3,348,000 |      |  |      | 3,348,000 |  |   | 3,348,000
|Weighted average shares outstanding-diluted                                    |  |                                 | 3,348,000 |   |                                |   | 4,042,000 |      |  |      | 4,042,000 |  |   | 4,042,000

The accompanying notes to consolidated financial statements are an integral part of these statements.



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

Consolidated Statements of Shareholders Equity

For the Nine Months Ended September 30, 2006 (unaudited)



|                                       |  |                       |       |                       |   |                            |  |                             |            |                                                   |   |           |                            |   |            |   |  |   |            |  
|-------------------------------------- |  | --------------------- | ----- | --------------------- | - | -------------------------- |  | --------------------------- | ---------- | ------------------------------------------------- | - | --------- | -------------------------- | - | ---------- | - |  | - | ---------- | -
|                                       |  | Class A Common Shares |       | Class B Common Shares |   | Additional Paid-in Capital |  | Deferred Compensation Plans |            | Accumulated Distributions in Excess of Net Income |   |           | Total Shareholders Equity |  
|Balance, December 31, 2005             |  | $                     | 3,182 |                       | $ | 166                        |  | $                           | 32,106,429 |                                                   | $ | 747,930   |                            | $ | (6,764,283 | ) |  | $ | 26,093,424 |  
|Increase in deferred compensation, net |  |                       |      |                       |   |                           |  |                             |           |                                                   |   | 1,074,756 |                            |   |           |   |  |   | 1,074,756  |  
|Net income                             |  |                       |      |                       |   |                           |  |                             |           |                                                   |   |          |                            |   | 4,009,059  |   |  |   | 4,009,059  |  
|Dividends                              |  |                       |      |                       |   |                           |  |                             |           |                                                   |   |          |                            |   | (926,353   | ) |  |   | (926,353   | )
|                                       |  |                       |       |                       |   |                            |  |                             |            |                                                   |   |           |                            |   |            |   |  |   |            |  
|Balance, September 30, 2006            |  | $                     | 3,182 |                       | $ | 166                        |  | $                           | 32,106,429 |                                                   | $ | 1,822,686 |                            | $ | (3,681,577 | ) |  | $ | 30,250,886 |  
|                                       |  |                       |       |                       |   |                            |  |                             |            |                                                   |   |           |                            |   |            |   |  |   |            |  

The accompanying notes to consolidated financial statements are an integral part of these statements.



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2006 and 2005

Unaudited



|                                                                                  |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                  |  | 2006 |             |   | 2005 |  
|Cash Flows from Operating Activities:                                             |  |      |             |   |      |   |             |  
|Net income                                                                        |  |      | 4,009,059   |   |      |   | 1,359,519   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |             |   |      |   |             |  
|Depreciation and amortization                                                     |  |      | 664,913     |   |      |   | 832,365     |  
|Write-off of financing costs                                                      |  |      | 20,952      |   |      |   | 141,376     |  
|Amortization of stock based compensation                                          |  |      | 1,074,756   |   |      |   | 336,568     |  
|Amortization of acquired unfavorable lease                                        |  |      |            |   |      |   | (139,772    | )
|Minority interest in earnings of subsidiaries                                     |  |      | 3,610,038   |   |      |   | 168,167     |  
|Impairment charge                                                                 |  |      |            |   |      |   | 287,259     |  
|Gain on sale of property                                                          |  |      | (6,137,479  | ) |      |   |            |  
|Gain on sale of investment in unconsolidated subsidiary                           |  |      | (1,546,204  | ) |      |   | (400,000    | )
|Write off of TMD minority interest                                                |  |      |            |   |      |   | 22,134      |  
|Loss on interest rate cap, net                                                    |  |      | 2,900       |   |      |   | 15,396      |  
|Equity in income of unconsolidated subsidiaries and undivided interests           |  |      | (339,316    | ) |      |   | (854,383    | )
|Distributions from unconsolidated subsidiaries and undivided interests            |  |      | 716,825     |   |      |   | 1,075,850   |  
|(Increase) decrease in assets:                                                    |  |      |             |   |      |   |             |  
|Restricted cash                                                                   |  |      | 87,854      |   |      |   | (83,638     | )
|Rent receivable                                                                   |  |      | (28,702     | ) |      |   | (77,188     | )
|Deferred rent receivable                                                          |  |      | 425,126     |   |      |   | (97,100     | )
|Prepaid and other assets                                                          |  |      | (19,010     | ) |      |   | (14,017     | )
|Increase (decrease) in liabilities:                                               |  |      |             |   |      |   |             |  
|Due to related parties                                                            |  |      | 90,123      |   |      |   |            |  
|Accounts payable and accrued expenses                                             |  |      | (70,031     | ) |      |   | (130,603    | )
|Unearned rent                                                                     |  |      | 44,444      |   |      |   | 46,142      |  
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash provided by operating activities                                         |  |      | 2,606,248   |   |      |   | 2,488,075   |  
|                                                                                  |  |      |             |   |      |   |             |  
|Cash Flows from Investing Activities:                                             |  |      |             |   |      |   |             |  
|Proceeds from sale of investment in unconsolidated subsidiary                     |  |      | 2,351,980   |   |      |   | 400,000     |  
|Net proceeds from sale of property and notes receivable-tenants                   |  |      | 13,237,255  |   |      |   | 7,362,720   |  
|Decrease in note receivable                                                       |  |      |            |   |      |   | 800,000     |  
|Decrease in notes receivable-tenants                                              |  |      | 20,940      |   |      |   | 34,553      |  
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash provided by investing activities                                         |  |      | 15,610,175  |   |      |   | 8,597,273   |  
|                                                                                  |  |      |             |   |      |   |             |  
|Cash Flows from Financing Activities:                                             |  |      |             |   |      |   |             |  
|Mortgage notes payable                                                            |  |      | (515,884    | ) |      |   | (580,982    | )
|Paydown of principal on mortgage notes payable                                    |  |      | (9,816,267  | ) |      |   | (5,217,712  | )
|Borrowings under mortgage note payable                                            |  |      | 1,600,000   |   |      |   |            |  
|Lines of credit, net                                                              |  |      |            |   |      |   | (2,247,613  | )
|Deferred financing and other costs                                                |  |      | (32,677     | ) |      |   |            |  
|Distributions to minority interest owners                                         |  |      | (3,604,550  | ) |      |   | (187,619    | )
|Dividends paid                                                                    |  |      | (763,577    | ) |      |   | (2,453,500  | )
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash used in financing activities                                             |  |      | (13,132,955 | ) |      |   | (10,687,426 | )
|                                                                                  |  |      |             |   |      |   |             |  
|Net increase in Cash and Cash Equivalents                                         |  |      | 5,083,468   |   |      |   | 397,922     |  
|Cash and Cash Equivalents, Beginning of Period                                    |  |      | 711,853     |   |      |   | 436,264     |  
|                                                                                  |  |      |             |   |      |   |             |  
|Cash and Cash Equivalents, End of Period                                          |  | $    | 5,795,321   |   |      | $ | 834,186     |  
|                                                                                  |  |      |             |   |      |   |             |  
|Supplement Disclosure of Cash Flow Information:                                   |  |      |             |   |      |   |             |  
|Cash payments for interest                                                        |  | $    | 1,399,559   |   |      | $ | 1,712,603   |  
|                                                                                  |  |      |             |   |      |   |             |  
|Non Cash Financing Activities:                                                    |  |      |             |   |      |   |             |  
|Due to joint venture partners                                                     |  | $    | 340,869     |   |      | $ |            |  
|Dividends payable-Class B                                                         |  | $    | 162,776     |   |      | $ |            |  
|                                                                                  |  |      |             |   |      |   |             |  

The accompanying notes to consolidated financial statements are an integral part
of these statements.



5



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)



|1. | GENERAL
|-- | -------

ARC Corporate Realty Trust, Inc. and
subsidiaries (ACRT) is a corporation which was formed under the laws of the State of Maryland on June 25, 1993. ACRT operates in a manner intended to enable it to qualify as a real estate investment trust (REIT) under
Sections 856-860 of the Internal Revenue Code (the Code).ACRT is managed by its advisor, ARC Capital Advisors L.P. (Advisor), which performs services for ACRT pursuant to the terms of an advisory agreement (the
Advisory Agreement) (Note 12). ACRT was formed to purchase geographically diverse credit lease properties which are general purpose retail, office and industrial properties each 100% leased to one or more creditworthy tenants under a
long term lease that generally requires tenants to pay most or all of the operating costs of the property including real estate taxes and insurance.

On February 8, 2006, the board of directors approved the adoption of a Plan of Liquidation and Dissolution (the Plan). The Plan is subject to the approval of ACRTs common stockholders, by two-thirds vote. ACRT intends
to sell its real estate properties on an orderly basis, to pay or provide for its liabilities and to distribute its remaining cash to its shareholders.

On October 12, 2006, ACRTs shareholders approved the Plan. Effective October 12, 2006, ACRT will change its basis of accounting from the going concern basis to the liquidation basis of accounting,
which will require ACRT to record all of its assets and liabilities at fair market value at October 12, 2006 and at each subsequent reporting period.



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



| | a. | Basis of Presentation - The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP) as a going concern and include the accounts of ACRT, its wholly-owned subsidiaries and those majority-owned subsidiaries in which ACRT can exercise control. Investments in non-controlled entities, which include
Triangle Plaza II, LLC, Fort Washington Fitness, L.P., Levittown ARC, LP, Willow Grove ACRT, LLC and ARC International Fund II, LP are accounted for under the equity method of accounting. Additionally, ACRTs undivided interests in the Rochelle
Park property and the Paramus property are accounted for under the equity method, as ACRT maintains joint control over the properties. Under the equity method, ACRTs investment increases as a result of contributions and its allocable share of
net income and decreases as a result of distributions and its allocable share of net loss. All significant intercompany balances and transactions have been eliminated in consolidation and in the use of the equity method of accounting.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Interim Financial Statements (unaudited)  The unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary
to present fairly the financial condition and results of operations for the interim periods. For a more complete understanding of ACRTs operations and financial position, reference is made to the financial statements (including notes thereto)
previously filed with the Securities and Exchange Commission with ACRTs Form 10-K and amendments thereto for the year ended December 31, 2005.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | Use of Estimates - The preparation of consolidated financial statements in conformity with GAAP requires 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 expenses during the reporting period. Actual
results could differ from those estimates.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Properties - Properties are carried at cost which includes the purchase price, acquisition fees, and any other costs incurred in acquiring the properties.
Buildings are depreciated on a straight-line basis over their estimated useful lives, which are 40 years. Maintenance and repairs are charged to expense as incurred. Replacements and betterments, which significantly extend the useful lives of a
property, are capitalized. In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, ACRT is amortizing certain intangible costs associated with property acquisitions
over the lives of the leases underlying the properties (see Note 2e).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | Purchase Accounting for the Acquisition of Real EstateIn accordance with SFAS No. 141, commencing with properties acquired after
June 30, 2002, the fair value of real estate acquired is allocated to the acquired tangible assets, consisting of land and building and identified intangible assets and liabilities, consisting of the value of above-market and below-market
leases, other value of in-place leases and value of tenant relationships, based in each case on of the tangible assets of an acquired property (which includes land and building) is determined by valuing the property as if it were vacant, and the
as-if vacant value is then allocated to land and building based on managements determination of relative fair values of these assets. Factors considered by management in performing these analyses include an estimate of carrying
costs during the expected lease up periods considering current market conditions and costs to execute similar leases. In estimating carrying
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



6



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ARC CORPORATE REALTY TRUST, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)



costs, management includes real estate taxes, insurance and other operating expenses and estimates of
lost rental revenues during expected lease up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions.

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease
values are recorded based on the difference between the current in-place lease rent and managements estimate of current market rent.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property over (ii) the estimated fair value of the
property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on managements evaluation of the specific characteristics of each tenants lease. The
value of in-place leases and customer relationships are amortized to expense over the remaining non-cancelable periods of the respective leases.



| | f. | Impairment-ACRT continually assesses the recoverability of its properties by determining whether the costs can be recovered through projected undiscounted
cash flows. The amount of impairment, if any, is measured by comparing the carrying amounts to the fair values of such properties. The evaluation includes reviewing anticipated cash flows of the properties, based on current leases in place, coupled
with an estimate of proceeds to be realized upon sale. However, estimating future sales proceeds is highly subjective and such estimates could differ materially from actual results.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SFAS No. 144 Accounting for the Impairment or Disposal of Long Lived Assets updates and clarifies the accounting and reporting for
the impairment of assets held in use and to be disposed of. The Statement, among other things, requires ACRT to classify the operations of properties to be disposed of as discontinued operations. ACRT accounts for properties held for sale in
accordance with SFAS No. 144. SFAS No. 144 requires that the assets and liabilities of properties that meet various criteria in SFAS No. 144 be presented separately in the balance sheet with assets and liabilities being separately
stated. The operating results of these properties are reflected as discontinued operations in the statements of income.

In 2005, the
property located in Philadelphia, Pennsylvania, leased to Barnes and Noble, was designated as to be disposed and an impairment charge of $287,259 was recorded, which included a disposition fee of $116,016. This property was sold on August 10,
2005 for aggregate net proceeds of $7,362,720, which resulted in no gain or loss for financial reporting purposes.

In 2006, the properties
located in Charlotte, North Carolina leased to CaroMont Medical Group Inc. and the property located in Norcross, Georgia leased to AT&T Wireless were designated to be disposed. Based on the current sales prices, ACRT anticipates that the
Charlotte, North Carolina properties will be sold to an affiliate of the Advisor for amounts in excess of their carrying amounts and, therefore, will result in a gain for financial reporting purposes. Based on the current sales price, ACRT
anticipates that the Norcross, Georgia property will be sold to a third party in excess of their carrying amounts and, therefore, will result in a gain for financial reporting purposes. At September 30, 2006, aggregate assets held for sale
(primarily property) was $7,426,924 and related liabilities (primarily mortgage notes payable) was $4,065,572.

The following presents the
operating results for the properties to be disposed of in 2006 and 2005 for the three and nine months ended September 30, 2006 and 2005:



|                         |  |                              |          |   |                             |   |          |      |  |   |            |   |  |   |            |  
|------------------------ |  | ---------------------------- | -------- | - | --------------------------- | - | -------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                         |  | Three Months Ended Sept. 30, |          |   | Nine Months Ended Sept. 30, |  
|                         |  | 2006                         |          |   | 2005                        |   |          | 2006 |  |   | 2005       |  
|Revenues                 |  | $                            | 224,233  |   |                             | $ | 727,102  |      |  | $ | 1,248,306  |   |  | $ | 2,387,924  |  
|Expenses                 |  |                              | (103,440 | ) |                             |   | (612,414 | )    |  |   | (695,254   | ) |  |   | (1,967,129 | )
|Gain on sale of property |  |                              |         |   |                             |   |         |      |  |   | 6,137,479  |   |  |   |           |  
|Minority interest        |  |                              | (157,666 | ) |                             |   | (36,577  | )    |  |   | (3,561,601 | ) |  |   | (122,537   | )
|                         |  |                              |          |   |                             |   |          |      |  |   |            |   |  |   |            |  
|Net (loss) income        |  | $                            | (36,873  | ) |                             | $ | 78,111   |      |  | $ | 3,128,930  |   |  | $ | 298,258    |  
|                         |  |                              |          |   |                             |   |          |      |  |   |            |   |  |   |            |  



| | g. | Environmental Matters-Based upon managements ongoing review of its properties, management is not aware of any environmental conditions with respect to
any of ACRTs properties, which would be reasonably likely to have a material adverse effect on ACRT. There can be no assurance, however, that the discovery of environmental conditions which were previously unknown, changes in law, the conduct
of tenants or activities relating to properties in the vicinity of ACRTs properties, will not expose ACRT to material liability in the future. Changes in law increasing the potential liability for environmental conditions existing on
properties or increasing the restrictions on discharges or other conditions may result in
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ARC CORPORATE REALTY TRUST, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)



significant unanticipated expenditures or may otherwise adversely affect the operations of
ACRTs tenants, which would adversely affect ACRTs consolidated financial condition and results of operations.



| | h. | Cash and Cash Equivalents-Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalent balances may exceed insurable limits. ACRT believes it mitigates risk by investing in or through
major financial institutions.



| | i. | Restricted Cash - Restricted cash represents cash maintained for real estate taxes, insurance, capital expenditures and various attorney escrows from the sale of the
Overland Park, Kansas property.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | j. | Rent Receivable ACRT continuously monitors collections from its tenants and makes a provision for estimated losses based upon historical
experience and any specific tenant collection issues that ACRT has identified.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | k. | Amortization - Deferred financing costs are amortized using the straight-line method over the life of the related mortgage or line of credit, which approximates
the interest method. Deferred leasing costs are amortized using the straight-line method over the life of the related lease. Capitalized costs related to ACRTs equity investments are amortized over the estimated useful life of the underlying
real estate assets.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | l. | Income Taxes - ACRT operates in a manner intended to enable it to qualify as a REIT under Sections 856-860 of the Code. Under these sections, a real estate
investment trust which distributes at least 90% of its real estate investment trust taxable income to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to
its shareholders. ACRT pays state taxes, which are not significant, as applicable.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | m. | Revenue Recognition - Rental revenue from tenant operating leases which provide for scheduled rental increases are recognized on a straight-line basis over the
term of the respective leases.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gains on sales of real estate are recognized pursuant to the provisions of SFAS No. 66,
Accounting for Sales of Real Estate. The specific timing of the sale is measured against various criteria in SFAS No. 66 related to the terms of the transactions and any continuing involvement in the form of management or
financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met.



| | n. | Derivative Instruments and Hedging Activities - ACRT follows the provisions of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended. The Statement generally requires that all derivative instruments be reflected in the consolidated financial statements at their estimated fair value. Changes in the fair value of non-hedging instruments are
reported in current period earnings.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o. | Earnings Per Share Basic net income per share is computed by dividing net income allocable to Class A and B common shareholders by the
weighted average number of shares outstanding during the period. Diluted net income per share amounts are similarly computed but include the effect, when dilutive, of in the money common share options.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following is a reconciliation of the denominator of the basic and diluted weighted average number of common shares outstanding.



|                                                                                           |  |                                             |  |                                            |  |       |  |      
|------------------------------------------------------------------------------------------ |  | ------------------------------------------- |  | ------------------------------------------ |  | ----- |  | -----
|                                                                                           |  | Three months Ended Sept. 30, (In thousands) |  | Nine months ended Sept. 30, (In thousands)
|                                                                                           |  | 2006                                        |  | 2005                                       |  | 2006  |  | 2005 
|Total weighted average Class A common shares                                               |  | 3,182                                       |  | 3,182                                      |  | 3,182 |  | 3,182
|                                                                                           |  |                                             |  |                                           
|Total weighted average Class B common shares                                               |  | 166                                         |  | 166                                        |  | 166   |  | 166  
|                                                                                           |  |                                             |  |                                            |  |       |  |      
|Weighted average number of common shares used in calculation of basic earnings per share   |  | 3,348                                       |  | 3,348                                      |  | 3,348 |  | 3,348
|                                                                                           |  |                                             |  |                                           
|Shares issuable on exercise of warrants                                                    |  |                                            |  | 104                                        |  | 104   |  | 104  
|Shares issuable upon exercise of stock options (15% of outstanding common shares)          |  |                                            |  | 590                                        |  | 590   |  | 590  
|                                                                                           |  |                                             |  |                                            |  |       |  |      
|Weighted average number of common shares used in calculation of diluted earnings per share |  | 3,348                                       |  | 4,042                                      |  | 4,042 |  | 4,042
|                                                                                           |  |                                             |  |                                            |  |       |  |      



8



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ARC CORPORATE REALTY TRUST, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)



| | p. | Recent Accounting Pronouncements  In December 2004, the FASB issued Statement No. 123 (revised 2004), Accounting for Stock-Based Compensation
(SFAS 123R) which supersedes Accounting Principals Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entities equity
instruments or that may be settled by the issuance of those equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share based payments transactions. SFAS 123R requires a public
entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The cost will be recognized over the period in which an employee is required to provide services
in exchange for the award. SFAS 123R is effective for fiscal years beginning after January 1, 2006, based on new rules issued by the Securities and Exchange Commission. The adoption of this pronouncement did not have any material impact on
ACRTs consolidated financial statements.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In March 2005, the FASB issued Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations-an Interpretation of SFAS Statement No. 143 (FIN 47). FIN 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived asset
when the timing and/or method of settlement are conditional on a future event. FIN 47 is effective for fiscal years ending after December 15, 2005. ACRT adopted FIN 47 on December 31, 2005. The adoption did not have any impact on
ACRTs consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections which replaces Accounting Principles Board Opinions No. 20 Accounting Changes and SFAS No. 3 Reporting Accounting Changes in Interim Financial Statements An Amendment of APB Opinion
No. 28. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In June 2005, the FASB ratified the Emerging Issues Task Forces (EITF) consensus on EITF 04-05, Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. EITF 04-05 provides a framework for determining whether a general partner controls, and should consolidate, a limited
partnership or a similar entity. It was effective after June 29, 2005, for all newly formed limited partnerships and for any pre-existing partnerships that modify their partnership agreements after that date. General partners of all other
limited partnerships will apply the consensus no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The adoption of EITF 04-05 did not have any impact on ACRTs consolidated financial
position or results of operations.

In 2005, the EITF released Issue No. 05-6, Determining the Amortization Period for Leasehold
Improvements (EITF 05-6), which clarifies the period over which leasehold improvements should be amortized. EITF 05-6 requires all leasehold improvements to be amortized over the shorter of the useful life of the assets, or the
applicable lease term, as defined. The applicable lease term is determined on the date the leasehold improvements are acquired and includes renewal periods for which exercise is reasonably assured. EITF 05-6 was effective for leasehold improvements
acquired in reporting periods beginning after June 29, 2005. The impact of the adoption of EITF 05-6 did not have a material impact on ACRTs consolidated financial position or results of operations.

In June 2006, FASB issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes-an Interpretation of FASB No. 109.
FIN 48 provides guidance on recognition and measurement of uncertainties in income taxes and is applicable for fiscal years beginning after December 15, 2006. The adoption is not expected to have a material impact on ACRTs consolidated
financial statements.

In September 2006, FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The Statement explains key concepts that are needed to apply the definition, including market participants, the markets in
which the company would exchange the asset or liability, and the valuation premise that follows from assumptions market participants would make about the use of an asset. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods with those fiscal years.



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ARC CORPORATE REALTY TRUST, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)



In September 2006, the SEC Staff issued SAB 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides guidance for SEC registrants on how the effects of uncorrected errors originating in previous years should be considered when
quantifying errors in the current year. SAB 108 was issued to eliminate diversity in practice for quantifying uncorrected prior year misstatements (including prior year unadjusted audit differences) and to address weaknesses in methods commonly used
to quantify such misstatements (i.e., the rollover and iron curtain methods). SAB 108 does not amend the SECs existing guidance for evaluating the materiality of errors included in SAB 99,Materiality.

SAB 108 provides transitional guidance that allows registrants to report the effect of adoption as a cumulative effect adjustment to
beginning of year retained earnings. If a cumulative effect adjustment is reported, it must be reported as of the beginning of the first fiscal year ending after November 15, 2006 (January 1, 2006 for calendar year-end companies). The
cumulative effect adjustment may be reflected in the registrants Form 10-K for the year of adoption or, if adopted earlier, it may be reflected in any Form 10-Q filed during the year of adoption. In any event, the cumulative effect
adjustment should be calculated as of the first day of the fiscal year of adoption of SAB 108. The initial application of the guidance is not expected to have a significant impact on ACRTs consolidated financial statements.



| | q. | Stock-based CompensationOn May 21, 2004, ACRT shareholders approved revisions to ACRTs 1997 Stock Option Plan which extended the life
of ACRTs stock options from ten to fifteen years and removed all restrictions on their exercise on April 1, 2008 or upon the occurrence of certain earlier events. However, the total number of options exercised cannot exceed fifteen
percent of the outstanding shares at the exercise date.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accordingly, ACRT will recognize compensation expense ratably over
the vesting period for variable stock awards previously granted under the plan.

Compensation expense was calculated thru December 31,
2005 using a market price of $12.00 based on ACRTs last stock offering which expired on December 31, 2003, and the option price of $8.50 per option. The compensation expense calculation was adjusted in the first quarter of 2006 to reflect
the current projected liquidation values on the shares of $13.50 a share. For the nine months ended September 30, 2006 and 2005, ACRT recognized stock based compensation expense totaling $1,074,756 and $336,568, respectively. For the three
months ended September 30, 2006 and 2005, ACRT recognized stock based compensation expense totaling $188,553 and $112,189 respectively.



| | r. | Fair Value of Financial Instruments
| | -- | -----------------------------------

Cash
Equivalents, Notes Receivable, Rent Receivable and Accounts Payable and Accrued Expenses

ACRT estimates that the fair value
approximates carrying value due to the relatively short maturities of the instruments.

Mortgage Notes Payable and Lines of Credit

ACRT determines the fair value of these instruments based on a discounted cash flow analysis using a discount rate that approximates the
current borrowing rates for instruments of similar maturities. Based on this analysis, ACRT has determined that the fair value of the variable rate instruments approximates their carrying values and the fixed rate instruments are $7.2 million and
$14.4 million at September 30, 2006 and December 31, 2005, respectively.



| | s. | Industry Segments ACRT operates in one industry segment, investments in credit lease properties.
| | -- | -------------------------------------------------------------------------------------------------



| | t. | Reclassifications - Certain reclassifications were made to prior period amounts to conform with the current period presentation.
| | -- | --------------------------------------------------------------------------------------------------------------------------------



|3. | PROPERTIES AND PROPERTY INVESTMENTS
|-- | -----------------------------------

The following
acquisitions, investments and disposals were consummated during 2006 and 2005:



10



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)



On January 3, 2005, an affiliate of the Advisor exercised its right to purchase ACRTs
property located in Philadelphia, PA for approximately $7.7 million. ACRT has recorded an impairment charge of $287,259 in connection with the transaction in 2005. On August 10, 2005, ACRT sold the Philadelphia, Pennsylvania property leased to
Barnes and Noble for $7,734,375 resulting in net proceeds to ACRT of $7,362,720 after costs and expenses, which resulted in no gain or loss for financial reporting purposes.

On February 15, 2005, the Willow Grove outstanding loan balance of $800,000 was repaid plus all outstanding and accrued interest, and as a result,
ACRTs investment in Willow Grove was zero. Additionally, ACRT sold its member interest in Willow Grove to the other Willow Grove member and an affiliate of the Advisor for net proceeds and a gain of $400,000.

On May 23, 2006, ACRT sold its partnership interest in Fort Washington Fitness LP, which owns the property in Fort Washington, Pennsylvania leased to
LA Fitness, to its joint venture partner for $2,500,000 and recognized a gain for financial reporting purposes of $1,546,204.

ACRT
had a note receivable from a tenant totaling $322,923 at December 23, 2005. On June 15, 2006, the note receivable and the property located in Overland Park, Kansas, leased to Borders Books and Bed, Bath and Beyond, was sold for $13,600,000
to an unrelated third party, which resulted in a gain for financial reporting purposes of $6,137,479.

On October 6, 2006, the property
located in Norcross, Georgia leased to AT&T was sold for $2,270,000 to an unrelated third party, which resulted in a gain for financial reporting purposes.



|4. | INVESTMENT IN UNCONSOLIDATED SUBSIDIARES AND UNDIVIDED INTERESTS
|-- | ----------------------------------------------------------------

ACRT investment in unconsolidated subsidiaries and undivided interest is as follows:



|                                                  |  |           |   |  |                   |           |   |                  |   |           |  
|------------------------------------------------- |  | --------- | - |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                  |  | %Interest |   |  | September 30,2006 |           |   | December 30,2005 |  
|Triangle Plaza II, LLC (Triangle)                 |  | 40        | % |  | $                 | 4,006,763 |   |                  | $ | 3,683,237 |  
|Levittown ARC, LP (Levittown)                     |  | 20        | % |  |                   | 148,417   |   |                  |   | 160,196   |  
|Rochelle Park Investors LLP (Rochelle)            |  | 51        | % |  |                   | (609,043  | ) |                  |   | (561,090  | )
|Paramus ACRT, LLC (Paramus)                       |  | 40        | % |  |                   | 2,562,882 |   |                  |   | 2,659,051 |  
|ARC International Fund II, LP (ARC International) |  | 11.2      | % |  |                   | 741,795   |   |                  |   | 760,488   |  
|Fort Washington Fitness, LP (Fort Washington)     |  | 50        | % |  |                   |          |   |                  |   | 991,349   |  
|Willow Grove ACRT, LLC (Willow Grove)             |  | 25        | % |  |                   |          |   |                  |   |          |  
|                                                  |  |           |   |  |                   |           |   |                  |   |           |  
|Total                                             |  |           |   |  | $                 | 6,850,814 |   |                  | $ | 7,693,231 |  
|                                                  |  |           |   |  |                   |           |   |                  |   |           |  

ACRTs equity in income (loss) of unconsolidated subsidiaries and undivided interest is as
follows:



|                  |  |                              |          |   |                             |   |         |      |  |   |         |   |  |   |          |  
|----------------- |  | ---------------------------- | -------- | - | --------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | -------- | -
|                  |  | Three Months Ended Sept. 30, |          |   | Nine Months Ended Sept. 30, |  
|                  |  | 2006                         |          |   | 2005                        |   |         | 2006 |  |   | 2005    |  
|Triangle          |  | $                            | (254,607 | ) |                             | $ | 110,460 |      |  | $ | (17,343 | ) |  | $ | $335,512 |  
|Levittown         |  |                              | (649     | ) |                             |   | (487    | )    |  |   | 1,721   |   |  |   | (2,130   | )
|Rochelle          |  |                              | 7,164    |   |                             |   | 99,118  |      |  |   | 105,047 |   |  |   | 226,791  |  
|Paramus           |  |                              | 51,461   |   |                             |   | 47,325  |      |  |   | 159,081 |   |  |   | 151,868  |  
|ARC International |  |                              | 13,910   |   |                             |   | 14,385  |      |  |   | 43,407  |   |  |   | 43,484   |  
|Fort Washington   |  |                              |         |   |                             |   | 35,075  |      |  |   | 47,403  |   |  |   | 98,858   |  
|Willow Grove      |  |                              |         |   |                             |   |        |      |  |   |        |   |  |   |         |  
|                  |  |                              |          |   |                             |   |         |      |  |   |         |   |  |   |          |  
|Total             |  | $                            | (182,721 | ) |                             | $ | 305,876 |      |  | $ | 339,316 |   |  | $ | 854,383  |  
|                  |  |                              |          |   |                             |   |         |      |  |   |         |   |  |   |          |  



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ARC CORPORATE REALTY TRUST, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)



The following is the combined summary financial information of the unconsolidated subsidiaries and
undivided interest:



|                              |  |                    |            |   |                   |   |            |  
|----------------------------- |  | ------------------ | ---------- | - | ----------------- | - | ---------- | -
|                              |  | September 30, 2006 |            |   | December 30, 2005 |  
|Real estate                   |  | $                  | 30,496,430 |   |                   | $ | 61,099,883 |  
|Other assets                  |  |                    | 4,312,716  |   |                   |   | 9,704,607  |  
|                              |  |                    |            |   |                   |   |            |  
|Total Assets                  |  | $                  | 34,809,146 |   |                   | $ | 70,804,490 |  
|                              |  |                    |            |   |                   |   |            |  
|Mortgage notes payable        |  | $                  | 25,531,615 |   |                   | $ | 55,876,692 |  
|Other liabilities             |  |                    | 116,541    |   |                   |   | 1,017,197  |  
|Equity                        |  |                    | 9,160,990  |   |                   |   | 13,910,601 |  
|                              |  |                    |            |   |                   |   |            |  
|Total Liabilities and Equity  |  | $                  | 34,809,146 |   |                   | $ | 70,804,490 |  
|                              |  |                    |            |   |                   |   |            |  
|                              |  |                    |            |   |                   |   |            |  
|Rental revenue                |  | $                  | 3,500,535  |   |                   | $ | 6,785,435  |  
|Operating expenses            |  |                    | (585,741   | ) |                   |   | (1,334,534 | )
|Interest expenses             |  |                    | (1,498,132 | ) |                   |   | (2,879,625 | )
|Depreciation and amortization |  |                    | (642,079   | ) |                   |   | (1,188,197 | )
|                              |  |                    |            |   |                   |   |            |  
|Net Income                    |  | $                  | 774,583    |   |                   | $ | 1,383,079  |  
|                              |  |                    |            |   |                   |   |            |  

Certain of Partnership or LLC agreements for investments in real estate investment contain
provisions that stipulate a disproportionate sharing of cash flow among the investors after a specified rate of return has been achieved. Accordingly, the cash flow distributed to ACRT from an investment in real estate may not be proportionate to
ACRTs ownership interest.

On January 5, 2005, Whitestone sent to the joint venture partner a notice of right of first refusal to
purchase Whitestones interest in the property at a price and other terms as set forth in the notice, subject to an attached form of contract that required both shareholder and board of director approval. Subsequently, ACRT discovered that the
calculation used to allocate capital proceeds in the contemplated sale, prepared by a third party, was incorrectly allocated and as a result management and the board of directors of ACRT did not approve the terms of the sale. In addition, ACRT
believes the joint venture partner, due to their unique insight into the value of the interest as the manager of the property, was aware that the capital proceeds were incorrectly allocated. The joint venture partner has refused to accept a revised
purchase price calculation, which necessitated ACRT bringing suit to halt the sale. On April 1, 2005, ACRTs joint venture partner filed a separate lawsuit against Whitestone compelling a sale of ACRTs interest under the terms of the
original right of first refusal.

In March 2005, ACRT brought suit against its joint venture partner regarding the exercise of a right of
first refusal on the purchase of ACRTs interest in Triangle. On October 5, 2006, the New York Supreme Court ruled that ACRT must sell its Triangle investment for $5.4 million and required ACRT to return a distribution it received in 2005
of $340,869 with accrued interest of approximately $43,000. This amount appears under due to joint venture partners on the consolidated balance sheets as of September 30, 2006. As a result of the October 5, 2006 court ruling, ACRT will not
receive its share of earnings from Triangle in 2006 and has ceased accounting for Triangle on the equity method.

On January 20, 2005,
the board of directors agreed to amend the Willow Grove agreement to accept repayment of the outstanding loan balance of $800,000 plus all outstanding and accrued interest within ninety days in lieu of waiting the remaining fifteen months
outstanding, as stated in the original agreement. After the repayment, ACRTs investment in Willow Grove was zero. Additionally, ACRT agreed to sell its member interest in Willow Grove to the other Willow Grove member and an affiliate of the
Advisor for net proceeds and a gain of $400,000. This transaction was completed on February 15, 2005.

On January 25, 2005, the
tenant in the Rochelle Park, NJ property, who had filed suit against ACRT, signed a stipulation of settlement agreeing to dismiss the suit against ACRT. As part of the settlement, the tenant entered into a contract to purchase ACRTs 51% tenant
in common interest and the remaining 49% tenant in common interest not owned by ACRT for $19,500,000.This contract was subsequently terminated.

ACRT is again in negotiations with the tenant on purchasing the property. However, at this time ACRT and the tenant have not been able to agree on a purchase price and the tenant, a quasi government entity, has
threatened to condemn.

On May 23, 2006, ACRT sold its partnership interest in Fort Washington Fitness LP, which owns the property in
Fort Washington, Pennsylvania leased to LA Fitness, to its joint venture partner for $2,500,000 and recognized a gain for financial reporting of $1,546,204.

On October 25, 2006, the investment in the Paramus, NJ property leased to Babys R Us, Levitz and Wade, Odell, Wade was sold to a related party which resulted in an amount in excess of historical cost basis.



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)



|5. | RELATED PARTY TRANSACTIONS
|-- | --------------------------

The Advisor performs
services for ACRT pursuant to the terms of the Advisory Agreement. Such services include serving as ACRTs investment and financial advisor and providing consultation, analysis and supervision of ACRTs activities in acquiring, financing,
managing and disposing of properties. The Advisor also performs and supervises the various administrative duties of ACRT such as maintaining the books and records. The Chairman and President of ACRT is an affiliate of the Advisor. The Advisor is
entitled to acquisition, financing, disposition and asset management fees.

ACRT incurred asset management fees of $482,549 and $518,917,
for the nine months ended September 30, 2006 and 2005, respectively. Unpaid asset management fees included in due to related parties on the consolidated balance sheets were $135,184 and $45,061 at September 30, 2006 and December 31,
2005, respectively.

The acquisition fee is equal to 3% of the purchase price of the investment. No acquisition fees were incurred in 2006
or 2005.

The financing fee is generally equal to .5% of the principal amount financed. No financing fees were incurred in 2006 or 2005.

On May 23, 2006 and June 15, 2006, ACRT incurred disposition fees in the amount of $148,020 and $203,796 on the sales of the Fort
Washington, Pennsylvania investment and the sale of the Overland Park, Kansas property, respectively. On August 10, 2005, ACRT incurred a disposition fee in the amount of $116,015 on the sale of the Philadelphia, Pennsylvania property leased to
Barnes and Noble. The disposition fee on this sale was equal to 1.5% of the contract sales price. The disposition fee is generally equal to 3% of the contract sales price of each portfolio property, provided that 50% of the disposition fee will be
paid only if the property is sold at a gain, pursuant to the Advisory Agreement.

ACRT has also agreed to pay the Advisor incentive
compensation in the amount of 20% of amounts distributed to ACRTs stockholders after the stockholders have received distributions equal to the amount of their initial investment in shares of Common Stock plus the preferred return of 8%.



|6. | LEASES
|-- | ------

ACRT is entitled to certain rentals
relating to the properties it owns. In addition to the base rent, the tenants are generally required to pay all operating costs related to the properties. Future minimum annual base rentals due under the non-cancelable operating leases in effect as
of September 30, 2006, are as follows:



|           |  |   |           
|---------- |  | - | ----------
|2006       |  | $ | 1,097,794 
|2007       |  |   | 4,416,164 
|2008       |  |   | 4,282,843 
|2009       |  |   | 4,187,626 
|2010       |  |   | 4,077,256 
|Thereafter |  |   | 18,178,659
|           |  |   |           
|           |  | $ | 36,240,342
|           |  |   |           

ACRT seeks to reduce its operating and leasing risks through diversification achieved by
geographic distribution of its properties, tenant industry diversification, avoiding dependency on a single property and the creditworthiness of its tenants. For the nine months ended September 30, 2006 and 2005, the following tenants accounted
for greater than 10% of rental revenues:



|                     |  |      |   |  |      |  
|-------------------- |  | ---- | - |  | ---- | -
|                     |  | 2006 |   |  | 2005 |  
|Sports Authority     |  | 17.1 | % |  | 13.8 | %
|Bed, Bath and Beyond |  |     |   |  | 11.1 |  
|Barnes and Noble     |  |     |   |  | 11.5 |  
|Office Max           |  | 10.7 |   |  | 8.6  |  
|CaroMont Medical     |  | 12.2 |   |  | 10.0 |  



|7. | MORTGAGES PAYABLE
|-- | -----------------

ACRT had fixed rate mortgages
totaling $9,636,517 and $18,179,843 at September 30, 2006 and at December 31, 2005, respectively. These mortgages are secured by the respective properties with a total net book value of $12,120,828 and



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ARC CORPORATE REALTY TRUST, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)



$21,358,469 at September 30, 2006 and at December 31, 2005, respectively. The fixed rate
mortgages have interest rates ranging from 6.86% to 8.65% and have maturities at various dates through July 1, 2017.

On
January 6, 2006, the fixed rate mortgage on the San Antonio, Texas property of $1,608,000 matured and was repaid. The repayment was made by drawing down $1,610,000 on ACRTs existing line of credit.

In 2006, the fixed rate mortgage on the Overland Park, Kansas property of $6,627,000 was repaid.

ACRT had variable rate mortgages totaling $8,026,359 and $8,215,184 at September 30, 2006 and December 31, 2005, respectively. The mortgages
carry variable interest rates of 206 and 225 basis points over LIBOR (5.33 % at September 30, 2006). The variable rate mortgages are secured by two properties with a combined net book value of $ 9,083,967 and $9,171,429 at September 30,
2006 and December 31, 2005, respectively.

At September 30, 2006, the payment of principal under the fixed and variable rate
mortgages for the next five years and thereafter is as follows:



|           |  |                       |           |                 |   |            |  |   |           
|---------- |  | --------------------- | --------- | --------------- | - | ---------- |  | - | ----------
|           |  | ScheduledAmortization |           | BalloonPayments |   | Total     
|2006       |  | $                     | 169,397   |                 |   |           |  | $ | 169,397   
|2007       |  |                       | 597,818   |                 | $ | 3,897,539  |  |   | 4,495,357 
|2008       |  |                       | 576,742   |                 |   |           |  |   | 576,742   
|2009       |  |                       | 453,255   |                 |   | 3,747,919  |  |   | 4,201,174 
|2010       |  |                       | 479,848   |                 |   |           |  |   | 479,848   
|Thereafter |  |                       | 1,081,129 |                 |   | 6,659,229  |  |   | 7,740,358 
|           |  |                       |           |                 |   |            |  |   |           
|           |  | $                     | 3,358,189 |                 | $ | 14,304,687 |  | $ | 17,662,876
|           |  |                       |           |                 |   |            |  |   |           

On January 15, 2003, in connection with ACRTs variable rate mortgage totaling
$4,414,500, ACRT entered into an interest rate cap agreement with a third party. The cap is coterminous with the mortgage loan and its notional amount equals the outstanding principal balance on the mortgage loan. The cap agreement was entered into
as part of ACRTs management of interest rate exposure and effectively limits the amount of interest rate risk that may be taken on its variable rate mortgage. In accordance with SFAS No. 133, the interest rate cap is reflected at its fair
value. The carrying amount of the interest rate cap, included in prepaid expenses and other assets, net was reported as an asset of $3,886 and $6,786, as of September 30, 2006 and December 31, 2005, respectively, based on information
supplied by the counter party to the cap contract, and the change in the fair value of the interest rate cap of ($2,900) and ($3,135) has been recorded as a (loss) on interest rate cap, net on the accompanying consolidated statements of income
(loss) for the nine months ended September 30, 2006 and 2005, respectively.

On March 4, 2004, in connection with ACRTs
variable rate mortgage totaling $5,300,000 on the Philadelphia, Pennsylvania property leased to Barnes and Noble, ACRT entered into an interest rate cap agreement and an interest rate swap agreement with a third party. The cap had a notional amount
of $2,650,000 and the cap was coterminous with the mortgage loan. In accordance with SFAS No. 133, the interest rate cap was reflected at its fair value. In connection with the sale of the Philadelphia, Pennsylvania property on August 10,
2005 (Note 3), the interest rate cap was terminated.



|8. | LINE OF CREDIT
|-- | --------------

On June 17, 2004, ACRT
established an additional secured credit facility, which provides for additional borrowing of up to $5,500,000 and decreases by $100,000 per annum. This credit facility bears interest at LIBOR plus 225 basis points and matures in five years. ACRT is
required to pay an annual commitment fee equal to 0.5% on the unused portion of the facility. On April 11, 2006, $5,065,000 was drawn down on this credit facility and used to pay off the Overland Park, Kansas mortgage. On June 15, 2006,
the property located in Overland Park, Kansas was sold and the credit facility was paid off. The total amount available under this facility at September 30, 2006 was $5,300,000.



|9. | STOCK OPTION PLANS
|-- | ------------------

ACRT established, with the
approval of the Shareholders, the 1997 Stock Option Plan (the Plan) for the purposes of encouraging and enabling ACRTs officers, employees, directors and advisors to acquire a proprietary interest in ACRT. The Plan



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ARC CORPORATE REALTY TRUST, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)



provides for administration by the Compensation Committee (the Committee) of the Board of
Directors. A maximum of seven hundred and fifty thousand Class A common shares have been reserved under the Plan. The Plan authorized (i) the grant of stock options that qualify as Incentive stock options (ISO) under section
422 of the Code (ii) the grant of stock options that do not so qualify and (iii) grants of shares upon the attainment of performance goals or subject to restrictions.

Options granted under the Plan may be subject to various restrictions on exercise including vesting provisions and a requirement that the Class A
common shares be listed on a national exchange or quoted on NASDAQ and/or the requirement that the options when exercised will not constitute an amount greater than a specified percentage of ACRTs issued and outstanding stock. On
January 21, 1998, ACRT, pursuant to the Plan previously approved by the shareholders, granted 25,000 nonqualified stock options to purchase Class A common stock to the five non-employee directors and 650,000 nonqualified stock options to
purchase Class A common stock to the advisor at an exercise price of $8.50. In January 2000 and October 2003, ACRT granted each of its three additional non-employee directors an option under the Option Plan to purchase 5,000 shares of
Class A common stock at an exercise price of $8.50. Each of these will vest as to 25% of such option for each full year that the non-employee Director has previously served and continues to serve as a Director of ACRT. In 1998 and 2003, three
non-employee directors holding a total of 15,000 stock options retired with their stock options unexercised. These stock options were retired and are available to be re-granted. The options are not exercisable unless and until both of the following
requirements are met: (a) either (i) the Class A common stock is listed for trading on any national securities exchange or quoted on any tier of the NASDAQ Stock Market or (ii) the occurrence of a Change of Control of ACRT, as
defined in the Plan, the sale of all or substantially all of ACRTs assets or adoption of a plan of liquidation by ACRT and (b) immediately prior to such exercise the number of shares of Class A common stock issued and outstanding, as
a result of the exercise of the options granted under the plan, shall not exceed fifteen percent of the issued and outstanding shares of Class A common stock. At September 30, 2006, no stock options under the Plan have been exercised, all
but 2,500 of the stock options granted have been vested and 75,000 are available for grant. Amendments to the Plan were recommended by the Board of Directors and approved by the shareholders of ACRT at the annual meeting held in May 2004. The Plan
now allows for grants of options until March 31, 2013. In addition, the current term of outstanding stock options awarded pursuant to the Plan were extended from 10 years to 15 years and all future stock options awarded pursuant to the Plan
will have a term that ends in 2013. The restrictions applicable to the exercise of the options will be removed effective April 1, 2008 or upon the occurrence of one of the events noted above.

Other Awards under the Option Plan. In addition to the incentive and non-qualified stock options available for grant under the Option Plan, the
compensation committee may also award:



| |  |  | stock appreciation rights;
| | - |  | --------------------------



| |  |  | restricted stock awards;
| | - |  | ------------------------



| |  |  | phantom stock unit awards; and
| | - |  | ------------------------------



| |  |  | performance share units.
| | - |  | ------------------------

There are options outstanding as
of September 30, 2006, and December 31, 2005 for 675,000 shares at a weighted exercise price of $8.50.

The following are
disclosures for common stock options outstanding at September 30, 2006:



|                    |  |                     |      |                        |      |        |         |                |   |     
|------------------- |  | ------------------- | ---- | ---------------------- | ---- | ------ | ------- | -------------- | - | ----
|Options Outstanding |  | Exercisable Options
|Number              |  | Exercise Price      |      | Remaining Life (Years) |      | Number |         | Exercise Price
|660,000             |  | $                   | 8.50 |                        | 2.00 |        | 660,000 |                | $ | 8.50
|10,000              |  |                     | 8.50 |                        | 4.00 |        | 10,000  |                |   | 8.50
|5,000               |  |                     | 8.50 |                        | 7.80 |        | 2,500   |                |   | 8.50
|                    |  |                     |      |                        |      |        |         |                |   |     
|675,000             |  | $                   | 8.50 |                        |      |        | 672,500 |                | $ | 8.50
|                    |  |                     |      |                        |      |        |         |                |   |     

Compensation expense was calculated thru December 31, 2005 using a market price of $12.00
based on ACRTs last stock offering which expired on December 31, 2003, and the option price of $8.50 per option. The compensation expense calculation was adjusted in the first quarter of 2006 to reflect the current projected liquidation
values on the shares of $13.50 a share. For the nine months ended September 30, 2006 and 2005, ACRT recognized stock based compensation expense totaling $1,074,756 and $336,568, respectively.



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)



|10. | CREDIT EVENT
|--- | ------------

On March 4, 2006, OfficeMax, one
of the tenants in the Lilburn, Georgia property, closed its store at this location. OfficeMax is still responsible for all rent payments and all minimum rent payments are current under the lease, which runs through 2016.



|11. | CLASS B COMMON STOCK
|--- | --------------------

On February 8, 2006, the
board of directors declared dividends to common stock shareholders-class B for 2005 totaling $162,770. The payment of these dividends were subject to the receipt of various tax documents due from the class B shareholders, which were not provided as
of September 30, 2006.



|12. | SUBSEQUENT EVENTS
|--- | -----------------

On October 6, 2006, the
property located in Norcross, Georgia leased to AT&T was sold for $2,270,000 to an unrelated third party, which resulted in a gain for financial reporting purposes.

On October 12, 2006, the Plan of Liquidation was approved by the shareholders.

On October 25,
2006, the investment in the Paramus, NJ property leased to Babys R Us, Levitz and Wade, Odell, Wade was sold for $9,121,498 to a related party.



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS

Forward Looking Statements

Certain information included or incorporated by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act, and as such may involve known and unknown risks, uncertainties
and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements, which
are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words may, will, should, expect, anticipate,
estimate, believe, intend, project, or the negative of these words or other similar words or terms. Factors which could have a material adverse effect on our operations and future prospects include,
but are not limited to, changes in economic conditions generally and the real estate market specifically, adverse developments with respect to our tenants, legislative/regulatory changes including changes to laws governing the taxation of REITs,
availability of debt and equity capital, interest rates, competition, supply and demand for properties in our current and proposed market areas and policies and guidelines applicable to REITs. These risks and uncertainties should be considered in
evaluating any forward-looking statements contained in this Form 10-Q.

The following should be read in conjunction with the unaudited consolidated
financial statements of ACRT including the respective notes thereto, all of which are included in this Form 10-Q.

General

ACRT was formed as a Maryland corporation in June 1993 and is an externally advised real estate investment trust (REIT) under the Internal Revenue Code of
1986. It has operated as a REIT since its inception. ACRT is managed by its advisor, ARC Capital Advisors, L.P., an affiliate of Robert Ambrosi, ACRTs Chairman, President and a director. The advisor performs services for ACRT pursuant to the
terms of an advisory agreement. Such services include serving as ACRTs investment and financial advisor and providing consultation, analysis and supervision of ACRTs activities in acquiring, financing, managing and disposing of
properties. The advisor also performs and supervises the various administrative duties of ACRT, such as maintaining its books and records.

ACRT was formed
to purchase geographically diverse credit lease properties, which are general purpose retail, office and industrial properties. Each property is 100% leased to one or more creditworthy tenants under a long-term lease that generally requires tenants
to pay most or all of the operating costs of the property, including real estate taxes and insurance.

As of September 30, 2006, ACRT owned or had
interests in 18 real estate properties encompassing 927,495 rentable square feet.

On February 8, 2006, the board of directors approved the adoption
of a Plan of Liquidation and Dissolution (the Plan). The Plan is subject to the approval of ACRTs common stockholders, by two-thirds vote. ACRT intends to sells its real estate properties on an orderly basis, to pay or provided for
its liabilities and to distribute its remaining cash to its shareholders. On October 12, 2006, ACRTs shareholders approved the Plan. Effective October 12, 2006, ACRT will change its basis of accounting from the going concern basis to
the liquidation basis of accounting, which will require ACRT to record all of its assets and liabilities at fair market value at October 12, 2006 and at each subsequent reporting period.

Critical Accounting Issues

ACRTs accompanying
consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America as a going concern, which require management to make estimates that effect the amounts of revenues,
expenses, assets and liabilities reported. The following are critical accounting policies which are important to the understanding of ACRTs financial condition and results of operations and which require some of managements most
difficult, subjective and complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions which could change in a manner that would materially affect managements future
estimates with respect to such matters. Accordingly, future reported financial condition and results of operations could differ materially from the current financial condition and results of operations reported based on managements current
estimates.

Revenue Recognition.Rental revenue from tenant operating leases which provide for scheduled rental increases are recognized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 13, on a straight-line basis over the term of the respective leases.

Gains on sales of real estate are recognized pursuant to the provisions of SFAS No. 66, Accounting for Sales of Real Estate. The specific timing of the sale is measured against various criteria in SFAS No. 66 related
to the terms of the transactions and any



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##### Table of Contents

continuing involvement in the form of management or financial assistance associated with the properties. If the sales
criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met.

Rent Receivable.ACRT continuously monitors collections from its tenants and makes a provision for estimated losses based upon historical experience and any specific tenant collection issues that ACRT has identified.

Purchase Accounting for the Acquisition of Real Estate.In accordance with SFAS No. 141, commencing with properties acquired after June 30, 2002, the
fair value of real estate acquired is allocated to the acquired tangible assets, consisting of land and building, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of
in-place leases and value of tenant relationships, based in each case on their fair values.

The fair value of the tangible assets of an acquired property
(which includes land and building) is determined by valuing the property as if it were vacant, and the as-if vacant value is then allocated to land and building based on managements determination of relative fair values of these
assets. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease up periods, considering current market conditions and costs to execute similar leases. In estimating carrying
costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenues during expected lease up periods based on current market demand. Management also estimates costs to execute similar leases
including leasing commissions.

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and
below-market in-place lease values are recorded based on the difference between the current in-place lease rent and managements estimate of current market rent.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (1) the purchase price paid for a property over (2) the estimated
fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on managements evaluation of the specific characteristics of each
tenants lease. The value of in-place leases and customer relationships are amortized to expense over the remaining non-cancelable periods of the respective leases.

Industry Segments. ACRT currently operates in one industry segment - investments in credit lease properties.

Impairment.ACRT continually assesses the recoverability of its properties by determining whether the costs can be recovered through projected undiscounted cash flows. The amount of impairment, if any, is measured by comparing the
carrying amounts to the fair values of such properties. Based on ACRTs analysis, management does not believe that any of its properties are impaired. SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived
Assets, updates and clarifies the accounting and reporting for the impairment of assets held in use and to be disposed of. The Statement, among other things, requires ACRT to classify the operations and cash flow of properties to be
disposed of as discontinued operations.

For the nine months ended September 30, 2006 and 2005, ACRT incurred an impairment charge of $0 and $287,259,
respectively. The impairment charge in 2005 was on the Philadelphia, Pennsylvania property leased to Barnes and Noble, which is included in discontinued operations.

ACRT accounts for properties held for sale in accordance with SFAS No. 144. SFAS No. 144 requires that the assets and liabilities of properties that meet various criteria in SFAS No. 144 be presented
separately in the balance sheet with assets and liabilities being separately stated. The operating results of these properties are reflected as discontinued operations in the statement of income (loss).

Liquidity and Capital Resources

On February 8,
2006 the board of directors approved the adoption of a Plan of Liquidation and Dissolution (the Plan). The Plan was approved by ACRTs Common stockholders, by two-thirds vote on October 12, 2006. ACRT intends to sell its real
estate properties on an orderly basis, to pay or provide for its liabilities and to distribute its remaining cash to its shareholders.

Pursuant to the
Plan, ACRT stopped making regular quarterly dividend payments after the first quarter of 2006.

In the first quarter of 2006, ACRT paid dividends of
$763,577 of which Net Cash Flow from Operations funded $580,112 and the remainder of $183,465 was funded primarily from distributions from unconsolidated subsidiaries and undivided interests of $244,700. For the nine months ended September 30,
2005, Net Cash Flow from Operations funded $2,488,075 of the total dividends paid of $2,453,500.



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As a result of the Plan of Liquidation it is unlikely that ACRT will raise any additional capital through the issuance of
common stock. Furthermore, liquidity will be primarily based upon the sales of existing properties.

On June 17, 2004, ACRT established an additional
secured credit facility, which provides for additional borrowing of up to $5,500,000 and decreases by $100,000 per annum. This credit facility bears interest at LIBOR plus 2.25% and matures in five years. ACRT is required to pay an annual commitment
fee equal to 0.5% on the unused portion of the facility. The total amount available under this facility at September 30, 2006 was $5,300,000. This credit facility is available to ACRT to facilitate working capital needs as it implements the
Plan of Liquidation.

ACRT believes that cash flow from operations and distributions from unconsolidated subsidiaries will provide a portion of the capital
to fund operating and administrative expenses and debt service. In addition, ACRT anticipates that cash on hand and borrowings under its secured facilities will assist in providing funds for these expenses and costs. As a result of the approval by
the shareholders of the Plan of Liquidation, dividends will only be paid from the proceeds of the sale of properties or upon final liquidation, as determined by the board of directors. Cash flows from operations as reported in the consolidated
statements of cash flows were $2,606,248 and $2,488,075 for the nine months ended September 30, 2006 and 2005, respectively.

Net cash provided by
investing activities was $15,610,175 and $8,597,273 for the nine months ended September 30, 2006 and 2005, respectively. Net cash provided by investing activities is related primarily to sale of properties or investments and repayments of notes
receivable.

Net cash used in financing activities was $13,132,955 and $10,687,426 for the nine months ended September 30, 2006 and 2005,
respectively. Net cash used in financing activities is primarily dividends paid, distributions to minority interest owners and debt service payments including paydown of a mortgage loan and the line of credit.

Debt Service Requirements

ACRTs principal liquidity needs are payments of interest and principal on outstanding indebtedness. As of September 30, 2006, a total of five of ACRTs seven consolidated properties were subject to outstanding mortgages
which had an aggregate principal amount outstanding of $17.7 million, including $8.0 million in variable interest rate mortgages. As of September 30, 2006, the weighted averaged interest rate on ACRTs outstanding mortgages was 7.93 %. The
scheduled principal payments as of September 30, 2006 for the next five years are as follows:



|     |  |   |        
|---- |  | - | -------
|2006 |  | $ | 169,397
|2007 |  |   | 597,818
|2008 |  |   | 576,742
|2009 |  |   | 453,255
|2010 |  |   | 479,848

Balloon payment amounts, due in the next five years, excluding the secured credit
facility, are as follows:



|     |  |   |          
|---- |  | - | ---------
|2007 |  | $ | 3,897,539
|2009 |  |   | 3,747,919

The interest rates on ACRTs outstanding indebtedness range from 6.86% to 8.65%. The ability of ACRT to make
its balloon payments will depend upon its ability to refinance the mortgages related thereto, sell the related property, have amounts available under its secured credit facility or obtain access to other sources of capital. The ability of ACRT to
accomplish this will be affected by the availability and cost of mortgage debt at that time, ACRTs equity in the mortgaged properties, the financial condition of ACRT, the operating history of the mortgaged properties, the then current tax
laws and general national, regional and local economic conditions.

ACRT has also purchased an interest rate cap in connection with its variable rate
mortgage on the Sacramento, California property. The Sacramento interest rate cap is coterminous with the mortgage and its notional amount equals the outstanding balance on the mortgage.

Lease Obligations

Since ACRTs tenants bear all or substantially all of the cost of property operations and maintenance and repairs, ACRT does not anticipate significant need for cash for these costs. For two of the thirteen consolidated properties,
ACRT has a certain level of property operating expense responsibility. To the extent there is a vacancy in a property, ACRT would be obligated to pay for all operating expenses, including real estate taxes and insurance.



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##### Table of Contents

Results of Operations for the Three Months Ended September 30, 2006 and 2005



|                                                                               |  |                        |       |   |      |   |       |                                   |  |   |      |  
|------------------------------------------------------------------------------ |  | ---------------------- | ----- | - | ---- | - | ----- | --------------------------------- |  | - | ---- | -
|Selected Income Statement Data                                                 |  | 2006                   |       |   | 2005 |   |       | Favorable (Unfavorable) 2006-2005 | 
|                                                                               |  | (Dollars in thousands) |       |   |      |  
|Rental revenues and reimbursements                                             |  | $                      | 1,016 |   |      | $ | 1,032 |                                   |  | $ | (16  | )
|Interest income                                                                |  |                        | 59    |   |      |   | 1     |                                   |  |   | 58   |  
|Interest expense                                                               |  |                        | 291   |   |      |   | 315   |                                   |  |   | 24   |  
|Depreciation and amortization expense                                          |  |                        | 180   |   |      |   | 191   |                                   |  |   | 11   |  
|Management fees-affiliate                                                      |  |                        | 153   |   |      |   | 170   |                                   |  |   | 17   |  
|Real estate taxes                                                              |  |                        | 111   |   |      |   | 132   |                                   |  |   | 21   |  
|Property operating expenses                                                    |  |                        | 31    |   |      |   | 36    |                                   |  |   | 5    |  
|General and administrative expense                                             |  |                        | 18    |   |      |   | 19    |                                   |  |   | 1    |  
|Stock based compensation                                                       |  |                        | 189   |   |      |   | 112   |                                   |  |   | (77  | )
|Professional expenses                                                          |  |                        | 196   |   |      |   | 173   |                                   |  |   | (23  | )
|Loss (gain) on interest rate cap, net                                          |  |                        | 11    |   |      |   | (3    | )                                 |  |   | (14  | )
|Other expenses                                                                 |  |                        | 50    |   |      |   | 7     |                                   |  |   | (43  | )
|Minority interest in earnings of subsidiaries                                  |  |                        | 17    |   |      |   | 16    |                                   |  |   | (1   | )
|Equity in income (loss) of unconsolidated subsidiaries and undivided interests |  |                        | (183  | ) |      |   | 306   |                                   |  |   | (489 | )
|(Loss) income from discontinued operations                                     |  |                        | (37   | ) |      |   | 78    |                                   |  |   | (115 | )
|Net (loss) income                                                              |  |                        | (392  | ) |      |   | 249   |                                   |  |   | (641 | )

Rental revenues decreased by $16,000 which is primarily attributable to lower property operating expense
reimbursements and lower real estate tax reimbursements in 2006 on the Wichita, Kansas property. The lower reimbursements are offset by lower property operating expenses and lower real estate tax expenses.

Interest income increased by $58,000 due mainly to interest income from higher cash balances and higher interest rates in 2006.

Interest expense decreased by $24,000 primarily due to lower outstanding loan balances in 2006 and offset by higher interest rates.

Depreciation and amortization expense decreased by $11,000 due to the slightly lower amortization of deferred financing costs in 2006.

Management fees affiliate decreased by $17,000 due to having less properties in 2006 due to sales in 2006 and the second half of 2005.

Real estate taxes decreased by $21,000 due to lower real estate taxes on the Wichita Kansas property (see rental revenues).

Stock based compensation increased $77,000 due to changes in the estimated fair value of ACRTs common stock from $12.00 to $13.50 per share in 2006.

Professional expense increased by $23,000 due to increased legal and accounting fees associated with the proxy preparation and lawsuits related to Triangle.

Other expense represents $43,000 of interest due to the joint venture partner on Triangle related to October 5, 2006 court ruling regarding the investment in
Triangle.

Equity in income (loss) of unconsolidated subsidiaries and undivided interests decreased by $489,000 primarily due to $ 365,000 related to
discontinuance of the equity method of accounting for Triangle and the reversal of prior period estimates of ACRTs share of Triangle investment and to $92,000 related to lower income on the Rochelle Park investment due primarily to losses on
the interest rate cap and higher interest expense and $35,000 related to lower income from the Fort Washington, Pennsylvania investment due to its sale in May 2006.

Income (loss) from discontinued operations decreased by $115,000 due primarily to lower income from the Overland Park, Kansas property due to its sale in June 2006.



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##### Table of Contents

Results of Operations for the Nine Months Ended September 30, 2006 and 2005



|                                                                       |  |                        |       |      |   |                                   |  |   |       |  
|---------------------------------------------------------------------- |  | ---------------------- | ----- | ---- | - | --------------------------------- |  | - | ----- | -
|Selected Income Statement Data                                         |  | 2006                   |       | 2005 |   | Favorable (Unfavorable) 2006-2005 | 
|                                                                       |  | (Dollars in thousands) |       |      |  
|Rental revenues and reimbursement                                      |  | $                      | 3,040 |      | $ | 3,260                             |  | $ | (220  | )
|Interest income                                                        |  |                        | 108   |      |   | 22                                |  |   | 86    |  
|Interest expense                                                       |  |                        | 938   |      |   | 953                               |  |   | 15    |  
|Depreciation and amortization expense                                  |  |                        | 548   |      |   | 567                               |  |   | 19    |  
|Asset management fees-affiliate                                        |  |                        | 483   |      |   | 519                               |  |   | 36    |  
|Real estate taxes                                                      |  |                        | 331   |      |   | 405                               |  |   | 74    |  
|Property operating expenses                                            |  |                        | 103   |      |   | 116                               |  |   | 13    |  
|General and administrative expenses                                    |  |                        | 83    |      |   | 89                                |  |   | 6     |  
|Stock based compensation                                               |  |                        | 1,075 |      |   | 337                               |  |   | (738  | )
|Professional expenses                                                  |  |                        | 486   |      |   | 422                               |  |   | (64   | )
|Loss on interest rate cap, net                                         |  |                        | 3     |      |   | 3                                 |  |   |      |  
|Other expenses                                                         |  |                        | 55    |      |   | 17                                |  |   | (38   | )
|Minority interest in earnings of subsidiaries                          |  |                        | 48    |      |   | 46                                |  |   | (2    | )
|Equity in income of unconsolidated subsidiaries and undivided interest |  |                        | 339   |      |   | 854                               |  |   | (515  | )
|Gain on sale of investment in unconsolidated subsidiaries              |  |                        | 1,546 |      |   | 400                               |  |   | 1,146 |  
|Income from discontinued operations                                    |  |                        | 3,129 |      |   | 298                               |  |   | 2,831 |  
|Net (loss) income                                                      |  |                        | 4,009 |      |   | 1,360                             |  |   | 2,649 |  

Rental revenues decreased by $220,000 due to $160,000 of increased rental income in 2005 on the Montgomeryville
property and to lower real estate tax reimbursements in 2006 on the Wichita, Kansas property. The decrease in real estate tax reimbursements is offset by a similar decrease in real estate tax expense.

Interest income increased by $86,000 due to interest income from the loan from ACRTs line of credit to the Overland Park, Kansas property and to higher cash
balances and to higher interest rates in 2006.

Interest expense decreased by $15,000 primarily due to lower outstanding loan balances in 2006 offset by
higher interest rates.

Depreciation and amortization expense decreased by $19,000 due to the slightly lower amortization of deferred financing costs in
2006.

Management fees affiliate decreased by $36,000 due to having less properties in 2006 due to sales in 2006 and the second half of 2005.

Real estate taxes decreased by $74,000 due to lower real estate taxes on the Wichita Kansas property (see rental revenues).

Stock based compensation increased by $738,000 due to changes in the estimated fair value of ACRTs common stock from $12.00 to $13.50 per share in 2006.

Professional expenses increased by $64,000 due to increased legal and accounting fees associated with the proxy preparation and lawsuits related to
Triangle.

Other expense increased by $38,000 due primarily to interest due the joint venture partner on Triangle related to the October 5, 2006 court
ruling regarding the investment in Triangle.

Equity in income of unconsolidated subsidiaries and undivided interests decreased by $515,000 primarily due
to $353,000 related to discontinuance of the equity method of accounting for Triangle and the reversal of prior period estimates of ACRTs share of Triangle investment and to $122,000 related to lower income on the Rochelle Park investment due
primarily to losses on the interest rate cap and higher interest expense and $51,000 related to lower income from the Fort Washington, Pennsylvania investment due to its sale in May 2006.



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##### Table of Contents

Gain on sale of investment in unconsolidated subsidiaries was $1,546,000 in 2006 from the sale of the Fort Washington,
Pennsylvania investment and $400,000 in 2005 from the sale of the Willow Grove, Pennsylvania investment.

Income from discontinued operations increased by
$2,831,000 due primarily to the gain on the sale of the Overland Park, Kansas property of $2,647,000.

Environmental Matters

Based upon managements ongoing review of its properties, management is not aware of any environmental conditions with respect to any of ACRTs properties,
which would be reasonably likely to have a material adverse effect on ACRT. There can be no assurance, however, that the discovery of environmental conditions which were previously unknown, changes in law, the conduct of tenants or activities
relating to properties in the vicinity of ACRTs properties, will not expose ACRT to material liability in the future. Changes in law increasing the potential liability for environmental conditions existing on properties or increasing the
restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of ACRTs tenants, which would adversely affect ACRTs consolidated financial condition
and results of operations.

Off-Balance Sheet Arrangements

Unconsolidated Real Estate Joint Ventures and Undivided Interests

ACRT has investments in various real estate joint ventures with varying structures. These investments include ACRTs non-controlling interests in Triangle Plaza II, LLC, Fort Washington Fitness, L.P., Levittown
ARC, LP, Willow Grove ACRT, LLC and ARC International Fund II, LP and its undivided interests in the Rochelle Park property and the Paramus property. See Item 1 Note 4 of Notes to Consolidated Financial Statements (unaudited) for information on
these investments.

The properties owned by the joint ventures and the undivided interests are financed with individual non-recourse mortgage loans.
Non-recourse mortgage debt is generally defined as debt whereby the lenders sole recourse with respect to borrower defaults is limited to the value of the property collateralized by the mortgage. The lender generally does not have recourse
against any other assets owned by the borrower or any of the members of the borrower, except for certain specified expectations listed in the particular loan documents. These exceptions generally relate to limited circumstances including breaches of
material representations. ACRT invests in joint ventures with third parties to increase portfolio diversification, reduce the amount of equity invested in any one property and to increase returns on equity due to the realization of advisory fees.



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##### Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures about Market Risk

ACRTs exposure to market risk relates to its variable rate debt. At September 30, 2006, ACRT had two variable rate mortgages outstanding totaling $8.026 million and $0 outstanding on its variable rate line of credit. The
mortgages bear interest at LIBOR plus 206 basis points (7.39% on $3.993 million) and LIBOR plus 225 basis points (7.58% on $4.033 million) and the line of credit bear interest at LIBOR plus 225 basis points. Had the LIBOR rate been 100 basis points
higher during the nine months ended September 30, 2006, ACRTs net income would have been reduced by approximately $60,000. ACRT also entered into an interest rate cap agreement on a notional amount equal to the $4.018 million mortgage
balance at September 30, 2006, which effectively caps the LIBOR rate at 7.45% per year.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures



| | (a) | Disclosure Controls and Procedures. ACRTs management, with the participation of ACRTs Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness
of ACRTs disclosure controls and procedures (as such term is defined in Rules 13a-15 (e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation,
ACRTs Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, ACRTs disclosure controls and procedures are effective.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Internal Control Over Financial Reporting



| | (b) | Internal Control Over Financial Reporting. There have not been any changes in ACRTs internal control over financial reporting during the third quarter to which this report
relates that have materially affected, or are reasonably likely to materially affect, ACRTs internal control over financial reporting.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

PART II - OTHER INFORMATION



|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM 1.  |  | Legal Proceedings  On January 5, 2005, Whitestone sent to the joint venture partner a notice of right of first refusal to purchase Whitestones interest in the property at a
price and other terms as set forth in the notice, subject to an attached form of contract that required both shareholder and board of director approval. Subsequently, ACRT discovered that the calculation used to allocate capital proceeds in the
contemplated sale, prepared by a third party, was incorrectly allocated and as a result management and the board of directors of ACRT did not approve the terms of the sale. In addition, ACRT believes the joint venture partner, due to their unique
insight into the value of the interest as the manager of the property, was aware that the capital proceeds were incorrectly allocated. The joint venture partner has refused to accept a revised purchase price calculation, which necessitated ACRT
bringing suit to halt the sale. On April 1, 2005, ACRTs joint venture partner filed a separate lawsuit against Whitestone compelling a sale of ACRTs interest under the terms of the original right of first refusal.
|         | 
|         |  | In March 2005, ACRT brought suit against its joint venture partner regarding the exercise of a right of first refusal on the purchase of ACRTs interest in Triangle. On October 5, 2006 the
New York Supreme Court ruled that ACRT must sell its Triangle investment for $5.4 million and required ACRT to return a distribution it received in 2005 of $340,869 with accrued interest of approximately $43,000. This amount appears under due
to joint venture partners on the consolidated balance sheets as of September 30, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         | 
|         |  | As a result of the October 5, 2006 court ruling, ACRT will not receive its share of earnings from Triangle in 2006 and ceased accounting for Triangle on the equity method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | 
|ITEM 1A. |  | ACRT has revised its Risk Factor disclosures from those set forth in its most recent Form 10-K. The revised Risk Factor disclosures are incorporated by reference to pages 3 through 6 of
ACRTs Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on September 11, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         | 
|ITEM 2.  |  | Changes in Securities, Use of Proceeds and Issuers Purchase of Equity Securities- not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | 
|ITEM 3.  |  | Defaults Upon Senior Securities-not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | 
|ITEM 4.  |  | Submission of Matters to a Vote of Security Holders- ACRT filed its definitive Schedule 14A and mailed a Proxy Statement regarding stockholder approval of a Plan of Complete Liquidation and
Dissolution to its stockholders on September 11, 2006. On October 12, 2006, the Plan of Liquidation was approved by the shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | 
|ITEM 5.  |  | Other information- not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | 
|ITEM 6.  |  | Exhibits and Reports                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         | 
|         |  | 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | 
|         |  | 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | 
|         |  | 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         | 
|         |  | 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



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SIGNATURES

Pursuant to the requirements 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, on this 14 day of November 2006.



ARC CORPORATE REALTY TRUST, INC.By:

/s/ Robert J. AmbrosiName:

Robert J. AmbrosiTitle:

Chairman and PresidentBy:

/s/ Bruce NelsonName:

Bruce NelsonTitle:

Chief Financial Officer




25