<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
          (Mark One)

              [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 1999

                                       OR

             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number 1-14029

                             AMRESCO CAPITAL TRUST
             (Exact name of Registrant as specified in its charter)

                   TEXAS                                          75-2744858
      (State or other jurisdiction of                         (I.R.S. Employer
       incorporation or organization)                        Identification No.)

   700 N. PEARL STREET, SUITE 1900, LB 342, DALLAS, TEXAS         75201-7424
          (Address of principal executive offices)                (Zip Code)

       Registrant's telephone number, including area code: (214) 953-7700

          Securities registered pursuant to Section 12(b) of the Act:

                                      NONE
                                (Title of class)

          Securities registered pursuant to Section 12(g) of the Act:

         COMMON SHARES OF BENEFICIAL INTEREST, $0.01 PAR VALUE PER SHARE
                         PREFERRED SHARE PURCHASE RIGHTS
                                (Title of class)

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

As of March 10, 2000, 10,015,111 shares of the registrant's common stock, par
value $.01 per share, were outstanding. As of that date, the aggregate market
value of the shares of common stock held by non-affiliates of the registrant
(based upon the closing price of $9.031 per share on March 10, 2000 as reported
on The Nasdaq Stock Market(R)) was approximately $75.6 million. Shares of common
stock held by each executive officer and trust manager have been excluded in
that such persons may be deemed to be affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None


<PAGE>   2




                              AMRESCO CAPITAL TRUST
                                      INDEX


<TABLE>
<CAPTION>
                                                                            Page No.
                                                                            --------
<S>      <C>                                                                <C>
PART I

Item 1.  Business ..........................................................    3
Item 2.  Properties ........................................................   15
Item 3.  Legal Proceedings .................................................   15
Item 4.  Submission of Matters to a Vote of Security Holders ...............   15

PART II

Item 5.  Market for Registrant's Common Equity and Related Shareholder
           Matters .........................................................   16
Item 6.  Selected Financial Data ...........................................   18
Item 7.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations ...........................................   19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........   31
Item 8.  Financial Statements and Supplementary Data .......................   33
Item 9.  Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure ............................................   33

PART III

Item 10. Trust Managers and Executive Officers of the Company ..............   34
Item 11. Executive Compensation ............................................   37
Item 12. Security Ownership of Certain Beneficial Owners and Management ....   40
Item 13. Certain Relationships and Related Transactions ....................   41

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..   44

SIGNATURES .................................................................   46
</TABLE>




                                       2
<PAGE>   3
                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

AMRESCO Capital Trust (the "Company") was organized on January 6, 1998 as a real
estate investment trust under the laws of the State of Texas. The Company was
formed to take advantage of certain mid- to high-yield lending and investment
opportunities in real estate related assets, including various types of
commercial mortgage loans (including, among others, participating loans,
mezzanine loans, acquisition loans, construction loans, rehabilitation loans and
bridge loans), commercial mortgage-backed securities ("CMBS"), commercial real
estate, equity investments in joint ventures and/or partnerships, and certain
other real estate related assets. The Company was initially capitalized through
the sale of 100 of its common shares of beneficial interest, par value $.01 per
share (the "Common Shares"), to AMRESCO, INC. ("AMRESCO") on February 2, 1998
for $1,000. The Company commenced operations on May 12, 1998, concurrent with
the completion of its initial public offering ("IPO") of 9,000,000 Common Shares
and private placement of 1,000,011 Common Shares (the "Private Placement") at
$15.00 per share. The net proceeds from the IPO and the Private Placement, after
the underwriters' discount and offering expenses attributable to the IPO,
aggregated approximately $139.7 million. Immediately after the closing of the
IPO, the Company began originating and acquiring investments. As of September
30, 1998, the Company had fully invested the proceeds from the IPO and the
Private Placement and had begun to leverage its investments. At December 31,
1999, the Company had debt outstanding, excluding non-recourse debt on real
estate, of $70.5 million.

The Company believes it has operated and it intends to continue to operate in a
manner so as to continue to qualify as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code"). As a result, the Company will generally not be subject to federal
income tax on that portion of its ordinary income or capital gain that is
currently distributed to its shareholders if it distributes at least 95% of its
annual REIT taxable income and it complies with a number of other organizational
and operational requirements including, among others, those concerning the
ownership of its outstanding Common Shares, the nature of its assets and the
sources of its income.

Pursuant to the terms of a Management Agreement dated as of May 12, 1998, as
amended, and subject to the direction and oversight of the Board of Trust
Managers, the Company's day-to-day operations are managed by AMREIT Managers,
L.P. (the "Manager"), an affiliate of AMRESCO (together with its affiliated
entities, the "AMRESCO Group") which was formed in March 1998. The terms of the
Management Agreement are more fully described below. Immediately after the
closing of the IPO, the Manager was granted options to purchase 1,000,011 Common
Shares; 70% of the options are exercisable at an option price of $15.00 per
share (the "IPO Price") and the remaining 30% of the options are exercisable at
an option price of $18.75 per share. The options vest ratably over a four-year
period commencing on the first anniversary of the date of grant.

AMREIT Holdings, Inc. ("Holdings"), a wholly-owned subsidiary of AMRESCO,
currently owns 1,500,011 shares, or approximately 15% of the Company's
outstanding common stock. Holdings acquired 1,000,011 shares at the IPO Price
pursuant to the Private Placement; the remaining 500,000 shares were acquired
through the IPO. AMRESCO owns 100 shares of the Company's outstanding common
shares; as described above, these shares were acquired on February 2, 1998 in
connection with the initial capitalization of the Company.

Subject to certain limited exceptions, AMRESCO has granted to the Company a
right of first refusal with respect to the first $100 million of targeted
mortgage loan investments which are identified by or to any member of the
AMRESCO Group during any calendar quarter and all mortgage-backed securities
(other than mortgage-backed securities issued in securitizations sponsored in
whole or in part by any member of the AMRESCO Group). Additionally, the Company
is a party to an Amended and Restated Correspondent Agreement with Holliday
Fenoglio Fowler, L.P. ("HFF") pursuant to which HFF endeavors to present to the
Company (on a non-exclusive basis) investment opportunities identified by HFF
which meet the investment criteria and objectives of the Company. HFF was a
member of the AMRESCO Group until March 17, 2000, at which time all of its
assets and several of AMRESCO's other business platforms were sold to Lend Lease
(US) Services, Inc. ("Lend Lease"). Lend Lease established a new limited
partnership, HFF, L.P., into which all of HFF's assets were transferred at
closing. HFF, L.P. subsequently changed its name to Holliday Fenoglio Fowler,
L.P. ("New HFF"). Substantially all of the employees of HFF became employees of
New HFF. The Amended and Restated




                                       3
<PAGE>   4

Correspondent Agreement was assigned to New HFF, which assumed the obligations
arising from this agreement after the closing of the transaction with Lend
Lease.

EMPLOYEES

The Company has no employees nor does it maintain a separate office. Instead,
the Company relies on the facilities and resources of the Manager and its
executive officers, each of whom is employed by AMRESCO. The Company is not a
party to any collective bargaining agreements. AMRESCO is a publicly-traded
financial services company headquartered in Dallas, Texas. AMRESCO, which began
operating in 1987, employed approximately 2,600 people as of December 31, 1999.
As of March 30, 2000, AMRESCO employed approximately 1,200 people.

BUSINESS STRATEGY

In the past, the Company's principal business objective has been to maximize
shareholder value by producing cash flow for distribution to its shareholders
through investment in mid- to high-yield real estate related assets which earn
an attractive spread over the Company's cost of funds. In accordance with this
objective, the Company has made investments in senior mortgage loans, mezzanine
loans, CMBS and commercial real estate (through investments in partnerships)
while maintaining what management believes is a conservative leverage position.
Specifically, the Company has sought to:

o    Take advantage of expertise existing within, and investment and
     co-investment opportunities arising from the business and operations of,
     the AMRESCO Group. During 1998, the Company acquired 10 loans from the
     AMRESCO Group at an aggregate purchase price of $39.7 million. The Company
     did not acquire any loans from the AMRESCO Group during 1999.

o    Utilize the expertise and resources of HFF to monitor trends and demands in
     the mortgage loan and real estate markets and to adjust its mortgage loan
     products in response thereto.

o    Capitalize upon the market research capabilities of the AMRESCO Group to
     analyze the Company's investment opportunities and the economic conditions
     in the Company's proposed geographic markets to assist the Company in
     selecting investments which satisfied the Company's investment criteria and
     targeted returns.

o    Utilize the expertise of the AMRESCO Group in the underwriting, origination
     and closing of mortgage loans and in the acquisition, management and
     servicing of mortgage loans, mortgage loan portfolios and CMBS.

o    Borrow against or leverage its investments to the extent consistent with
     the Company's leverage policies. At December 31, 1999 and 1998, the
     Company's debt to equity ratio, excluding non-recourse debt on real estate,
     was 0.6 to 1 and 0.3 to 1, respectively. Including non-recourse debt on
     real estate, the Company's debt to equity ratio was 0.9 to 1 and 0.4 to 1
     at December 31, 1999 and 1998, respectively. The Company has used, and it
     continues to use, repurchase agreements to finance a portion of its CMBS
     portfolio. These agreements often involve financing with a shorter term
     than the underlying assets being financed. In addition, repurchase
     agreements require margin calls if there is a dimunition of asset value due
     to spread widening or interest rate changes. Both of these risks result in
     a need for liquidity to either pay down or pay off repurchase agreement
     financing. The Company would be required to increase its leverage from its
     line of credit or sell assets in the event that repurchase agreement
     financing could not be obtained at maturity. The Company currently has the
     approved capacity under its line of credit should these events occur.

o    Implement various hedging strategies, including, but not limited to,
     interest rate swaps and interest rate collars, caps or floors (to the
     extent permitted by the REIT provisions of the Code) to minimize the
     effects of interest rate fluctuations on its investments and its borrowings
     if, given the cost of such hedges and the Company's desire not to
     jeopardize its status as a REIT, the Manager determines that such
     strategies are in the best interest of the Company's shareholders.

o    Manage the credit risk of its assets by (i) extensively underwriting its
     investments utilizing the processes developed and utilized by the AMRESCO
     Group, (ii) selectively choosing its investments for origination or
     acquisition in compliance with the Company's investment policies, (iii)
     actively monitoring the credit quality of its assets, and (iv) maintaining
     what management believes are appropriate capital levels and allowances for
     credit losses.




                                       4
<PAGE>   5
Beginning in mid 1998 (shortly after the closing of the Company's IPO), market
prices for publicly traded REITs and mortgage REITs in particular began a
significant decline. Additionally, during the third and fourth quarters of 1998,
the commercial mortgage-backed securitization market deteriorated dramatically.
Because of these developments, the Company, like many other REITs, became
limited in its ability to raise new capital to achieve its business strategy as
outlined above. REITs are limited in their ability to grow through retained
earnings because they are required to distribute at least 95% of their REIT
taxable income annually. In order to continue to grow its asset base as a
stand-alone entity, a REIT must raise new capital either in the form of equity
or debt. It also became apparent that the market was pricing the Company's
equity at severely discounted values relative to its book value.

Accordingly, in late 1998, the Company's Board of Trust Managers began
discussions of ways to strengthen the Company's balance sheet, gain access to
additional sources of capital and provide liquidity to use for future
investments and operations. Following an extensive review of the various
alternatives available to the Company and after consideration of several
proposals from other entities, the Company ultimately entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Impac Commercial Holdings, Inc.
("ICH"), another mortgage REIT, in early August 1999. Although the Company
believed at that time that the combination would be beneficial to its
shareholders, prevailing market conditions and other factors made the merger
less attractive as time progressed. Furthermore, it appeared that the benefits
to be derived from the combination would take longer than originally anticipated
to materialize. Ultimately, the Company and ICH mutually agreed to terminate the
Merger Agreement in late December 1999. During the latter part of 1999, the
Company's Common Shares continued to trade at a substantial discount to the
Company's book value and the CMBS market continued to deteriorate.

In early 2000, the Board of Trust Managers approved a course of action to market
and sell the Company's non-core assets, including its CMBS investments and its
equity investments in real estate. During the first quarter of 2000, the Company
also continued to analyze strategic alternatives to maximize shareholder value,
including continuing to operate as a going concern (either as a REIT or as a C
corporation), merging or combining with other entities, selling its shares or
its assets, or winding down its operations in a liquidation. On March 29, 2000,
the Board of Trust Managers unanimously approved a Plan of Liquidation and
Dissolution (the "Plan") for the Company. Implementation of the Plan requires
the affirmative vote of at least two-thirds of the Company's outstanding Common
Shares.

A majority of the Company's loans are expected to be fully repaid at or prior to
their scheduled maturities (including extension options) in accordance with the
terms of the underlying loan agreements. Given the short duration of the
Company's loans and the quality of most of its assets, the Company believes that
the liquidation process can be completed in 18 to 24 months, although there can
be no assurances that this time table will be met or that the anticipated
proceeds from the liquidation will be achieved. For additional discussion of the
status of the Company's sales efforts, reference is made to "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations".

MANAGEMENT AGREEMENT

For its services during the period from May 12, 1998 (the Company's inception of
operations) through December 31, 1999, the Manager has been entitled to receive
a base management fee equal to 1% per annum of the Company's average invested
non-investment grade assets and 0.5% per annum of the Company's average invested
investment grade assets. In addition to the base management fee, the Manager has
been entitled to receive incentive compensation for each fiscal quarter in an
amount equal to 25% of the dollar amount by which all of the Company's Funds
From Operations (as defined by the National Association of Real Estate
Investment Trusts) plus gains (or minus losses) from debt restructurings and
sales of property, as adjusted, exceeds the ten-year U.S. Treasury rate plus
3.5%. In addition to the fees described above,


                                       5
<PAGE>   6
 the Manager has also been entitled to receive reimbursement for its costs of
providing certain due diligence and professional services to the Company. The
following table summarizes the amounts charged to the Company by the Manager
since May 12, 1998 under the terms of the Management Agreement (dollars in
thousands):

<TABLE>
<CAPTION>
                                                         Period from
                                                        May 12, 1998
                                         Year Ended       through
                                         December 31,    December 31,
                                             1999           1998
                                         ------------   ------------
<S>                                      <C>            <C>
                Base management fees     $      2,066   $        835
                Incentive compensation           --             --
                Reimbursable expenses             192            140
                                         ------------   ------------

                                         $      2,258   $        975
                                         ============   ============
</TABLE>

On March 29, 2000, the Company's Board of Trust Managers approved certain
modifications to the Manager's compensation in response to the changes in the
Company's business strategy. In addition to the base management fee described
above, the Manager will be entitled to receive reimbursement for its quarterly
operating deficits, if any, beginning April 1, 2000. These reimbursements will
be equal to the excess, if any, of the Manager's operating costs (including
principally personnel and general and administrative expenses) over the sum of
its base management fees and any other fees earned by the Manager from sources
other than the Company. Currently, AMRESCO (through the Manager) employs 7
people who are fully dedicated to the Company. Additionally, three of the
Company's executive officers allocate their time, as necessary, to the Company.
After March 31, 2000, two of these three officers will no longer be employed by
AMRESCO, although they will continue to serve in their present capacities as
officers of the Company. As part of the modification, the Manager is no longer
entitled to receive incentive compensation and/or a termination fee in the event
that the Management Agreement is terminated. Prior to the modifications, the
Manager could have been entitled to a termination fee in the event that the
Management Agreement was terminated by the Company without cause, including a
termination resulting from the liquidation and dissolution of the Company. The
termination fee would have been equal to the sum of the Manager's base
management fee and incentive compensation earned during the twelve-month period
immediately preceding the termination. During the period from January 1, 2000
through March 31, 2000, the Manager is entitled to receive the fees and
reimbursements provided for under the original terms of the Management
Agreement.

HISTORICAL INVESTMENT ACTIVITIES

General

The Manager is authorized in accordance with the terms of the Management
Agreement to make the day-to-day investment decisions of the Company based on
guidelines in effect and approved from time to time by the Company's Board of
Trust Managers. The Trust Managers have reviewed all transactions of the Company
on a quarterly basis to determine compliance with the guidelines. Due to the
typically higher risk nature of its investments, the Manager has selectively and
extensively underwritten the Company's investments utilizing the expertise,
processes and procedures developed by the AMRESCO Group.

The Company operates exclusively as an investor in real estate related assets.
Historically, its asset allocation decisions and investment strategies have been
influenced by changing market factors and conditions. The Company has no policy
requiring that any specific percentage of its assets be invested in any
particular type or form of real estate investment nor does it limit any
particular type or form of real estate investment (other than CMBS) to a
specific percentage. CMBS investments, by policy, cannot exceed 40% of the
Company's total consolidated assets. The Board of Trust Managers has approved
the sale of the Company's non-core assets, including its CMBS and equity
investments in real estate. From time to time, the percentage of the Company's
investments that will be invested in a particular category of real estate assets
will vary.



                                       6
<PAGE>   7
The Company's historical investment activities have been focused in three
primary areas: loan investments, CMBS and equity investments in real estate.
Each of these investment categories is more fully described below. During the
year ended December 31, 1999 and the period from May 12, 1998 (inception of
operations) through December 31, 1998, revenues derived from each of these
categories were as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                    Year Ended           Period from May 12, 1998
                                                 December 31, 1999       through December 31, 1998
                                             ------------------------    ------------------------
                                               Amount      % of Total      Amount      % of Total
                                             ----------    ----------    ----------    ----------
<S>                                          <C>                   <C>   <C>                   <C>
         Loan investments                    $   16,099            69%   $    4,834            55%
         Investments in CMBS                      3,699            16         1,563            18
         Equity investments in real estate        3,199            13           181             2
         Other                                      396             2         2,167            25
                                             ----------    ----------    ----------    ----------

                                             $   23,393           100%   $    8,745           100%
                                             ==========    ==========    ==========    ==========
</TABLE>

Revenues derived from loan investments are included in the Company's
consolidated statements of income for the year ended December 31, 1999 and the
period from May 12, 1998 (inception of operations) through December 31, 1998, as
follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                           Period from
                                                                           May 12, 1998
                                                             Year Ended      through
                                                            December 31,   December 31,
                                                                1999           1998
                                                            ------------   ------------
<S>                                                         <C>            <C>
         Interest income on mortgage loans                  $     14,568   $      4,278
         Operating income from real estate                         1,531            211
         Equity in earnings of other real estate ventures           --              345
                                                            ------------   ------------

                                                            $     16,099   $      4,834
                                                            ============   ============
</TABLE>

The Company provides financing through some real estate loan arrangements that,
because of their nature, qualify as either real estate or joint venture
investments for financial reporting purposes. Such determination by the Company
affects the balance sheet classification of these investments and the
recognition of revenues derived therefrom. These investments are referred to in
this report as "ADC loan arrangements". For a discussion of ADC loan
arrangements as well as operating profit and information regarding the Company's
assets, reference is made to the audited consolidated financial statements and
notes thereto included in Item 8 of this report. Revenues derived from equity
investments in real estate includes both consolidated and unconsolidated
investments which are held directly by the Company. Other is comprised
principally of interest income which was derived from the temporary investment
of the Company's excess cash and, to a lesser extent, of income from its
unconsolidated taxable subsidiary and a minority-owned partnership that owns
CMBS. At December 31, 1999, the Company's unconsolidated taxable subsidiary
owned one CMBS and it held interests in a partnership that owns a mixed-use
property. At December 31, 1998, the taxable subsidiary held only the commercial
mortgage-backed security. During the period from May 12, 1998 through December
31, 1998, other represented a more significant component of the Company's
revenues due to the income which was derived from the temporary investment of
the Company's IPO and Private Placement proceeds prior to their deployment in
real estate related investments.

The Company does not have, nor does it rely upon, any major customers.
Additionally, the Company has made no investments outside of the United States.



                                       7
<PAGE>   8
Loan Investments

Historically, the Company has specialized in providing mid- to high-yield senior
and mezzanine financing to real estate owners and developers on a participating
and non-participating basis. Mezzanine loans, the repayment of which is
subordinated to senior mortgage loans, are secured by a second lien mortgage
and/or a pledge of the ownership interests of the borrower. Mezzanine loans
generally afford a relatively higher yield and entail greater risks than senior
mortgage loans. Based on committed amounts, senior mortgage loans and mezzanine
loans comprised 85% and 15%, respectively, of the Company's loan investment
portfolio at December 31, 1999. The Company's existing mortgage loan commitments
range in size from $3.4 million to $45 million. As of December 31, 1999, the
Company's loan investments are summarized as follows (dollars in thousands):

<TABLE>
<CAPTION>
  Date of                                                                                                   Interest  Interest
   Initial    Scheduled                                            Collateral      Commitment     Amount      Pay      Accrual
  Investment  Maturity        Location        Property Type        Position         Amount     Outstanding    Rate      Rate
  ----------  --------  -------------------  --------------    -----------------   ----------  -----------   ------    -------
<S>           <C>       <C>                  <C>               <C>                  <C>         <C>          <C>       <C>
   05/12/98   03/31/01  Richardson, TX       Office            Second Lien          $ 14,700     $ 13,709    10.0%      12.0%
   06/01/98   06/01/01  Houston, TX          Office            First Lien             11,800       11,079    12.0%      12.0%
   06/22/98   06/19/00  Wayland, MA          Office            First Lien             45,000       39,134    10.5%      10.5%
   07/02/98   06/30/00  Washington, D.C.     Office            First Lien              7,000        6,409    10.5%      10.5%
   07/10/98   07/31/00  Pasadena, TX         Apartment         First Lien              3,350        2,993    10.0%      14.0%
   09/30/98    Various  San Antonio, TX/     Residential Lots  First Lien              8,400        3,555    10.0%      14.0%
                             Sunnyvale, TX
   05/18/99   05/19/01  Irvine, CA           Office            First Lien             15,260       13,057    10.0%      12.0%
   07/29/99   07/28/01  Lexington, MA        R&D/Bio-Tech      First Lien              5,213        2,753    11.5%      14.5%
   08/19/99   08/15/01  San Diego, CA        Medical Office    First Lien              5,745        4,048    11.5%      11.5%
                                                                                    --------     --------

  Mortgage loans held for investment                                                 116,468       96,737
                                                                                    --------     --------

   06/12/98   06/30/00  Pearland, TX         Apartment         First Lien             12,827       12,291    10.0%      11.5%
   06/17/98   06/30/00  San Diego, CA        R&D/Bio-Tech      First Lien              5,560        4,732    10.0%      13.5%
   06/19/98   06/18/00  Houston, TX          Office            First Lien             24,000       21,622    12.0%      12.0%
   07/01/98   07/01/01  Dallas, TX           Office            Ptrshp Interests       10,068        8,262    10.0%      15.0%
                                                                                    --------     --------

  ADC loan arrangements                                                               52,455       46,907
                                                                                    --------     --------

  Total loan investments                                                            $168,923     $143,644
                                                                                    ========     ========
</TABLE>

Loan structures vary as they are usually customized to fit the characteristics
of the real estate and its capital structure. Generally, the Company's loans
have terms ranging from one to three years. Many of the Company's loans,
particularly construction and rehabilitation loans, provide for initial
investments followed by subsequent advances as costs are incurred by the
borrower. Typically, loans provide for a fixed pay rate and fixed accrual rate
of interest and, in some cases, may also provide for profit participation above
the contractual accrual rate. The incremental interest earned at the accrual
rate is often times not payable by the borrower until maturity of the loan. At
December 31, 1999, the Company had 13 loan investments which accrue interest at
accrual rates ranging from 10.5% to 15% per annum. Three of the 13 loan
investments provide the Company with the opportunity for profit participation in
excess of the contractual accrual rates.

The following table sets forth information regarding the location of the
properties securing the Company's loan investments at December 31, 1999 (dollars
in thousands):

<TABLE>
<CAPTION>
                                                                     % of Total
                                    Committed      Loan Amount       Committed
                                     Amount        Outstanding        Amount
                                  -------------   -------------    -------------
<S>                               <C>             <C>              <C>
               Texas              $      85,145   $      73,511               50%
               Massachusetts             50,213          41,887               30
               California                26,565          21,837               16
               Washington, D.C            7,000           6,409                4
                                  -------------   -------------    -------------

                                  $     168,923   $     143,644              100%
                                  =============   =============    =============
</TABLE>




                                       8
<PAGE>   9
At December 31, 1999, the Company's loan investments were collateralized by the
following product types (dollars in thousands):

<TABLE>
<CAPTION>
                                                                % of Total
                                  Committed    Loan Amount      Committed
                                   Amount      Outstanding       Amount
                                ------------   ------------    ------------
<S>                             <C>            <C>             <C>
               Office           $    127,828   $    113,272              76%
               Multifamily            16,177         15,284              10
               R&D/Bio-Tech           10,773          7,485               6
               Residential             8,400          3,555               5
               Medical Office          5,745          4,048               3
                                ------------   ------------    ------------

                                $    168,923   $    143,644             100%
                                ============   ============    ============
</TABLE>

At December 31, 1999, the Company's loan investments were collateralized by the
following loan types (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                     % of Total
                                                   Committed      Loan Amount        Committed
                                                    Amount        Outstanding          Amount
                                                 ------------     ------------      ------------
<S>                                              <C>              <C>                         <C>
               Acquisition/Rehabilitation        $     64,868     $     53,660                38%
               Construction                            51,527           47,622                31
               Acquisition                             44,128           38,807                26
               Single-Family Lot Development            8,400            3,555                 5
                                                 ------------     ------------      ------------

                                                 $    168,923     $    143,644               100%
                                                 ============     ============      ============
</TABLE>

The three properties underlying the Company's construction loans were
substantially completed during 1999. As of December 31, 1999, these properties
were 99%, 86% and 54% leased, respectively.

The Company is obligated to fund its loan commitments to the extent that the
borrowers are not in violation of any of the conditions established in the loan
agreements. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee if amounts are repaid
to the Company during certain prepayment lock-out periods. A portion of the
commitments could expire without being drawn upon and therefore the total
commitment amounts do not necessarily represent future cash requirements. As the
Company's loan portfolio is expected to contract as a result of repayments,
geographic and product type concentrations will persist.

The Company has typically originated its loan investments; however, it has also
purchased mortgage loans from members of the AMRESCO Group. To the extent the
Company acquired mortgage loans from the AMRESCO Group, such acquisitions were
made in strict conformance with the Company's policies regarding transactions
with the AMRESCO Group. During the period from May 12, 1998 (inception of
operations) through December 31, 1998, the Company acquired 10 loans from the
AMRESCO Group at an aggregate purchase price of $39.7 million. The Company did
not acquire any loans from the AMRESCO Group during 1999. Currently, any
proposed acquisition or sale of assets involving a member of the AMRESCO Group
requires the prior approval of a majority of the Independent Trust Managers of
the Investment Committee of the Board of Trust Managers.

The underwriting process for loans has taken into account special risks
associated with mid- to high-yield lending, including an in-depth assessment of
the character, experience (including operating history) and financial capacity
of the borrower or the borrowers' principal(s), a detailed analysis of the
property or project being financed and an analysis of the market in which the
borrower operates, including competition, market share data, comparable
properties, absorption rates and market rental rates as well as general
information such as population, employment trends, median income and demographic
data. Prior to closing, the Manager has either obtained a Phase I environmental
assessment or reviewed a recently obtained Phase I environmental assessment and
at least one of the Manager's representatives performed a site inspection.
Sources of information which were examined (if available) during the due
diligence process included: (a) current and historical operating statements; (b)
existing or new appraisals; (c) sales comparables; (d) industry statistics and
reports regarding operating expenses; (e) existing leases and market rates for
comparable leases; and (f) deferred maintenance observed during site inspections
and described in structural and engineering reports. Using all of the



                                       9
<PAGE>   10
information obtained during the due diligence process, the Manager then
developed projections of net operating income and cash flows to determine
current and expected exit values, as well as appropriate lending limits and
pricing given the risks inherent in each transaction.

As of December 31, 1999, the Company had no realized losses on its portfolio of
outstanding loans. The Company's allowance for loan losses, totaling $4.2
million at December 31, 1999, was ascribed entirely to a mezzanine loan with an
outstanding balance of $8,262,000 and a recorded investment of $7,191,000.
Currently, the Company does not expect that the ultimate resolution of this
investment will have a material adverse impact on its financial position or
results of operations. For additional discussion of this loan investment,
reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Item 7 of this report.

Commercial Mortgage-backed Securities

The Company has acquired non-investment grade classes of CMBS from several
sources. In most commercial mortgage securitizations, including those from which
the Company has acquired its bonds, a series of CMBS is issued in multiple
classes in order to obtain investment-grade credit ratings for the senior
classes (i.e., those with credit ratings of "BBB", "A", "AA" or "AAA") in order
to increase their marketability. The non-investment grade, or subordinated
classes, typically include classes with ratings below investment grade "BBB".
These subordinated classes also typically include an unrated higher-yield,
credit-support class which generally is required to absorb the first losses on
the underlying mortgage loans. Each class of CMBS may be issued with a specific
fixed rate or variable coupon rate and has a stated maturity or final scheduled
distribution date. As the subordinated classes provide credit protection to the
senior classes by absorbing losses from underlying mortgage loan defaults or
foreclosures, they carry more credit risk than the senior classes. Subordinated
classes are generally issued at a discount to their outstanding face value and
therefore generally afford a higher yield than the senior classes.

Currently, the Company's investments in CMBS are classified as available for
sale and are carried at estimated fair value as determined by quoted market
rates. Any unrealized gains or losses are excluded from earnings and reported as
a component of accumulated other comprehensive income (loss) in shareholders'
equity.

During the period from May 12, 1998 (inception of operations) through December
31, 1998, the Company acquired five commercial mortgage-backed securities at an
aggregate purchase price of $34.5 million. All of these securities were acquired
on or before September 1, 1998. The Company made no direct investments in CMBS
during 1999. At December 31, 1999, the aggregate amortized cost and estimated
fair value of CMBS, by underlying credit rating, were as follows (dollars in
thousands):

<TABLE>
<CAPTION>
                                        Aggregate          Aggregate           Aggregate          Percentage of
                          Security      Amortized         Unrealized             Fair            Total Based on
                           Rating         Cost               Losses              Value              Fair Value
                                     --------------      --------------      --------------       --------------
<S>                                  <C>                 <C>                 <C>                  <C>
                             BB-     $        4,271      $       (1,140)     $        3,131                  13%
                             B               19,664              (4,854)             14,810                  60%
                             B-              11,319              (4,691)              6,628                  27%
                                     --------------      --------------      --------------        ------------

                                     $       35,254      $      (10,685)     $       24,569                 100%
                                     ==============      ==============      ==============        ============
</TABLE>

Additionally, at December 31, 1999, the Company had recorded an unrealized loss
of $127,000, net of tax effects, related to one commercial mortgage-backed
security owned by AMREIT II, Inc., its unconsolidated taxable subsidiary. The
subsidiary acquired the security on May 27, 1998 at a purchase price of $3.5
million.

In February 1999, the Company contributed $0.7 million to a newly formed
investment partnership with Olympus Real Estate Corporation. Concurrently, the
partnership, which is 5% owned by the Company, acquired several classes of
subordinated CMBS, including some unrated and interest only securities, at an
aggregate purchase price of $12.7 million. The unrated and interest only
securities were purchased by the partnership for $830,000 and $625,000,
respectively. The other securities have an investment rating of either "BB" or
"B".

At December 31, 1999 and 1998, investments in CMBS comprised approximately 12%
and 17%, respectively, of the Company's investment portfolio.



                                       10
<PAGE>   11
As of December 31, 1999, the Company's CMBS holdings and their anticipated
maturity date were as follows:

<TABLE>
<CAPTION>
                                                                                          Expected
                 Class                          Security Name                          Maturity Date
               ---------   -----------------------------------------------------      ----------------
<S>                        <C>                                                        <C>
               G           Merrill Lynch Mortgage Investors, Inc. Series 1998-C2           March 2013
               H           Merrill Lynch Mortgage Investors, Inc. Series 1998-C2           March 2013
               J           Merrill Lynch Mortgage Investors, Inc. Series 1998-C2           March 2014
               G2          Morgan Stanley Capital I Series 1997 RR                      November 2022
               B-2A        CDC Depositor Trust Series 1998-ST1A                         February 2003
               B-3A        CDC Depositor Trust Series 1998-ST1A                         February 2003
</TABLE>

Prior to its sale in March 2000, the B-3A bond was owned by the Company's
unconsolidated taxable subsidiary. The B-2A bond was sold in January 2000. The
list above excludes the bonds held by the partnership in which the Company has a
5% ownership interest. All of the mortgage loans underlying the minority-owned
partnership's CMBS are scheduled to mature in December 2003.

Because there are numerous characteristics to consider when evaluating CMBS for
purchase, each CMBS was analyzed individually, taking into consideration both
objective data as well as subjective analysis. The Manager's due diligence
included an analysis of (i) the underlying collateral pool, (ii) the prepayment
and default history of the mortgage loans previously originated by the
originator, (iii) cash flow analyses under various prepayment and interest rate
scenarios (including sensitivity analyses) and (iv) an analysis of various
default scenarios. However, which of these characteristics (if any) were
important and how important each characteristic may have been to the evaluation
of a particular CMBS depended on the individual circumstances. The Manager used
sampling and other analytical techniques to determine on a loan-by-loan basis
which mortgage loans would undergo a full-scope review and which mortgage loans
would undergo a more streamlined review process. Although the choice was a
subjective one, considerations that influenced the choice for scope of review
included mortgage loan size, debt service coverage ratio, loan-to-value ratio,
mortgage loan maturity, lease rollover, property type and geographic location. A
full-scope review may have included, among other factors, a site inspection,
tenant-by-tenant rent roll analysis, review of historical income and expenses
for each property securing the mortgage loan, a review of major leases for each
property (if available); recent appraisals (if available), engineering and
environmental reports (if available), and the price paid for similar CMBS by
unrelated third parties in arm's length purchases and sales (if available) or a
review of broker price opinions (if the price paid by a bona fide third party
for similar CMBS was not available and such price opinions were available). For
those mortgage loans that were selected for the more streamlined review process,
the Manager's evaluation may have included a review of the property operating
statements, summary loan level data, third party reports, and a review of prices
paid for similar CMBS by bona fide third parties or broker price opinions, each
as available. If the Manager's review of such information did not reveal any
unusual or unexpected characteristics or factors, no further due diligence was
performed.

Equity Investments in Real Estate

The Company has made equity investments in real estate through two partnerships.
The Company acquired these interests on a leveraged basis with the expectation
that the investments would provide sufficient cash flow to provide a return on
its investment after debt service within the Company's target parameters. The
tax depreciation associated with these investments is used to offset the
non-cash accrual of interest on some of its loan investments and original issue
discount generally associated with CMBS.



                                       11
<PAGE>   12
The Company has entered into a master partnership that, through individual
subsidiary partnerships, has acquired interests in five newly constructed,
grocery-anchored shopping centers in the Dallas/Fort Worth, Texas area. The
Company holds a 99.5% interest in the master partnership. The master partnership
directly or indirectly owns 100% of the equity investment in each of these
centers. Information about these centers is summarized below.

<TABLE>
<CAPTION>
                                                                                             Percentage
                                                                                            Leased as of
                                                                            Approximate     December 31,
                Acquisition Date           Location          Square Feet   Purchase Price       1999
                ----------------   ---------------------    ------------- ---------------   -------------
<S>                                <C>                      <C>           <C>               <C>
                October 23, 1998   Arlington, Texas            82,730     $10.3 million          100%
                April 30, 1999     Flower Mound, Texas         86,516     $10.4 million           98%
                April 30, 1999     Grapevine, Texas            85,611     $12.4 million          100%
                April 30, 1999     Fort Worth, Texas           61,440     $ 7.4 million           98%
                August 25, 1999    Richardson, Texas           87,540     $10.7 million          100%
</TABLE>

In connection with the acquisition of the Arlington center, the subsidiary
partnership obtained a $7.5 million non-recourse loan from an unaffiliated third
party. Immediately prior to the closing, the Company contributed $3.4 million of
capital to the master partnership which, in turn, was then contributed to the
subsidiary partnership. The proceeds from this contribution were used, in part,
to fund the balance of the purchase price and to pay partnership formation
expenses and costs associated with the non-recourse financing.

In connection with the acquisitions of the Flower Mound, Grapevine and Fort
Worth centers, the three subsidiary partnerships which hold title to these
assets obtained non-recourse financing totaling $19.5 million from an
unaffiliated third party. Immediately prior to the closing, the Company
contributed $11.4 million of capital to the master partnership. The master
partnership, in turn, contributed these funds to the subsidiary partnerships.
The proceeds from this contribution were used to fund the balance of the
purchase price, to pay costs associated with the financing and to provide
initial working capital to the subsidiary partnerships.

In connection with the acquisition of the Richardson center, the subsidiary
partnership obtained a $7.6 million non-recourse loan from an unaffiliated third
party. Immediately prior to the closing, the Company contributed $3.4 million of
capital to the master partnership which, in turn, was then contributed to the
subsidiary partnership. The proceeds from this contribution were used, in part,
to fund the balance of the purchase price, to pay costs associated with the
financing and to provide initial working capital to the subsidiary partnership.

The loans on all five of these properties bear interest at 6.83% per annum. The
interest rates on the first four loans were adjusted in connection with the
placement of the fifth loan on August 25, 1999. Prior to that time, a $7.5
million loan bore interest at 7.28% per annum and three loans aggregating $19.5
million bore interest at 6.68% per annum. The loans require interest only
payments through January 1, 2002; thereafter, interest and principal payments
are due based upon 25-year amortization schedules. The loans, which mature on
January 1, 2014, prohibit any prepayment of the outstanding principal prior to
January 1, 2006. Thereafter, the loans may be prepaid at any time, in whole or
in part, upon payment of an amount equal to the greater of (a) 1% of the then
outstanding principal balance and (b) the present value of the sum of all of the
remaining principal and interest payments of the loan or loans being repaid,
assuming that all of these payments are paid when scheduled, less the principal
balance of the loan on the repayment date, using as a discount rate the yield of
the U.S. Treasury security having a maturity date that is the same maturity date
of the loan or loans being repaid. The current principal balance and the balance
due at maturity for each loan is as follows (in thousands):

<TABLE>
<CAPTION>
                                                     Current        Balance Due at
                            Location                 Balance            Maturity
                         ---------------------   --------------     --------------
<S>                                              <C>                <C>
                         Arlington, Texas        $        7,500     $        5,387
                         Flower Mound, Texas              6,882              4,944
                         Grapevine, Texas                 7,783              5,590
                         Fort Worth, Texas                4,833              3,471
                         Richardson, Texas                7,602              5,461
                                                 --------------     --------------

                                                 $       34,600     $       24,853
                                                 ==============     ==============
</TABLE>



                                       12
<PAGE>   13
Each subsidiary partnership has entered into lease agreements with various
lessees covering the center it owns. The principal tenant of each property is
Randall's Food & Drug, a wholly-owned subsidiary of Safeway, Inc. Each lease is
a triple net lease with the lessee obligated to pay the rent shown below plus
its pro rata share (based on the square footage it occupies divided by the total
square footage of the center) of the taxes, insurance premiums and the costs of
repair and maintenance of the center. Each of the Randall's Food & Drug leases
has a 25-year term, with an option to extend the lease for four additional
5-year terms. Rental payments are due monthly. Each of the Randall's Food & Drug
leases provides for a rent increase on the tenth anniversary of the lease.
Approximate minimum annual rental amounts due from Randall's Food & Drug for
each property are as follows:

<TABLE>
<CAPTION>
                                                              Approximate
                                                             Total Minimum
                                       Location               Annual Rent
                               --------------------------  -------------------
<S>                                                             <C>
                               Arlington, Texas                 $616,000
                               Flower Mound, Texas              $621,000
                               Grapevine, Texas                 $680,000
                               Fort Worth, Texas                $565,000
                               Richardson, Texas                $614,000
</TABLE>

In addition to these amounts, Randall's Food & Drug is obligated under the terms
of each lease to make an annual payment equal to 1% of its gross sales over
specified minimum amounts.

The Company competes for tenants in these five centers primarily on the basis of
customer traffic generated by its retail anchor tenants. Smaller tenants are
generally attracted to retail centers on the basis of desirable locations,
competitive lease terms and high occupancy rates. If any anchor tenant closes or
relocates, there could be a material adverse effect on the operation of the
affected center.

On March 2, 1999, the Company acquired a 49% limited partnership interest in a
partnership that owns a 116,000 square foot office building in Richardson,
Texas. In connection with this acquisition, the Company contributed $1.4 million
of capital to this partnership. The property is encumbered by a first lien
mortgage with a current principal balance of approximately $13.7 million. The
non-recourse mortgage loan, which is provided by an unaffiliated third party,
bears interest at 6.75% per annum and requires interest and principal payments
based upon a 25-year amortization schedule. The loan matures on March 5, 2019,
at which time $4.9 million is due. On the tenth anniversary of the loan, the
lender has the option, upon 60 days prior written notice, to increase the
interest rate to the then current market rate. No prepayment of principal, other
than scheduled amortization, is permitted during years 1-5 and years 11-15. The
loan can be prepaid during years 6 and 16 upon payment of a penalty equal to 3%
of the amount prepaid. During years 7 and 17, the loan can be prepaid upon
payment of a penalty equal to 2% of the amount prepaid. In years 8 and 18, the
loan can be prepaid upon payment of a penalty equal to 1% of the amount prepaid.
In years 9, 10, 19 and 20, the loan can be prepaid without penalty. Safeco
Insurance Company of America currently occupies approximately 74,000 square feet
of space in the building under a 10-year lease. In 2002 and 2004, Safeco is
obligated under the terms of the lease to take additional space totaling
approximately 16,000 square feet. The lease provides for two 5-year renewal
options at market rates. As of December 31, 1999, the property was 100% leased.

The Company's unconsolidated taxable subsidiary holds interests (indirectly) in
a partnership which owns a 909,000 square foot mixed-use property in Columbus,
Ohio.

The Company does not operate the real estate owned by the partnerships, but
rather it relies upon qualified and experienced real estate operators
unaffiliated with the Company.

In considering potential equity investments in real estate, the Company's
Manager performed due diligence substantially similar to that described above in
connection with the acquisition or origination of loan investments.

COMPETITION

The Company has competed in the acquisition and origination of investments with
a significant number of other REITs, investment banking firms, savings and loan
associations, banks, mortgage bankers, insurance companies, mutual funds, credit
companies and other entities, some of which have greater financial resources
than the Company. In addition, there are several REITs similar to the Company,
and others may be organized in the future. The effect of the existence of such
additional investors may be to increase competition for the available supply of
targeted investments. The availability of




                                       13
<PAGE>   14

targeted investments is dependent upon, among other things, the size of and
level of activity in the commercial real estate lending market, which depend on
various factors, including the level of interest rates, regional and national
economic conditions and inflation and deflation in commercial real estate
values.

In addition, the Company (to the extent the Company owns commercial real estate
through investments in partnerships) and the owners of real properties securing
the Company's mortgage loans compete with numerous other owners and operators of
similar properties, including commercial developers, real estate companies and
REITs. Many of these entities may have greater financial and other resources and
more operating experience than the Company or the owners of real properties
securing the Company's mortgage loans, as applicable. Many of the real
properties owned by the Company and those owned and operated by borrowers under
its mortgage loans are located in markets or submarkets in which significant
construction or rehabilitation of properties may occur. This could result in
overbuilding in these markets or submarkets. Any such overbuilding could
adversely impact the ability of the Company to lease its properties and the
ability of the borrowers under the Company's mortgage loans to lease their
respective properties and repay their mortgage loans. This could, in turn,
adversely impact the Company's income and its ability to make distributions to
its shareholders.

There are an estimated 25 to 40 significant competitive structured finance
lenders competing against the Company. The Company ranks on the lower end on
volume and on the upper end on return on assets in this group of lenders.
Historically, the Company has been competitive as a finance company due to its
ability and willingness to customize financing structures. The Company may be
less competitive at times due to its relatively small capitalization and lack of
low cost capital.

If shareholders approve the liquidation and dissolution, the Company will no
longer compete in any such areas after completing the liquidation of its assets.

ENVIRONMENTAL MATTERS

Under existing and future environmental legislation, a current or previous owner
or operator of real estate may be liable for the remediation of hazardous or
toxic substances on, under or in such real estate. Accordingly, the value and
operating costs of real estate acquired by the Company may be affected by the
obligation to pay for the cost of complying with this legislation. As a part of
the Manager's due diligence activities, Phase I environmental assessments were
obtained on all real estate acquired by the Company and on the real estate
collateralizing its loan investments. The purpose of Phase I environmental
assessments was to identify potential environmental contamination that is made
apparent from historical reviews of the real estate, reviews of certain public
records, preliminary (non-invasive) investigations of the sites and surrounding
real estate, and screening of relevant records for the presence of hazardous
substances, toxic substances and underground storage tanks. There can be no
assurance that such assessments revealed all existing or potential environmental
risks and liabilities, nor that there will be no unknown or material
environmental obligations or liabilities.

Based on these assessments, the Company believes that its real estate
investments and the real estate underlying its loan investments are in
compliance, in all material respects, with all federal, state and local
ordinances and regulations regarding hazardous or toxic substances and other
environmental matters, the violation of which could have a material adverse
effect on the Company or the borrowers, as applicable. The Company has not been
notified by any governmental authority of any material noncompliance, liability
or claim relating to hazardous or toxic substances or other environmental
matters in connection with any of its owned properties nor is it aware of any
such noncompliance with respect to the real estate collateralizing its loan
investments.

SHAREHOLDER RIGHTS PLAN

On February 25, 1999, the Company's Board of Trust Managers adopted a
shareholder rights plan (the "Rights Plan"). The Rights Plan was adopted in
response to the consolidation trend in the REIT industry rather than in response
to any specific proposals or communications. The Rights Plan is designed to
provide the Company's Board of Trust Managers with negotiating leverage in
dealing with a potential acquirer, to protect the Company from unfair and
abusive takeover tactics and to prevent an acquirer from gaining control of the
Company without offering a full and fair price to all shareholders. The Rights
Plan is not intended to prevent an acquisition beneficial to all of the
Company's shareholders. In connection with the adoption of the Rights Plan, the
Board of Trust Managers declared a dividend of one preferred share purchase
right (a "Right") for each outstanding Common Share of the Company. The dividend
was paid on March 11, 1999 to shareholders of record on March 11, 1999. Each
Right entitles the registered holder to purchase from the Company one
one-hundredth of a Series A Junior Participating Preferred Share ("Preferred
Share") for $37.50 per one



                                       14
<PAGE>   15

one-hundredth of a Preferred Share. The Rights trade with the Company's Common
Shares and are not exercisable until a triggering event, as defined, occurs.

ITEM 2.  PROPERTIES

The Company does not maintain a separate office. It relies exclusively on the
facilities of its manager, AMREIT Managers, L.P. (the "Manager"), an affiliate
of AMRESCO, INC. The executive offices of the Company, the Manager and AMRESCO,
INC. are located at 700 North Pearl Street, Suite 1900, Dallas, Texas 75201.

The Company (through a majority-owned partnership) holds interests in five
grocery-anchored shopping centers in the Dallas/Fort Worth, Texas area. These
properties are described in Item 1. Business under the heading "Historical
Investment Activities - Equity Investments in Real Estate". As of March 1, 2000,
the leasing status of each of the centers was as follows:

<TABLE>
<CAPTION>
                                             Percentage
                          Location             Leased
                    ---------------------  ----------------
<S>                                                <C>
                    Arlington, TX                  100%
                    Flower Mound, TX                98%
                    Grapevine, TX                  100%
                    Fort Worth, TX                  98%
                    Richardson, TX                 100%
</TABLE>

An unconsolidated taxable subsidiary of the Company holds interests (indirectly)
in a partnership which owns a 909,000 square foot mixed-use property in
Columbus, Ohio. The partnership interests were acquired through foreclosure on
February 25, 1999. The property is held subject to a $17 million first lien
mortgage provided by an unaffiliated third party and a $6.8 million second lien
mortgage provided by one of the Company's wholly-owned subsidiaries. As of March
1, 2000, the property was 75% leased.

Effective March 2, 1999, the Company acquired a 49% limited partner interest in
a partnership which owns a 116,000 square foot office building in Richardson,
Texas. The property is encumbered by a first lien mortgage with a current
outstanding balance of approximately $13.7 million. As of March 1, 2000, the
property was 100% leased.


ITEM 3.  LEGAL PROCEEDINGS

The Company is not a party to any material pending legal proceedings.


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

No matters were submitted to a vote of the Company's security holders during the
fourth quarter of 1999, through the solicitation of proxies or otherwise.




                                       15
<PAGE>   16
                                     PART II

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

MARKET INFORMATION

The Company's common shares of beneficial interest, par value $.01 per share
(the "Common Shares"), are traded on The Nasdaq Stock Market(R) ("Nasdaq") under
the symbol "AMCT". The following table sets forth for the indicated periods the
high and low sale prices for the Common Shares, as reported by Nasdaq.

<TABLE>
<CAPTION>
                                                                   High              Low
                                                                ------------     ------------
<S>                                                             <C>              <C>
                  1998
                  ----
                  Second Quarter (commencing May 7, 1998) ....  $     15.063     $     12.375
                  Third Quarter ..............................        13.500            8.688
                  Fourth Quarter .............................        10.438            5.875

                  1999
                  ----
                  First Quarter ..............................        10.500            8.250
                  Second Quarter .............................        10.750            8.250
                  Third Quarter ..............................        11.063            8.563
                  Fourth Quarter .............................         9.563            8.000

                  2000
                  ----
                  First Quarter (through March 10, 2000) .....         9.750            8.313
</TABLE>

SHAREHOLDER INFORMATION

At March 10, 2000, the Company had approximately 40 holders of record of its
Common Shares. It is estimated that there were approximately 2,600 beneficial
owners of the Common Shares at that date.

Because the Board of Trust Managers believes it is essential for the Company to
continue to qualify as a REIT, the Company's Declaration of Trust, subject to
certain exceptions, limits the number of Common Shares that may be owned by any
single person or affiliated group to 9.8% (the "Aggregate Share Ownership
Limit") of the total outstanding Common Shares. The Trust Managers may waive the
Aggregate Share Ownership Limit and have waived such Aggregate Share Ownership
Limit with respect to AMRESCO, INC. and its affiliates (for whom there is no
fixed Aggregate Share Ownership Limit) and FMR Corp. (for whom the Aggregate
Share Ownership Limit is 15%). The Aggregate Share Ownership Limit was also
waived for Prudential Securities, Inc. ("PSI") (for whom the Aggregate Share
Ownership Limit was 15%); such waiver expired on December 31, 1998 by which time
PSI's ownership was below 9.8%.




                                       16
<PAGE>   17
DISTRIBUTION INFORMATION

Since its inception, the Company has paid quarterly dividends on its Common
Shares which have been designed to allow the Company to qualify as a REIT under
the Internal Revenue Code of 1986, as amended (the "Code"). The following table
sets forth information regarding the declaration, payment and federal income tax
status of the Company's dividends since its commencement of operations on May
12, 1998 (dollars in thousands, except per share amounts).

<TABLE>
<CAPTION>
                                                                                                DIVIDEND
                                                                                                  PER
                         DECLARATION           RECORD               PAYMENT         DIVIDEND     COMMON      ORDINARY      RETURN OF
                            DATE                DATE                 DATE             PAID        SHARE       INCOME        CAPITAL
                       -----------------   -----------------   -----------------   ----------   ----------   ----------   ----------
<S>                    <C>                 <C>                 <C>                 <C>          <C>          <C>          <C>
 1998
 ----
 Period from May 12,
   1998 through June   July 23, 1998       July 31, 1998       August 17, 1998     $    1,001   $     0.10   $   0.1000   $       --
   30, 1998
 Third Quarter         October 22, 1998    October 31, 1998    November 16, 1998        2,401         0.24       0.2400           --
 Fourth Quarter        December 15, 1998   December 31, 1998   January 27, 1999         4,002         0.40       0.4000           --
                                                                                   ----------   ----------   ----------   ----------

                                                                                   $    7,404   $     0.74   $   0.7400   $       --
                                                                                   ==========   ==========   ==========   ==========

 1999
 ----
 First Quarter         April 22, 1999      April 30, 1999      May 17, 1999        $    3,602   $     0.36   $   0.3268   $   0.0332
 Second Quarter        July 22, 1999       July 31, 1999       August 16, 1999          3,906         0.39       0.3466       0.0434
 Third Quarter         October 21, 1999    October 31, 1999    November 15, 1999        4,006         0.40       0.3555       0.0445
 Fourth Quarter        December 15, 1999   December 31, 1999   January 27, 2000         4,407         0.44       0.3911       0.0489
                                                                                   ----------   ----------   ----------   ----------

                                                                                   $   15,921   $     1.59   $   1.4200   $   0.1700
                                                                                   ==========   ==========   ==========   ==========
</TABLE>

In order to maintain its qualification as a REIT, the Company must currently
make annual distributions to its shareholders of at least 95% of its taxable
income. For tax years beginning after December 31, 2000, the minimum
distribution requirement has been reduced from 95% to 90%. For the taxable years
ended December 31, 1999 and 1998, the Company declared dividends totaling $1.59
and $0.74 per share, respectively, which satisfied the 95% distribution
requirement for such years.

On March 29, 2000, the Company's Board of Trust Managers adopted a Plan of
Liquidation and Dissolution. If the liquidation and dissolution is approved by
the Company's shareholders, its dividend policy (which currently provides for
the payment of at least 95% of its REIT taxable income to shareholders each
year) will be modified to provide for the distribution of the Company's assets
to its shareholders. The timing and amount of future distributions will be at
the discretion of the Board of Trust Managers and will be dependent upon the
Company's financial condition, tax basis income, capital requirements, the
timing of asset dispositions and the extinguishment of its financing facilities,
reserve requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Trust Managers
deems relevant. At a minimum, the Company intends to make distributions which
will allow it to continue to qualify as a REIT under the Code. Although the
Company generally expects to continue to pay quarterly dividends, the timing of
such distributions may vary from the Company's historical practices in response
to the timing of its asset dispositions and the repayment of its loans.

SALES OF UNREGISTERED SECURITIES

The Company was initially capitalized through the sale of 100 of its Common
Shares to AMRESCO, INC. (AMRESCO) on February 2, 1998 for $1,000. On February
11, 1998, AMRESCO contributed additional capital of $25,000 to the Company; no
additional shares were issued to AMRESCO in connection with this contribution.
On May 12, 1998, concurrent with the completion of its initial public offering
of 9,000,000 Common Shares, the Company sold 1,000,011 Common Shares to AMREIT
Holdings, Inc., a wholly-owned subsidiary of AMRESCO, at the initial public
offering price of $15.00 per share, or $15,000,165 in aggregate cash
consideration, pursuant to a private placement (the "Private Placement"). The
Common Shares sold in the Private Placement and those sold in connection with
the Company's initial capitalization were sold without registration under the
Securities Act of 1933 in reliance on the exemption provided by Section 4(2)
thereof.




                                       17
<PAGE>   18
ITEM 6.  SELECTED FINANCIAL DATA

The selected financial data set forth below for the year ended December 31, 1999
and the period from February 2, 1998 (date of initial capitalization) through
December 31, 1998 has been derived from the Company's audited consolidated
financial statements. This information should be read in conjunction with "Item
1. Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations", as well as the audited consolidated
financial statements and notes thereto included in "Item 8. Financial Statements
and Supplementary Data".

<TABLE>
<CAPTION>
                                                                                              Period from
                                                                                            February 2, 1998
                                                                            Year Ended           through
              (In thousands, except per share and ratio data)            December 31, 1999  December 31, 1998
                                                                         -----------------  -----------------
<S>                                                                       <C>                <C>
              Revenues ...............................................    $       23,393     $        8,745
              Net income .............................................    $        7,320     $        3,952
              Earnings per common share:
                 Basic ...............................................    $         0.73     $         0.56
                 Diluted .............................................    $         0.73     $         0.56
              Dividends declared per common share ....................    $         1.59     $         0.74
              Total assets ...........................................    $      231,244     $      190,926
              Total debt .............................................    $      105,097     $       46,838
              Long-term debt .........................................    $       34,600     $       46,838
              Total shareholders' equity .............................    $      117,951     $      130,266
              Debt to equity ratio ...................................          0.9 to 1           0.4 to 1
              Debt to equity ratio (excluding non-recourse debt
                  on real estate) ....................................          0.6 to 1           0.3 to 1
</TABLE>

The Company believes that the following additional financial data is also
meaningful to users of its financial reports. Such information should also be
read in conjunction with "Item 1. Business" and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations", as well as the
audited consolidated financial statements and notes thereto included in "Item 8.
Financial Statements and Supplementary Data". Although the Company was initially
capitalized on February 2, 1998 (with $1,000), it did not commence operations
until its initial public offering was completed on May 12, 1998. As a result,
the Company had no earnings prior to the commencement of its operations.
Accordingly, the 1998 data set forth below reflects operations, earnings per
common share and other relevant information for the period from May 12, 1998
(inception of operations) through December 31, 1998.

<TABLE>
<CAPTION>
                                                                                               Period from
                                                                                               May 12, 1998
                                                                            Year Ended           through
(In thousands, except per share and yield data)                          December 31, 1999   December 31, 1998
                                                                         -----------------   -----------------
<S>                                                                       <C>                 <C>
Dividends declared per common share .................................     $          1.59     $          0.74
Dividend yield (annualized) .........................................                 18.7%(a)            12.2%(a)

Operating Results under Generally Accepted Accounting Principles:
    Revenues ........................................................     $        23,393     $         8,745
    Net income ......................................................     $         7,320     $         3,952
    Earnings per common share:
       Basic ........................................................     $          0.73     $          0.39
       Diluted ......................................................     $          0.73     $          0.39

Tax Basis Operating Results:
    Tax basis income ................................................     $        14,159     $         7,495
    Tax basis income per common share:
       Basic ........................................................     $          1.41     $          0.75
       Diluted ......................................................     $          1.41     $          0.75
</TABLE>

     (a)  To derive the dividend yield for the year ended December 31, 1999,
          dividends declared during the year were divided by the Company's
          closing stock price on December 31, 1999 ($8.50 per share). To derive
          the dividend yield for 1998, dividends declared per common share
          during the period from May 12, 1998 (inception of operations) through
          December 31, 1998 were annualized; the result was then divided by the
          Company's closing stock price on December 31, 1998 ($9.50 per share).




                                       18
<PAGE>   19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

AMRESCO Capital Trust (the "Company") is a real estate investment trust ("REIT")
which was formed in early 1998 to take advantage of certain mid- to high-yield
lending and investment opportunities in real estate related assets, including
various types of commercial mortgage loans (including, among others,
participating loans, mezzanine loans, acquisition loans, construction loans,
rehabilitation loans and bridge loans), commercial mortgage-backed securities
("CMBS"), commercial real estate, equity investments in joint ventures and/or
partnerships, and certain other real estate related assets. Subject to the
direction and oversight of the Board of Trust Managers, the Company's day-to-day
operations are managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of
AMRESCO, INC. (together with its affiliated entities, the "AMRESCO Group").

The Company commenced operations on May 12, 1998 concurrent with the completion
of its initial public offering ("IPO") of 9,000,000 common shares and private
placement of 1,000,011 common shares with AMREIT Holdings, Inc., a wholly-owned
subsidiary of AMRESCO, INC. (the "Private Placement"). To date, the Company's
investment activities have been focused in three primary areas: loan
investments, CMBS and equity investments in real estate.

The Company may experience high volatility in financial statement net income and
tax basis income from quarter to quarter and year to year, primarily as a result
of the size of its investment portfolio, fluctuations in interest rates,
borrowing costs, prepayment rates and favorable and unfavorable credit related
events such as profit participations or credit losses. The operating results of
the Company will depend, in part, upon the ability of the Company to manage its
interest rate, prepayment and credit risks, while maintaining its status as a
REIT. Additionally, the Company's accounting for some real estate loan
arrangements as either real estate or joint venture investments may contribute
to volatility in financial statement net income. Furthermore, as described
below, the Company intends to sell its non-core assets, including its CMBS
holdings and its equity investments in real estate. These transactions, should
they occur, are expected to contribute significantly to volatility in the
Company's future financial statement net income and tax basis income. Also, the
Board of Trust Managers has approved a Plan of Liquidation and Dissolution
(the "Plan") which provides for the complete liquidation of the Company.

The liquidation and dissolution of the Company requires the affirmative vote of
at least two-thirds of the Company's outstanding common shares. The Company
plans to submit this matter to its shareholders at its Annual Meeting which is
expected to be held in June 2000. If the Plan receives shareholder approval at
the Annual Meeting, the Company will adopt liquidation basis accounting
immediately thereafter. Under liquidation basis accounting, the Company's assets
would be adjusted to their net realizable values and the Company's liabilities
would be adjusted to their expected settlement amounts. These adjustments, if
any, would be recognized in earnings at that time.

In early 2000, the Board of Trust Managers approved a course of action to market
and sell the Company's non-core assets, which include its CMBS investments and
its equity investments in real estate. To date, the Company has entered into a
non-binding letter agreement for the sale of its ownership interest in one
partnership that holds title to real estate. Additionally, the Company has
identified potential buyers for its ownership interests in two other
partnerships as further described below. In January 2000, the Company sold one
of its CMBS investments (a "B" rated bond) for $3.6 million, which approximated
its carrying value at December 31, 1999. In March 2000, the Company's
unconsolidated taxable subsidiary sold its only CMBS investment for $3.1
million. This bond was sold at a price which was approximately $0.1 million less
than its carrying value at December 31, 1999 (excluding tax effects). The
reduction in value (from December 31, 1999) was attributable to a combination of
higher interest rates and an increase in the spread demanded by purchasers for
this particular security in early 2000. The Company is continuing to market the
balance of its CMBS holdings.

A majority of the Company's loans are expected to be fully repaid at or prior to
their scheduled maturities (including extension options) in accordance with the
terms of the underlying loan agreements. Initially, proceeds from loan
repayments and the asset sales described above will be used to repay the
Company's existing credit facilities. As of December 31, 1999, amounts
outstanding under these facilities totaled $70.5 million. After these credit
facilities have been fully repaid and assuming that the Plan has received
shareholder approval, liquidating distributions will then be made to the
Company's shareholders as, and when, additional loans are repaid and assets are
sold, provided that the Board of Trust Managers believes that adequate reserves
are available for the payment of the Company's liabilities and expenses. Given
the short duration of the Company's loans and the quality of most of its assets,
the Company believes that the liquidation process will be completed



                                       19
<PAGE>   20

in 18 to 24 months, although there can be no assurances that this time table
will be met or that the anticipated proceeds from the liquidation will be
achieved.

RESULTS OF OPERATIONS

The following discussion of results of operations should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
"Item 8. Financial Statements and Supplementary Data".

Under generally accepted accounting principles, net income for the year ended
December 31, 1999 and the period from May 12, 1998 (inception of operations)
through December 31, 1998 was $7,320,000 and $3,952,000, respectively, or $0.73
and $0.39 per common share, respectively. The Company had no income or expenses
during the period from February 2, 1998 (date of initial capitalization) through
May 11, 1998. The Company's sources of revenue for the year ended December 31,
1999 and the period from May 12, 1998 through December 31, 1998, totaling
$23,393,000 and $8,745,000, respectively, are set forth below.

o    $16,099,000 and $4,834,000, respectively, from loan investments. As some of
     the Company's loan investments are accounted for as either real estate or
     joint venture investments for financial reporting purposes, these revenues
     are included in the consolidated statements of income for the year ended
     December 31, 1999 and the period from February 2, 1998 through December 31,
     1998 as follows: interest income on mortgage loans of $14,568,000 and
     $4,278,000, respectively; operating income from real estate of $1,531,000
     and $211,000, respectively; and equity in earnings of other real estate
     ventures of $0 and $345,000, respectively.

o    $3,699,000 and $1,563,000, respectively, from investments in CMBS.

o    $3,327,000 and $181,000, respectively, of operating income from real estate
     owned by the Company (through a majority-owned partnership).

o    $17,000 and $243,000, respectively, of equity in earnings from its
     unconsolidated subsidiary, partnerships and other real estate ventures.

o    $251,000 and $1,924,000, respectively, of interest income from short-term
     investments.

Additionally, the Company realized a gain of $584,000 during the year ended
December 31, 1999 in connection with the repayment of an ADC loan arrangement.
The gain was comprised principally of interest income earned at the accrual rate
over the life of the loan investment. No gains were realized during 1998.

The Company incurred expenses of $16,631,000 and $4,793,000 during the year
ended December 31, 1999 and the period from May 12, 1998 through December 31,
1998, respectively. These expenses are set forth below.

o    $2,206,000 and $1,187,000, respectively, of management fees, including
     $2,066,000 and $835,000, respectively, of base management fees payable to
     the Manager pursuant to the Management Agreement and $140,000 and $352,000,
     respectively, of expense associated with compensatory options granted to
     the Manager. Costs associated with the compensatory options decreased
     during the year ended December 31, 1999 primarily as a result of a decrease
     in the expected volatility of the Company's stock. No incentive fees were
     incurred during either period.

o    $1,437,000 and $1,294,000, respectively, of general and administrative
     costs, including $200,000 and $0, respectively, of resolution costs
     associated with a non-performing loan, $0 and $330,000, respectively, of
     due diligence costs associated with an abandoned transaction, $304,000 and
     $396,000, respectively, for professional services, $234,000 and $162,000,
     respectively, for directors and officers' insurance, $192,000 and $140,000,
     respectively, of reimbursable costs pursuant to the Management Agreement,
     $(8,000) and $68,000, respectively, related to compensatory options granted
     to some members of the AMRESCO Group, $114,000 and $0, respectively, of
     dividend equivalent costs, $23,000 and $0, respectively, of fees paid to
     the Company's Independent Trust Managers for their participation at special
     meetings of the Board of Trust Managers, $91,000 and $56,000, respectively,
     related to restricted stock awards to the Company's Independent Trust
     Managers and $111,000 and $57,000, respectively, of travel costs. Costs
     associated with the compensatory options decreased during the year ended
     December 31, 1999



                                       20
<PAGE>   21

     primarily as a result of a decrease in the expected volatility of the
     Company's stock. These categories do not represent all general and
     administrative expenses.

o    $1,737,000 and $0, respectively, of costs associated with an abandoned
     merger.

o    $5,593,000 and $567,000, respectively, of interest expense (net of
     capitalized interest totaling $593,000 and $57,000, respectively)
     associated with the Company's credit facilities and five non-recourse loans
     secured by real estate.

o    $1,084,000 and $277,000, respectively, of participating interest associated
     with amounts due to an affiliate.

o    $1,252,000 and $100,000, respectively, of depreciation expense, including
     $810,000 and $56,000, respectively, related to five grocery-anchored
     shopping centers and $442,000 and $44,000, respectively, related to loan
     investments accounted for as real estate.

o    $3,322,000 and $1,368,000, respectively, of provision for loan losses.
     During the year ended December 31, 1999, the Company charged-off $500,000
     against an existing allowance for losses related to the non-performing loan
     referred to above. This loan is discussed further in this section of
     Management's Discussion and Analysis of Financial Condition and Results of
     Operations under the sub-heading "Loan Investments". No charge-offs were
     recorded during the period from May 12, 1998 through December 31, 1998.

During the year ended December 31, 1999 and the period from May 12, 1998 through
December 31, 1998, minority interest in a subsidiary partnership's net income
totaled $26,000 and $0, respectively.

Year Ended December 31, 1999 Compared to Period from February 2, 1998 (Date of
Initial Capitalization) through December 31, 1998

The Company was initially capitalized through the sale of 100 common shares to
AMRESCO, INC. on February 2, 1998 and it commenced operations on May 12, 1998
concurrent with the completion of its initial public offering of 9,000,000
common shares and private placement of 1,000,011 common shares with AMREIT
Holdings, Inc., a wholly-owned subsidiary of AMRESCO, INC. The following
comparisons reflect the fact that during the entire year ended December 31,
1999, the Company's net proceeds from the issuance of its common shares were
fully invested and it (and its consolidated partnerships) had outstanding
borrowings under several credit facilities. By contrast, during the period from
February 2, 1998 (date of initial capitalization) through December 31, 1998, the
Company was actively investing the $139.7 million of net proceeds received from
the issuance of its common shares. These proceeds were not fully invested until
September 30, 1998. Additionally, the Company did not begin to borrow under its
credit facilities until September 30, 1998. During the period from February 2,
1998 (date of initial capitalization) through December 31, 1998, the Company had
operations for only 234 days (from May 12, 1998 through December 31, 1998). The
Company had no income or expenses during the period from February 2, 1998
through May 11, 1998.

The Company's revenues increased by $14,648,000, or 168%, from $8,745,000 to
$23,393,000, due primarily to increases in interest income derived from mortgage
loan investments, income from commercial mortgage-backed securities, and
operating income from real estate. More specifically, the higher revenues were
attributable to the following (amounts in parentheses represent incremental
revenues earned in 1999 as compared to 1998):

o    mortgage loans that were originated during 1998 and those that were
     acquired immediately after the closing of the IPO (other than loans
     accounted for as real estate or joint venture investments for financial
     reporting purposes) were outstanding for a longer period of time during the
     year ended December 31, 1999 and at higher average balances due to
     additional fundings under these commitments ($7,197,000);

o    some of the loans that contributed to 1999 revenues were acquired on
     September 30, 1998 and therefore they generated only three months of
     revenues in the earlier period ($1,746,000);

o    three new loan originations that occurred in mid 1999 ($1,347,000);

o    acquisitions of CMBS that occurred on May 27, 1998, June 30, 1998 and
     September 1, 1998 ($2,136,000);

o    acquisitions of real estate that occurred on October 23, 1998, April 30,
     1999 and August 25, 1999 ($3,146,000);




                                       21
<PAGE>   22

o    the properties underlying two of the Company's ADC loan arrangements
     accounted for as real estate were substantially completed in 1999 and began
     producing operating income ($1,112,000); and

o    a property underlying one of the Company's ADC loan arrangements accounted
     for as real estate was operating during the entire year ended December 31,
     1999 as compared to a period of just over six months during 1998
     ($208,000).

The higher revenues described above were offset by declines in interest income
from short-term investments and equity in earnings from the Company's
unconsolidated subsidiary, partnerships and other real estate ventures. Interest
income declined by $1,673,000, from $1,924,000 to $251,000, as the uninvested
portion of the net proceeds received from the issuance of the Company's common
shares were temporarily invested in short-term investments during the period
from May 12, 1998 through September 30, 1998. Equity in earnings from
unconsolidated subsidiary, partnerships and other real estate ventures declined
by $571,000, from $588,000 to $17,000. For the most part, this decline was
attributable to the non-performing loan referred to above. This loan was
performing until late in the fourth quarter of 1998. Prior to its
reclassification, which is described below, this loan was accounted for as a
joint venture investment for financial reporting purposes.

During the year ended December 31, 1999, the average book value of the Company's
assets, excluding cash and cash equivalents, approximated $204 million. During
the period from February 2, 1998 through December 31, 1998, the average book
value of the Company's assets, excluding cash and cash equivalents, approximated
$91 million.

The Company's expenses increased by $11,838,000, or 247%, from $4,793,000 to
$16,631,000, due primarily to increases in borrowing costs (including
participating interest in mortgage loans), base management fees, depreciation
expense and the Company's provision for loan losses. Additionally, the Company's
1999 expenses included $1,737,000 of costs associated with an abandoned merger.

During the year ended December 31, 1999, the Company incurred borrowing costs,
including participating interest in mortgage loans, of $6,677,000 (net of
amounts capitalized of $593,000). During the period from May 12, 1998 (inception
of operations) through December 31, 1998, the Company incurred borrowing costs,
including participating interest in mortgage loans, of only $844,000 (net of
amounts capitalized of $57,000) as it did not begin to leverage its assets until
September 30, 1998. As of December 31, 1999 and 1998, obligations under the
Company's various financing arrangements totaled $105,097,000 and $52,647,000,
including amounts due to an affiliate of $0 and $5,809,000, respectively.
Amounts due to the affiliate were fully extinguished on November 1, 1999. Base
management fees increased by $1,231,000, from $835,000 to $2,066,000, as a
result of the Company's larger average asset base upon which the fee is
calculated. Depreciation expense increased by $1,152,000, from $100,000 to
$1,252,000, as a result of the real estate acquisitions described above and the
fact that the projects securing two of the Company's ADC loan arrangements
accounted for as real estate were substantially completed and held available for
occupancy during 1999. Finally, the Company's provision for loan losses
increased by $1,954,000, from $1,368,000 to $3,322,000. The increase was
attributable to one investment, an ADC loan arrangement, that was deemed to be
impaired as of December 31, 1999. This loan is discussed further in this section
of Management's Discussion and Analysis of Financial Condition and Results of
Operations under the sub-heading "Loan Investments". The higher expenses
enumerated above were offset, in part, by a decline in compensatory option
charges. For the reasons cited above, the aggregate costs associated with
compensatory options declined by $288,000, from $420,000 to $132,000.

For the reasons cited above, income before gains and minority interests
increased by $2,810,000, or 71%, from $3,952,000 to $6,762,000.

Net income increased by $3,368,000, or 85%, from $3,952,000 to $7,320,000. In
addition to the factors cited above, net income increased partially as a result
of a $584,000 gain realized in connection with the repayment of an ADC loan
arrangement. During 1999, the Company's net income was reduced by a minority
interest in a subsidiary partnership's net income totaling $26,000.

Distributions

Historically, the Company's policy has been to distribute at least 95% of its
REIT taxable income to shareholders each year. To that end, dividends have been
paid quarterly. For a discussion of future distributions, see caption entitled
"Distribution Information" in Item 5. "Market for Registrant's Common Equity and
Related Shareholder Matters". Tax basis income differs from income reported for
financial reporting purposes due primarily to differences in methods of




                                       22
<PAGE>   23
accounting for ADC loan arrangements and stock-based compensation awards and the
nondeductibility, for tax purposes, of the Company's loan loss reserve (for a
discussion of ADC loan arrangements and a reconciliation of financial statement
net income to tax basis income, see the notes to the audited consolidated
financial statements included in Item 8 of this report). As a result of these
accounting differences, net income under generally accepted accounting
principles is not necessarily an indicator of distributions to be made by the
Company. Dividends declared to date, as well as their federal income tax status,
are as follows (dollars in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                                                   DIVIDEND
                                                                                                     PER
                              DECLARATION            RECORD            PAYMENT         DIVIDEND     COMMON     ORDINARY    RETURN OF
                                 DATE                DATE                DATE            PAID       SHARE       INCOME       CAPITAL
                           -----------------   -----------------   -----------------   ---------   ---------   ---------   ---------
<S>                        <C>                 <C>                 <C>                 <C>         <C>         <C>         <C>
 1998
 ----
 Period from May 12, 1998
    through June 30, 1998  July 23, 1998       July 31, 1998       August 17, 1998     $   1,001   $    0.10   $  0.1000   $      --
 Third Quarter             October 22, 1998    October 31, 1998    November 16, 1998       2,401        0.24      0.2400          --
 Fourth Quarter            December 15, 1998   December 31, 1998   January 27, 1999        4,002        0.40      0.4000          --
                                                                                       ---------   ---------   ---------   ---------

                                                                                       $   7,404   $    0.74   $  0.7400   $      --
                                                                                       =========   =========   =========   =========
 1999
 ----
 First Quarter             April 22, 1999      April 30, 1999      May 17, 1999        $   3,602   $    0.36   $  0.3268   $  0.0332
 Second Quarter            July 22, 1999       July 31, 1999       August 16, 1999         3,906        0.39      0.3466      0.0434
 Third Quarter             October 21, 1999    October 31, 1999    November 15, 1999       4,006        0.40      0.3555      0.0445
 Fourth Quarter            December 15, 1999   December 31, 1999   January 27, 2000        4,407        0.44      0.3911      0.0489
                                                                                       ---------   ---------   ---------   ---------

                                                                                       $  15,921   $    1.59   $  1.4200   $  0.1700
                                                                                       =========   =========   =========   =========
</TABLE>

A portion of each of the distributions declared in 1999 was classified as a
non-taxable return of capital as a result of the merger related charges
described above.

Loan Investments

During the period from May 12, 1998 through December 31, 1998, the Company
assembled a portfolio of 21 loans, representing $209.6 million in aggregate
commitments; eleven of these loans were originated by the Company while two of
the loans were acquired from AMRESCO Funding Corporation ("AFC") and eight of
the loans were acquired from AMRESCO Commercial Finance, Inc. ("ACFI"), both of
whom are members of the AMRESCO Group. As of December 31, 1998, $136.8 million
had been advanced under these facilities. During the year ended December 31,
1999, six of the Company's loans were fully repaid, three loan originations were
closed and four loans were sold to ACFI. Additionally, one loan was
reclassified, net of a $500,000 charge-off, to investment in unconsolidated
subsidiary following the subsidiary's acquisition (through foreclosure on
February 25, 1999) of the partnership interests of one of the Company's
borrowers. Excluding the loan classified as an investment in unconsolidated
subsidiary, the Company had 13 loans representing $168.9 million in aggregate
commitments as of December 31, 1999; $143.6 million had been advanced under
these facilities at December 31, 1999. A portion of the commitments may expire
without being drawn upon and therefore the total commitment amounts do not
necessarily represent future cash requirements.

The two loans were acquired from AFC immediately after the closing of the IPO at
an aggregate cash purchase price of $5,433,000, including accrued interest and
as adjusted for unamortized loan commitment fees.

The eight loans were acquired from ACFI on September 30, 1998 pursuant to two
separate agreements. The first agreement provided for the purchase of three
loans at an aggregate cash purchase price of $11,314,000, including accrued
interest of $137,000. The second agreement provided for the purchase of five
loans at an aggregate cash purchase price of $22,978,000, including accrued
interest of $675,000. Immediately following the purchase of the five loans, the
Company sold to ACFI a contractual right to collect from the Company an amount
equal to the economic equivalent of all amounts collected from the five loans in
excess of (i) $17,958,000 and (ii) a return on this amount, or so much of it as
was outstanding from time to time, equal to 12% per annum. The aggregate cash
sales price of $5,020,000 had the effect of reducing the Company's credit
exposure with respect to such loans. The sales price was comprised of $4,345,000
which had the effect of reducing the Company's net investment in such loans; the
balance of the sales price, or $675,000, equated to the amount of interest which
was accrued under the five loan agreements as of September 30, 1998. As
additional consideration, ACFI agreed to immediately reimburse the Company for
any additional advances which were required to be made under the five loan
agreements. The proceeds received from ACFI were accounted for as a financing.



                                       23
<PAGE>   24
In January 1999 and November 1999, the Company sold one loan and three loans,
respectively, to ACFI. Prior to their sale, these investments had been subject
to the ACFI economic interest described above. The fifth loan was fully repaid
by the borrower in May 1999. The proceeds from the sales, which produced no gain
or loss for the Company, totaled $13,340,000. In connection with the most recent
sale, amounts due to ACFI were fully extinguished; additionally, ACFI's
contingent reimbursement obligations were discharged.

During the year ended December 31, 1999, the Company advanced a total of $71.2
million under its loan commitments. The proceeds from the six loan repayments
and the four loan sales totaled $48.5 million, including accrued interest, a
profit participation and a prepayment fee aggregating $1.2 million. Principal
collections on the Company's other loan investments totaled $3.5 million during
the year ended December 31, 1999.

In cases where the Company has originated loans, the borrowers paid a commitment
fee to the Company that is in addition to interest payments due under the terms
of the loan agreements. Commitment fees are deferred and recognized over the
life of the loan as an adjustment of yield or, in those cases where loan
investments are classified as either real estate or joint ventures for financial
reporting purposes, such fees are deferred and recognized upon the disposition
of the investment.

Based upon the amounts outstanding under these facilities, the Company's
portfolio of commercial mortgage loans had a weighted average interest pay rate
of 10.7% and a weighted average interest accrual rate of 11.8% as of December
31, 1999. At December 31, 1999, three of the 13 loans provided the Company with
the opportunity for profit participation above the contractual accrual rate. The
following table summarizes the Company's loan investments as of December 31,
1999 and 1998 (dollars in thousands):

<TABLE>
<CAPTION>
              Scheduled
              Maturity/
              Date of
 Date of      Repayment,                                                                        Commitment Amount
 Initial       Sale or                                                     Collateral         ---------------------
Investment     Other        Location        Property Type                   Position            1999        1998
----------    --------   --------------     ----------------------------   -----------        ---------   ---------
<S>           <C>        <C>                <C>                            <C>                <C>         <C>
05/12/98      03/31/01   Richardson, TX     Office                         Second Lien        $  14,700   $  14,700
06/01/98      06/01/01   Houston, TX        Office                         First Lien            11,800      11,800
06/22/98      06/19/00   Wayland, MA        Office                         First Lien            45,000      45,000
07/02/98      06/30/00   Washington, D.C.   Office                         First Lien             7,000       7,000
07/10/98      07/31/00   Pasadena, TX       Apartment                      First Lien             3,350       3,350
09/01/98      11/30/99   Los Angeles, CA    Mixed Use                      First Lien                --      18,419
09/30/98      05/28/99   San Antonio, TX    Residential Lots               First Lien                --       3,266
09/30/98       Various   San Antonio, TX/   Residential Lots               First Lien             8,400       8,400
                           Sunnyvale, TX
09/30/98      05/27/99   Galveston, TX      Apartment                      First Lien                --       3,664
09/30/98      11/01/99   Ft. Worth, TX      Apartment                      Ptrshp Interests          --       2,650
09/30/98      01/14/99   Austin, TX         Office                         First Lien                --       6,325
09/30/98      11/01/99   Dallas, TX         Medical Office                 First Lien                --       3,015
09/30/98      11/01/99   Norwood, MA        Industrial/Office              First Lien                --       8,765
10/01/98      12/31/99   Richardson, TX     Office                         First Lien                --         567
12/29/98      02/03/99   San Antonio, TX    Residential Lots               First Lien                --         255
05/18/99      05/19/01   Irvine, CA         Office                         First Lien            15,260          --
07/29/99      07/28/01   Lexington, MA      R&D/Bio-Tech                   First Lien             5,213          --
08/19/99      08/15/01   San Diego, CA      Medical Office                 First Lien             5,745          --
                                                                                              ---------   ---------
Mortgage loans held for investment                                                              116,468     137,176
                                                                                              ---------   ---------

 05/12/98     02/25/99   Columbus, OH       Mixed Use                      Second Lien               --       7,000
 06/12/98     06/30/00   Pearland, TX       Apartment                      First Lien            12,827      12,827
 06/17/98     06/30/00   San Diego, CA      R&D/Bio-Tech                   First Lien             5,560       5,560
 06/19/98     06/18/00   Houston, TX        Office                         First Lien            24,000      24,000
 07/01/98     07/01/01   Dallas, TX         Office                         Ptrshp Interests      10,068      10,068
 09/30/98     03/01/99   Richardson, TX     Office                         First Lien                --      13,001
                                                                                              ---------   ---------
ADC loan arrangements                                                                            52,455      72,456
                                                                                              ---------   ---------

Total loan investments                                                                        $ 168,923   $ 209,632
                                                                                              =========   =========

<CAPTION>
              Scheduled
              Maturity/
              Date of
 Date of      Repayment,                                                      Amount Outstanding            Interest       Interest
 Initial       Sale or                                                       ---------------------            Pay          Accrual
Investment     Other        Location        Property Type                      1999        1998              Rate           Rate
----------    --------   --------------     ----------------------------     ---------   ---------          --------       --------
<S>           <C>        <C>                <C>                              <C>         <C>                 <C>           <C>
05/12/98      03/31/01   Richardson, TX     Office                           $  13,709   $  10,811           10.0%          12.0%
06/01/98      06/01/01   Houston, TX        Office                              11,079      10,034           12.0%          12.0%
06/22/98      06/19/00   Wayland, MA        Office                              39,134      24,962           10.5%          10.5%
07/02/98      06/30/00   Washington, D.C.   Office                               6,409       5,489           10.5%          10.5%
07/10/98      07/31/00   Pasadena, TX       Apartment                            2,993       2,614           10.0%          14.0%
09/01/98      11/30/99   Los Angeles, CA    Mixed Use                               --      17,418           10.0%          12.0%
09/30/98      05/28/99   San Antonio, TX    Residential Lots                        --       2,059           16.0%          16.0%
09/30/98       Various   San Antonio, TX/   Residential Lots                     3,555       1,637           10.0%          14.0%
                           Sunnyvale, TX
09/30/98      05/27/99   Galveston, TX      Apartment                               --       3,664           10.0%          15.0%
09/30/98      11/01/99   Ft. Worth, TX      Apartment                               --       2,649           10.5%          16.0%
09/30/98      01/14/99   Austin, TX         Office                                  --       6,314           10.0%          16.0%
09/30/98      11/01/99   Dallas, TX         Medical Office                          --       2,364           10.0%          13.0%
09/30/98      11/01/99   Norwood, MA        Industrial/Office                       --       7,733           10.0%          12.5%
10/01/98      12/31/99   Richardson, TX     Office                                  --         300           9.97%          15.0%
12/29/98      02/03/99   San Antonio, TX    Residential Lots                        --         255           16.0%          16.0%
05/18/99      05/19/01   Irvine, CA         Office                              13,057          --           10.0%          12.0%
07/29/99      07/28/01   Lexington, MA      R&D/Bio-Tech                         2,753          --           11.5%          14.5%
08/19/99      08/15/01   San Diego, CA      Medical Office                       4,048          --           11.5%          11.5%
                                                                             ---------   ---------
Mortgage loans held for investment                                              96,737      98,303
                                                                             ---------   ---------

 05/12/98     02/25/99   Columbus, OH       Mixed Use                               --       6,839(a)        15.0%          15.0%
 06/12/98     06/30/00   Pearland, TX       Apartment                           12,291(b)    4,237(b)        10.0%          11.5%
 06/17/98     06/30/00   San Diego, CA      R&D/Bio-Tech                         4,732(c)    3,994(c)        10.0%          13.5%
 06/19/98     06/18/00   Houston, TX        Office                              21,622(b)    6,682(b)        12.0%          12.0%
 07/01/98     07/01/01   Dallas, TX         Office                               8,262(d)    6,459(d)        10.0%          15.0%
 09/30/98     03/01/99   Richardson, TX     Office                                  --      10,277(b)        10.0%          14.0%
                                                                             ---------   ---------
ADC loan arrangements                                                           46,907      38,488
                                                                             ---------   ---------

Total loan investments                                                       $ 143,644   $ 136,791
                                                                             =========   =========
</TABLE>

(a)  Loan was reclassified to investment in unconsolidated subsidiary, net of a
     $500,000 charge-off, on February 25, 1999. Prior to its reclassification,
     the loan was accounted for as an investment in joint venture for financial
     reporting purposes.

(b)  Accounted for as real estate for financial reporting purposes.

(c)  Accounted for as real estate for financial reporting purposes. Loan was
     fully repaid on March 24, 2000.

(d)  Accounted for as investment in joint venture for financial reporting
     purposes. Loan was deemed to be impaired as of December 31, 1999.


                                       24
<PAGE>   25
The Company provides financing through certain real estate loan arrangements
that, because of their nature, qualify either as real estate or joint venture
investments for financial reporting purposes. For a discussion of these loan
arrangements, see the notes to the audited consolidated financial statements
included in "Item 8. Financial Statements and Supplementary Data". For all loan
investments, payments of interest only are due monthly at the interest pay rate.
All principal and all remaining accrued and unpaid interest are due at the
scheduled maturities of the loans. One loan provides for the payment of accrual
rate interest quarterly.

A mezzanine loan with an outstanding balance of $8,262,000 and a recorded
investment of $7,191,000 was impaired as of December 31, 1999. The allowance for
loan losses related to this investment, which is secured by partnership
interests in the borrower, totaled $4,190,000 at December 31, 1999. In addition
to the Company's mortgage, the property is encumbered by a $45.5 million first
lien mortgage provided by an unaffiliated third party, of which $44 million is
currently outstanding. The first lien mortgage, which matures on June 30, 2001,
requires interest only payments through June 30, 2000. From July 1, 2000 through
maturity, the first lien mortgage also requires monthly principal reductions of
approximately $42,000. To date, all interest payments have been made in
accordance with the terms of the first lien mortgage and the Company's loan. On
February 15, 2000, the Company entered into a Conditional Agreement with the
borrower. Under the terms of the Conditional Agreement, which is subject to
approval by the first lien lender, the Company has agreed to accept $3,000,000
in complete satisfaction of all amounts owed to it by the borrower provided that
such payment is received by the Company on or before May 15, 2000. Although the
Company believes that its loan loss reserves related to this investment are
adequate for financial reporting purposes, tax basis income will be adversely
affected in the event that this discounted payoff is received.

A mezzanine (second lien) loan with an outstanding balance of $6,839,000 and a
recorded investment of $6,659,000 was over 30 days past due as of December 31,
1998. The allowance for loan losses related to this investment totaled $500,000
at December 31, 1998. On February 25, 1999, an unconsolidated taxable subsidiary
of the Company assumed control of the borrower (a partnership) through
foreclosure of the partnership interests. In addition to the second lien
mortgage, the property is encumbered by a $17 million first lien mortgage
provided by an unaffiliated third party. The first lien mortgage, which matures
on March 1, 2001, requires interest only payments throughout its term. On March
11, 1999, the first lien lender notified the Company that it considered the
first lien loan to be in default because of defaults under the Company's
mezzanine loan; however, it did not give notice of an intention to accelerate
the balance of the first lien loan at that time. On September 21, 1999, a
subsidiary of the Company entered into a non-binding letter agreement with a
prospective investor who intends to make a substantial equity commitment to the
project. Under the terms of the agreement, the Company would continue to have an
interest in the project as an equity owner. On March 16, 2000, the first lien
lender gave notice to the partnership of its intention to accelerate the first
lien loan in the event that certain alleged non-monetary events of default are
not cured. In addition to the alleged default described above, the first lien
lender has now asserted that the borrower permitted a transfer of a beneficial
interest in the partnership in violation of the loan agreement and that it has
failed to perform certain obligations under the Intercreditor Agreement. The
notice also specified that, as a result of the alleged defaults, interest has
accrued at the default rate from the date of the earliest event of default. To
date, all interest payments have been made in accordance with the terms of the
first lien mortgage. Management has attempted to negotiate with the first lien
lender in an effort to, among other things, obtain its approval to permit the
to-be-formed investment partnership to assume the first lien mortgage. The first
lien lender has thus far refused to entertain any negotiations unless the
partnership agrees to waive all of its claims and defenses and pay the default
interest claimed by the first lien lender to be due. The prospective investor is
negotiating with other lenders in an effort to secure take-out financing for the
first lien mortgage; however, there can be no assurances that such financing
will be obtained. During the first quarter of 1999, the Company charged-off
$500,000 against the allowance for losses related to this investment which
amount represented management's estimate at that time of the amount of the
expected loss which could result upon a disposition of the collateral. If the
first lien lender issues can be satisfactorily resolved and the proposed
transaction with the prospective investor is consummated, the Company currently
believes that it will fully recover its original investment, although there can
be no assurances that this will be the case. Aside from the $500,000 charge-off
described above, no additional impairment losses have been recognized on this
investment.



                                       25
<PAGE>   26
At December 31, 1999, the Company's commercial mortgage loan commitments were
geographically dispersed as follows:

<TABLE>
<CAPTION>
                                Location                            Percent
                            ------------------                    ------------
<S>                                                               <C>
                            Texas                                      50%
                            Massachusetts                              30%
                            California                                 16%
                            Washington, D.C.                            4%
</TABLE>

The underlying collateral for these loans at December 31, 1999 was comprised of
the following property types:

<TABLE>
<CAPTION>
                             Property Type                          Percent
                            ------------------                    ------------
<S>                                                               <C>
                            Office                                     76%
                            Multifamily                                10%
                            R&D/Bio-Tech                                6%
                            Residential                                 5%
                            Medical Office                              3%
</TABLE>

The Company's loan portfolio was comprised of the following loan types as of
December 31, 1999:

<TABLE>
<CAPTION>
                                      Loan Type                     Percent
                            -------------------------------       ------------
<S>                                                               <C>
                            Acquisition/Rehabilitation                 38%
                            Construction                               31%
                            Acquisition                                26%
                            Single-Family Lot Development               5%
</TABLE>

Eighty-five percent of the portfolio is comprised of first lien loans while the
balance of the portfolio (15%) is secured by second liens and/or partnership
interests. The percentages reflected above are based upon committed loan amounts
and exclude the loan that was reclassified to investment in unconsolidated
subsidiary in February 1999.

As the loan investment portfolio is expected to contract as a result of
repayments, geographic and product type concentrations will persist. Geographic
and product type concentrations present additional risks, particularly if there
is a deterioration in the general condition of the real estate market or in the
sub-market in which the loan collateral is located, or if demand for a
particular product type does not meet expectations due to adverse market
conditions that are different from those projected by the Company.

Commercial Mortgage-backed Securities

As of December 31, 1999, the Company held five commercial mortgage-backed
securities ("CMBS") which were acquired at an aggregate purchase price of $34.5
million. All of these securities were acquired on or before September 1, 1998.
Due to the significant widening of spreads in the CMBS market during the latter
half of 1998, the value of the Company's CMBS holdings had declined by $6.245
million at December 31, 1998. During the year ended December 31, 1999, the value
of the Company's CMBS holdings declined by an additional $4.440 million due to
an increase in comparable-term U.S. Treasury rates and continued (albeit less
dramatic) spread widening in the CMBS market. As a result, during the year ended
December 31, 1999 and the period from May 12, 1998 (inception of operations)
through December 31, 1998, the Company recorded unrealized losses of $4.440
million and $6.245 million, respectively, on its CMBS portfolio. Additionally,
during the year ended December 31, 1999, the Company recorded an unrealized gain
of $103,000, net of tax effects, related to one commercial mortgage-backed
security owned by its unconsolidated taxable subsidiary. The security held by
this subsidiary has an investment rating of "B-". Unlike spreads for the
majority of the Company's direct CMBS investments, the spread for this
particular bond declined during the year ended December 31, 1999. During the
period from May 12, 1998 through December 31, 1998, the Company recorded an
unrealized loss of $230,000, net of tax effects, related to the security held by
the taxable subsidiary. As these securities are classified as available for
sale, the unrealized loss was reported as a component of accumulated other
comprehensive income (loss) in shareholders' equity for financial



                                       26
<PAGE>   27
reporting purposes. The unrealized losses had no impact on the Company's taxable
income or cash flow in 1999 or 1998. The Company's direct CMBS investments as of
December 31, 1999 are summarized as follows (dollars in thousands):

<TABLE>
<CAPTION>

                                          Aggregate      Aggregate    Aggregate        Percentage of
                           Security       Amortized     Unrealized      Fair            Total Based
                            Rating          Cost          Losses        Value          on Fair Value
                           ---------   ---------------  ---------- ---------------    ---------------
<S>                                    <C>              <C>        <C>                <C>
                              BB-      $         4,271  $ (1,140)  $         3,131                 13%
                              B                 19,664    (4,854)           14,810                 60%
                              B-                11,319    (4,691)            6,628                 27%
                                       ---------------  --------   ---------------    ---------------
                                       $        35,254  $(10,685)  $        24,569                100%
                                       ===============  ========   ===============    ===============
</TABLE>

While management believes that the fundamental value of the real estate
mortgages underlying its bonds has been largely unaffected to date, the
combination of increasing spreads and comparable-term U.S. Treasury rates have
caused the current fair value of these securities to decline. In the absence of
dramatic declines in spreads and/or comparable-term U.S. Treasury rates in the
near term, management expects to realize losses in connection with the planned
sales of these securities. These losses, should they occur, will adversely
impact the Company's earnings and tax basis income. To date, two CMBS sales have
been completed. On January 11, 2000, the Company sold one of its CMBS holdings
(a "B" rated bond) for $3.6 million. The Company realized a $0.3 million loss on
the sale of this security. On March 21, 2000, the Company's unconsolidated
taxable subsidiary sold its CMBS for $3.1 million. In connection with this sale,
the subsidiary realized a loss of $0.3 million.

In February 1999, the Company contributed $0.7 million to a newly formed
investment partnership with Olympus Real Estate Corporation. The partnership,
which is 5% owned by the Company, acquired several classes of subordinated CMBS
at an aggregate purchase price of $12.7 million. In connection with the
partnership's procurement of financing, the Company's investment in this
partnership was reduced to $0.3 million in February 2000. Currently, the Company
intends to sell its partnership interest. To that end, the Company is
negotiating a sale of its 5% interest to the partnership's majority partner (or
an affiliate thereof) although there can be no assurances that such sale will be
consummated or that it will be consummated on terms favorable to the Company.

Equity Investments in Real Estate

On October 23, 1998, the Company (through a majority-owned partnership) acquired
an interest in the first of five newly constructed, grocery-anchored shopping
centers in the Dallas/Fort Worth, Texas area, an 82,730 square foot facility in
Arlington, Texas, for $10.3 million. In connection with this acquisition, the
title-holding partnership obtained non-recourse financing of $7.5 million from
an unaffiliated third party. Immediately prior to the closing, the Company
contributed $3.4 million of capital to the partnership which was used to fund
the balance of the purchase price, to pay costs associated with the financing
and to provide initial working capital to the title-holding partnership. On
April 30, 1999, the Company (through the majority-owned partnership) acquired
interests in three additional, grocery-anchored shopping centers. These newly
constructed properties, which were acquired by three subsidiary partnerships at
an aggregate purchase price of $30.2 million, include an 86,516 square foot
facility in Flower Mound, Texas, a 61,440 square foot facility in Fort Worth,
Texas and an 85,611 square foot facility in Grapevine, Texas. In connection with
these acquisitions, the three title-holding partnerships obtained non-recourse
financing totaling $19.5 million from an unaffiliated third party. Immediately
prior to the closings, the Company contributed $11.4 million of capital to the
partnership. The proceeds from this contribution were used to fund the balance
of the purchase price, to pay costs associated with the financing and to provide
initial working capital to the title-holding partnerships. On August 25, 1999,
the Company (through the majority-owned partnership) acquired an interest in the
fifth grocery-anchored shopping center. The newly constructed property, an
87,540 square foot facility in Richardson, Texas, was acquired by a subsidiary
partnership at a purchase price of $10.7 million. In connection with this
acquisition, the title-holding partnership obtained non-recourse financing of
$7.6 million from an unaffiliated third party. Immediately prior to the closing,
the Company contributed $3.4 million of capital to the partnership which was
used to fund the balance of the purchase price, to pay costs associated with the
financing and to provide initial working capital to the title-holding
partnership. The Company holds a 99.5% interest in the majority-owned (or
master) partnership. The master partnership owns, directly or indirectly, 100%
of the equity interests in each of the five title-holding partnerships. To date,
the Company has contributed a total of $18.2 million of capital to the
partnerships.

The five consolidated title-holding partnerships are indebted under the terms of
five non-recourse loan agreements with Jackson National Life Insurance Company.
All five loans, aggregating $34.6 million, bear interest at 6.83% per annum.




                             27









<PAGE>   28

The interest rates on the first four loans were adjusted in connection with the
placement of the fifth loan on August 25, 1999. Prior to that time, a $7.5
million loan bore interest at 7.28% per annum and three loans aggregating $19.5
million bore interest at 6.68% per annum. The loans require interest only
payments through January 1, 2002; thereafter, interest and principal payments
are due based upon 25-year amortization schedules. The loans, which mature on
January 1, 2014, prohibit any prepayment of the outstanding principal prior to
January 1, 2006. Thereafter, prepayment is permitted at any time, in whole or in
part, upon payment of a yield maintenance premium of at least 1% of the then
outstanding principal balance.

The Company is currently negotiating a sale of its 99.5% ownership interest for
$18.5 million. If these negotiations are successful, the Company would expect to
complete this sale in the second quarter of 2000.

On March 2, 1999, the Company acquired a 49% limited partner interest in a
partnership which owns a 116,000 square foot office building in Richardson,
Texas. The property is encumbered by a first lien mortgage with a current
outstanding balance of approximately $13.7 million. In connection with this
acquisition, the Company contributed $1.4 million of capital to the partnership.
On March 8, 2000, the Company entered into a non-binding letter agreement
pursuant to which it agreed to sell its 49% ownership interest for $1.8 million.
Currently, the Company expects to consummate this sale on March 31, 2000.

There can be no assurances that the sales discussed above will be consummated or
that they will be consummated on terms favorable to the Company.

The Company's unconsolidated taxable subsidiary holds interests (indirectly) in
a partnership which owns a 909,000 square foot mixed-use property in Columbus,
Ohio. This investment is described above under the sub-heading "Loan
Investments".

LIQUIDITY AND CAPITAL RESOURCES

The following discussion of liquidity and capital resources should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in "Item 8. Financial Statements and Supplementary Data".

The Company's principal demands for liquidity are cash for operations, including
funds which are required to satisfy its obligations under existing loan
commitments, interest expense associated with its indebtedness, debt repayments
and distributions to its shareholders. In the near term, the Company's principal
sources of liquidity are the funds available to it under its financing
facilities described below.

Effective as of July 1, 1998, the Company and some of its subsidiaries entered
into a $400 million credit facility (the "Line of Credit") with Prudential
Securities Credit Corporation ("PSCC"). Subject to PSCC's approval on an asset
by asset basis, borrowings under the facility could be used to finance the
Company's structured loan and equity real estate investments. As a result of the
dislocation in the capital markets in mid to late 1998, PSCC became more
restrictive in the application of its approval rights with respect to financing
for new investments sought by the Company. Accordingly, very few investments
were consummated in late 1998 and early 1999. Prior to the modifications
discussed below, borrowings under the Line of Credit bore interest at rates
ranging from LIBOR plus 1% per annum to LIBOR plus 2% per annum. At December 31,
1998, $39,338,000 had been borrowed under the Line of Credit. The weighted
average interest rate at December 31, 1998 was 6.65%.

To reduce the impact that rising interest rates would have on this floating rate
indebtedness, the Company entered into an interest rate cap agreement which
became effective on January 1, 1999. This agreement had a notional amount of
$33.6 million and was scheduled to expire on July 1, 2000. The agreement
entitled the Company to receive from a counterparty the amounts, if any, by
which one month LIBOR exceeded 6.0%. Prior to its termination (as described
below), no payments were due from the counterparty as one month LIBOR had not
exceeded 6.0%. On July 2, 1999, the agreement was terminated and replaced with
an interest rate cap agreement which became effective on August 1, 1999. The new
agreement, which was entered into to more closely match the then outstanding
borrowings, has a notional amount of $59 million. Until its expiration on
November 1, 2000, the agreement entitles the Company to receive from a
counterparty the amounts, if any, by which one month LIBOR exceeds 6.25%. During
the period from August 1, 1999 through December 31, 1999, amounts due from the
counterparty under this agreement totaled $13,000. There are no margin
requirements



                                       28
<PAGE>   29

associated with interest rate caps and therefore there is no liquidity risk
associated with this particular hedging instrument (see Item 7A. "Quantitative
and Qualitative Disclosures About Market Risk").

Effective as of May 4, 1999, the Company and some of its subsidiaries entered
into an Amended and Restated Interim Warehouse and Security Agreement (the
"Amended Line of Credit") with PSCC. The agreement amended the Company's
existing line of credit. The Amended Line of Credit includes the following
modifications:

     o    a reduction in the size of the committed facility from $400 million to
          $300 million;

     o    the elimination of the requirement that assets financed with proceeds
          from the facility must be securitizable;

     o    a reduction in the amount of capital the Company must fund with
          respect to construction and rehabilitation loans before PSCC is
          required to begin advancing funds;

     o    an extension of the maturity date from July 1, 2000 to November 3,
          2000; and

     o    the modification to, and addition of, sublimits on specified
          categories of loans and assets, including:

          o    a new $40 million sublimit on mezzanine loans and equity
               investments; and

          o    a reduction in the sublimit on construction loans from $150
               million to $115 million, with the addition of a new $50 million
               sublimit within this category for construction loans that are
               less than 70% pre-leased at the time the initial advance is to be
               made under the Amended Line of Credit with respect to a
               construction loan fitting this category.

Under the Amended Line of Credit, borrowings bear interest at LIBOR plus 1.25%
per annum to the extent such borrowings do not exceed the Company's Tangible Net
Worth, as defined. Borrowings in excess of the Company's Tangible Net Worth bear
interest at LIBOR plus 3% per annum. Borrowings are secured by a first lien
security interest in all assets funded with proceeds from the Amended Line of
Credit. At December 31, 1999, $60,641,000 was outstanding under the Amended Line
of Credit. All of these borrowings bear interest at LIBOR plus 1.25% per annum.
The weighted average interest rate at December 31, 1999 was 7.73%.

As compensation for amending the existing line of credit and extending the
maturity date, the Company granted warrants to Prudential Securities
Incorporated, an affiliate of PSCC, to purchase 250,002 common shares of
beneficial interest at $9.83 per share. The exercise price represents the
average closing market price of the Company's common shares for the ten-day
period ending on May 3, 1999. The warrants were issued in lieu of a commitment
fee or other cash compensation.

Following the completion of the modifications to its line of credit facility,
the Company's investment activities increased, albeit at a slower rate than was
achieved in 1998 before the capital markets deteriorated.

Effective as of July 1, 1998, the Company and some of its subsidiaries entered
into a $100 million Master Repurchase Agreement (the "Repurchase Agreement")
with PSCC; subsequently, PSCC was replaced by Prudential-Bache International,
Ltd. ("PBI"), an affiliate of PSCC, as lender. Borrowings under the Repurchase
Agreement can be used to finance a portion of the Company's portfolio of
commercial mortgage-backed securities. The Repurchase Agreement provides that
the Company may borrow a varying percentage of the market value of its CMBS,
depending on the credit quality of such securities. Borrowings under the
Repurchase Agreement bear interest at rates ranging from LIBOR plus 0.20% per
annum to LIBOR plus 1.5% per annum depending upon the advance rate and the
credit quality of the securities being financed. Borrowings under the facility
are secured by an assignment to PBI of all commercial mortgage-backed securities
funded with proceeds from the Repurchase Agreement. The Repurchase Agreement
matures on June 30, 2000. At December 31, 1999, $9,856,000 was outstanding under
the Repurchase Agreement. At December 31, 1998, there were no outstanding
borrowings under this facility. The weighted average interest rate at December
31, 1999 was 7.62%.

Under the terms of the Amended Line of Credit and the Repurchase Agreement, PSCC
and PBI, respectively, retain the right to mark the underlying collateral to
market value. A reduction in the value of its pledged assets may require the
Company to provide additional collateral or fund margin calls. From time to
time, the Company may be required to provide such additional collateral or fund
margin calls.



                                       29
<PAGE>   30
The Company expects that proceeds generated from loan repayments and sales of
its non-core assets, including CMBS and equity investments in real estate, will
be sufficient to fully repay its two credit facilities on or before their
scheduled maturity dates. Beyond the maturity date of the Amended Line of
Credit, the Company believes that its cash flow from operations and the proceeds
from loan repayments and sales of its non-core assets will be sufficient to meet
the Company's liquidity and capital requirements.

REIT STATUS

Management believes that the Company is operated in a manner that will enable it
to continue to qualify as a REIT for federal income tax purposes. As a REIT, the
Company will not pay income taxes at the trust level on any taxable income which
is distributed to its shareholders, although AMREIT II, Inc., its "non-qualified
REIT subsidiary", may be subject to tax at the corporate level. Qualification
for treatment as a REIT requires the Company to meet specified criteria,
including specified requirements regarding the nature of its ownership, assets,
income and distributions of taxable income. The Company may, however, be subject
to tax at normal corporate rates on any ordinary income or capital gains not
distributed.

YEAR 2000 ISSUE

All of the Company's information technology infrastructure is provided by the
Manager, and the Manager's systems are supplied by AMRESCO, INC. To date,
AMRESCO, INC. has not experienced any material difficulties with respect to its
internal business-critical systems used in connection with the operations of the
Manager or the Company, nor does it anticipate any material difficulties in the
future. Under the terms of the Company's Management Agreement with the Manager,
all of the costs associated with addressing the Company's Year 2000 issue were
to be borne by the Manager. As a result, the Company did not incur any
expenditures in connection with Year 2000 readiness modifications.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-K are not based on historical facts
and are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company intends that
forward-looking statements be subject to such Act and any similar state or
federal laws. Forward-looking statements, which are based on various
assumptions, include statements regarding the intent, belief or current
expectations of the Company, its Manager, and their respective Trustees or
directors and officers, and may be identified by reference to a future period or
periods or by use of forward-looking terminology such as "intends," "may,"
"could," "will," "believe," "expect," "anticipate," "plan," or similar terms or
variations of those terms or the negative of those terms. Actual results could
differ materially from those set forth in forward-looking statements due to
risks, uncertainties and changes with respect to a variety of factors,
including, but not limited to, changes in international, national, regional or
local economic environments, changes in prevailing interest rates, credit and
prepayment risks, basis and asset/liability risks, spread risk, event risk,
conditions which may affect public securities and debt markets generally or the
markets in which the Company operates, the Year 2000 issue, the availability of
and costs associated with obtaining adequate and timely sources of liquidity,
dependence on existing sources of funding, the size and liquidity of the
secondary market for commercial mortgage-backed securities, geographic or
product type concentrations of assets (temporary or otherwise), hedge mismatches
with liabilities, other factors generally understood to affect the real estate
acquisition, mortgage and leasing markets and securities investments, changes in
federal income tax laws and regulations, and other risks described from time to
time in the Company's SEC reports and filings, including its registration
statement on Form S-11 and periodic reports on Form 10-Q, Form 8-K and Form
10-K.




                                       30
<PAGE>   31
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a party to various financial instruments which are subject to
market risk. These instruments include mortgage loan investments, investments in
commercial mortgage-backed securities ("CMBS") and certain of the Company's
borrowing facilities. The Company is also a party to an interest rate cap
agreement which it entered into in order to mitigate the market risk exposure
associated with its credit facilities. The Company's financial instruments
involve, to varying degrees, elements of interest rate risk. Additionally, the
Company's investment portfolio, which is comprised of both financial instruments
(mortgage loans and CMBS) and equity investments in real estate, is subject to
real estate market risk. The Company is a party to certain other financial
instruments, including trade receivables and payables and amounts due to
affiliates which, due to their short-term nature, are not subject to market
risk; accordingly, no discussion of these instruments is provided herein.

All of the Company's financial instruments, including its derivative financial
instruments, have been entered into for purposes other than trading. The Company
has not entered into, nor does it intend to enter into, any financial
instruments for trading or speculative purposes. As the Company has no
investments outside of the United States, it is not subject to foreign currency
exchange rate risk.

As a real estate investment trust, the Company is subject to certain limitations
imposed by the Internal Revenue Code of 1986, as amended, as it relates to the
use of derivative instruments, particularly with regard to hedging fair value
exposures. As a result, the Company generally does not attempt to hedge its
exposure to changes in the fair value of its investments through the use of
derivative instruments. Instead, these exposures have been managed by the
Company through its diversification efforts and strict underwriting of its
investments. Furthermore, the Company generally intends to hold its mortgage
loan investments to maturity. Excluding extension options which are available to
some of the Company's borrowers, these mortgage loan investments had remaining
terms ranging from 5.5 months to 19.5 months as of December 31, 1999.

In the following discussion of market risk exposures, the Company has employed
sensitivity analyses, where practicable to do so, in quantifying the potential
loss in future earnings, fair values or cash flows resulting from one or more
selected hypothetical changes in relevant market rates.

Mortgage Loans

The Company's loan portfolio is comprised of mid- to high-yield senior and
mezzanine investments. Mezzanine loans, the repayment of which are subordinated
to senior mortgage loans, are secured by a second lien mortgage and/or a pledge
of the ownership interests of the borrower. With the exception of two
investments, the Company's loans provide for a fixed pay rate and fixed accrual
rate of interest. The two floating rate loans provide for an interest rate
floor. Three of the Company's loans provide for profit participation above the
contractual accrual rate. For all but one of the Company's loans, the
incremental interest earned at the accrual rate is not payable by the borrowers
until the maturities of their respective loans. Generally, the Company's loans
have higher loan-to-value ratios than most conventional loans.

The fair values of the Company's mortgage loans are less sensitive (than are the
values of more conventional loans) to changes in interest rates due to their
comparatively shorter duration and higher yield, equity-like characteristics.
For example, the Company does not believe that a 10% increase or decrease in
general interest rates (from those prevailing at December 31, 1999) would have a
significant impact on the fair value of its predominately fixed rate mortgage
loan portfolio. A significant increase in interest rates could, however, make it
more difficult for the Company's borrowers to sell or refinance their respective
properties. This could have a material adverse effect on the Company, either
through loan defaults or the need to grant extensions of the maturity dates,
thereby delaying repayment. Additionally, a general real estate market decline
could have a material adverse impact on the Company. If rental rates were to
decline and/or vacant space was not able to be leased as a result of declining
demand, cash flows from the properties securing the Company's loans might be
inadequate to service the loans. In the event of shortfalls, borrowers may or
may not be willing to supplement property cash flows to pay the Company all
amounts due under the terms of its mortgage loans. If real estate values were to
decline, borrowers may find it difficult, if not impossible, to repay some or
all of the principal and accrued interest in connection with a sale or
refinancing of the underlying properties. With the exception of certain limited
guarantees, most of the Company's loans are without recourse and therefore
borrowers may have little or no incentive to retain ownership of their
properties if real estate values decline sharply. A number of factors could lead
to a real estate market decline including, but not limited to, a slowdown in the
growth of the economy, increasing commercial mortgage



                                       31
<PAGE>   32

interest rates and supply and demand factors. In the event of a decline, some
real estate markets may be adversely impacted more than others. Despite
generally high loan-to-value ratios, the Company's borrowers have varying
amounts of equity at risk; this equity, which is subordinate to the Company's
investment, serves to protect the Company in the event of a declining real
estate market. As a result of these factors and the unique characteristics of
the Company's mortgage loan investments, it is not possible for the Company to
quantify the potential loss in earnings or cash flows that might result from a
real estate market decline.

The Company has attempted to mitigate these risk exposures by carefully
underwriting its investments and by diversifying its mortgage loan portfolio.
The underwriting process for its loans has included, among other things, an
in-depth assessment of the character, experience (including operating history)
and financial capacity of the borrower. In the event of a real estate market
decline, the borrower's motivations and financial capacity could, to some
extent, limit the potential loss to the Company. While the Company has attempted
to mitigate these risk exposures, there can be no assurance that these efforts
will be successful.

Commercial Mortgage-backed Securities

The fair values of the Company's investments in non-investment grade CMBS are
subject to both interest rate risk and spread risk. The non-investment grade, or
subordinated classes, of CMBS include classes with credit ratings below
investment grade "BBB". As the subordinated classes provide credit protection to
the senior classes by absorbing losses from underlying mortgage loan defaults or
foreclosures, they also carry more credit risk than the senior classes. Among
other factors, the fair value of the Company's interests in CMBS is dependent
upon, and is sensitive to changes in, comparable-term U.S. Treasury rates and
the spreads over such U.S. Treasury rates in effect from time to time. Spreads
over comparable-term U.S. Treasury rates, which are based upon supply and demand
factors, typically vary across different classes of CMBS and are generally
greater for each successively lower rated class of CMBS. Spreads are influenced
by a number of factors including, but not limited to, investor expectations with
respect to future economic conditions, interest rates and real estate market
factors, all or any of which can impact the ability of borrowers to perform
under the terms of the mortgage loans underlying CMBS. As a result, even in an
environment characterized by relatively constant U.S. Treasury rates and low
commercial mortgage default rates, the value of the Company's CMBS holdings can
be adversely impacted simply by increasing spreads. This situation occurred
during the latter half of 1998 and was the primary reason for the decline in the
value of the Company's CMBS holdings during that period. During 1999, the value
of the Company's CMBS holdings declined further due to a combination of
increasing spreads and an increase in comparable-term U.S. Treasury rates.

As of December 31, 1999, the Company held five commercial mortgage-backed
securities with credit ratings ranging from "BB-" to "B-". On January 11, 2000,
the Company sold one of its CMBS holdings (a "B" rated bond) for $3.6 million,
which amount approximated its carrying value at December 31, 1999. The Company
realized a $0.3 million loss on the sale of this security. The weighted average
duration of the Company's CMBS investments, excluding the security that was sold
in January 2000, approximated 5.7 years as of December 31, 1999. The estimated
fair value of the Company's CMBS holdings, excluding the bond that was sold in
January 2000, was $21 million at December 31, 1999. All other things being
equal, a 100 basis point increase or decrease in comparable-term U.S. Treasury
rates (from those in effect as of December 31, 1999) would be expected to cause
the value of the Company's current CMBS holdings to decline or increase,
respectively, by approximately $1.2 million. Similarly, if comparable-term U.S.
Treasury rates remained constant but spreads over such U.S. Treasury rates
increased by 100 basis points (from those quoted as of December 31, 1999) for
each of the classes of CMBS currently owned by the Company, the fair value of
its securities portfolio would also be expected to decline by approximately $1.2
million. Conversely, a 100 basis point decline in spreads across all classes of
CMBS (all other things being equal) would be expected to increase the value of
the portfolio by a like amount.

As of December 31, 1999, the Company's unconsolidated taxable subsidiary held
one commercial mortgage-backed security that had a credit rating of "B-". On
March 21, 2000, this bond was sold for $3.1 million. In connection with this
sale, the subsidiary realized a loss of $0.3 million.

As the Company's securities are classified as available for sale, unrealized
gains and losses have been excluded from earnings and reported as a component of
accumulated other comprehensive income (loss) in shareholders' equity. As
discussed in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations", management currently intends to sell its
remaining CMBS. As of December 31, 1999, unrealized losses associated with these
securities totaled $10.3 million. In the absence of dramatic declines in spreads
and/or comparable term U.S.



                                       32
<PAGE>   33

Treasury rates, management expects to realize losses in connection with these
sales, should they occur. If losses are realized, the Company's earnings would
be adversely impacted by the amount of such losses.

Although impossible to quantify, declines in rental rates and/or real estate
values could adversely impact the ability of borrowers to fully repay or
otherwise satisfy their loan obligations which in turn could lead to losses
which would be absorbed initially by the holders of the unrated credit support
class and then by successively higher rated subordinate classes. The Company has
attempted to mitigate its exposure to these types of risks by investing in
various classes of subordinated CMBS which are backed by mortgage loans secured
by a diversified mix of commercial real estate assets (both by property type and
location). Additionally, the Company performed extensive due diligence in its
underwriting process in order to identify loans which it believed might be more
likely to default. The Company then attempted to quantify the risks and
projected losses from the pool of mortgage loans which it then factored into the
price that it was willing to pay for the securities. However, there can be no
assurances that such strategies will enable the Company to avoid adverse
consequences in the future in the event that these bonds continue to be held.

Borrowing Facilities

The Company is a party to two credit facilities, each of which bears interest at
floating rates. Specifically, both facilities bear interest at varying spreads
over one-month LIBOR. One of the facilities is used to finance some of the
Company's structured loan and equity real estate investments (the "Amended Line
of Credit") while the other facility is used to finance a portion of the
Company's CMBS (the "Repurchase Agreement"). As of December 31, 1999, amounts
outstanding under the Amended Line of Credit and the Repurchase Agreement
totaled $60.6 million and $9.9 million, respectively. To reduce the impact of
changes in interest rates on these floating rate debt facilities, the Company
purchased an interest rate cap agreement. As described below, this agreement
reduces (but does not eliminate) the Company's risk of incurring higher interest
costs due to rising interest rates.

If the one-month LIBOR on December 31, 1999 increased by 100 basis points on
that date (from 5.82% to 6.82%) and then remained constant at the higher rate
throughout 2000, the Company's interest costs on its outstanding borrowings
($70.5 million), in the absence of the interest rate cap agreement described
below, would increase by approximately $590,000 for the year ending December 31,
2000. These additional interest costs (and the savings described below) assume
that the Company's borrowings remain constant until November 3, 2000 (the
maturity date of the Amended Line of Credit), at which time all outstanding
amounts are repaid. In order to reduce the impact that rising interest rates
would have on this floating rate indebtedness, the Company entered into an
interest rate cap agreement effective August 1, 1999. The cap agreement has a
notional amount of $59.0 million. Until its expiration on November 1, 2000, the
agreement entitles the Company to receive from the counterparty the amounts, if
any, by which one-month LIBOR exceeds 6.25% multiplied by the notional amount.
If the one-month LIBOR increased as described above, the Company would receive
approximately $280,000 from the counterparty under the terms of the cap
agreement. Under this scenario, earnings and cash flows for the year ending
December 31, 2000 would be reduced by a net amount of approximately $310,000.
Any further increase in one-month LIBOR would effect only that portion of the
Company's indebtedness in excess of the cap agreement's notional amount ($11.5
million). As the Company paid an up-front, one-time premium of $110,000 for the
cap, there is no liquidity risk to the Company associated with holding this
derivative financial instrument.

Conversely, a sustained 100 basis point reduction in the one-month LIBOR (if it
occurred on December 31, 1999) would increase earnings and cash flows for the
year ending December 31, 2000 by approximately $590,000. Under this scenario, no
payments would be received from the counterparty under the cap agreement.

The Company (through a majority-owned partnership) is indebted under the terms
of five non-recourse loans aggregating $34.6 million. As the loans bear interest
at a fixed rate, the Company's future earnings and cash flows would not be
reduced in the event of rising interest rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Included herein at pages F-1 through F-22.

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

None



                                       33
<PAGE>   34
                                    PART III

ITEM 10. TRUST MANAGERS AND EXECUTIVE OFFICERS OF THE COMPANY

TRUST MANAGERS

Currently, the Company's Board of Trust Managers is comprised of six members,
one of which is affiliated with AMREIT Managers, L.P. ("AMREIT Managers"), the
Company's Manager, one of which was affiliated with AMREIT Managers through
March 2000 and four of whom are independent trust managers. As required by the
Company's Declaration of Trust, the Board of Trust Managers is divided into
three classes. Each class consists of two trust managers, at least one of whom
is an independent trust manager. As defined in the Company's Bylaws, an
independent trust manager is a natural person who is not an officer or employee
of the Company or any of its affiliates, or an affiliate of any advisor or
manager to the Company under any advisory or management agreement with the
Company. In addition, except for acting as a trust manager or as a director of
any entity controlled by the Company, an independent trust manager cannot have
performed more than a "de minimus" amount of service for the Company or had a
material business relationship with AMREIT Managers or any other advisor or
manager of the Company. The term of office of one class of trust managers
expires each year at the annual meeting of shareholders. The initial term of
office of the Class II trust managers will expire at the 2000 annual meeting of
shareholders and the initial term of office of the Class III trust managers will
expire at the 2001 annual meeting of shareholders. The term of office of the
Class I trust managers expires at the 2002 annual meeting of shareholders. Each
trust manager of the class elected at each annual meeting of shareholders will
hold office for a term of three years. However, if the Plan of Liquidation and
Dissolution is approved by the Company's shareholders at the 2000 annual
meeting, then the term of each trust manager will expire on the date that the
Company files articles of dissolution.

The Company's Bylaws require the Board of Trust Managers to have not less than
two nor more than nine members, as determined from time to time by the existing
Board of Trust Managers. The Bylaws further require that the majority of the
members of the Board of Trust Managers and of any committee of the Board of
Trust Managers be independent trust managers, except in the case of a vacancy.
Vacancies occurring on the Board of Trust Managers among the independent trust
managers may be filled by the vote of a majority of the trust managers,
including the independent trust managers, or the holders of a majority of the
outstanding common shares at an annual or special meeting of shareholders.

The following table sets forth certain information with respect to the Company's
current trust managers:

<TABLE>
<CAPTION>
                                                                                Trust
                                                                                Manager            Term         Board
         Name                  Age                   Position                    Since    Class    Expires    Committees
--------------------------    ------ ---------------------------------------    --------- ------- --------   -----------
<S>                           <C>    <C>                                        <C>       <C>     <C>        <C>
Robert L. Adair III            56    Chairman of the Board of Trust Managers      1998       I      2002     (a)(b)
                                       and Chief Executive Officer
John C. Deterding              67    Independent Trust Manager                    1998       I      2002     (a)(b)(d)
Bruce W. Duncan                48    Independent Trust Manager                    1998      II      2000     (a)(b)(c)
Robert H. Lutz, Jr.            50    Trust Manager                                1998      II      2000     (a)
Christopher B. Leinberger      49    Independent Trust Manager                    1998     III      2001     (a)(c)(d)
James C. Leslie                44    Independent Trust Manager                    1998     III      2001     (b)(c)(d)
</TABLE>

(a)  Member of the Executive Committee

(b)  Member of the Investment Committee

(c)  Member of the Audit Committee

(d)  Member of the Compensation Committee

Robert L. Adair III is Chairman of the Board of Trust Managers and Chief
Executive Officer of the Company. Mr. Adair has served as Chief Executive
Officer of the Company since November 1998 and has served as Chairman of the
Board of Trust Managers of the Company since its inception in 1998. From 1994
through March 2000, Mr. Adair also served as a director, President and Chief
Operating Officer of AMRESCO, INC. Mr. Adair served AMRESCO, INC. and its
predecessors in various capacities since 1987. Mr. Adair, who is also a director
of Stratus Properties, Inc., holds a B.B.A. degree from The University of Texas
and an M.B.A. degree from the Wharton School at the University of Pennsylvania.



                                       34
<PAGE>   35

John C. Deterding is a member of the Board of Trust Managers and has served in
such capacity since May 1998. Mr. Deterding served as Senior Vice President and
General Manager of the Commercial Real Estate Division of General Electric
Capital Corporation ("GECC") from 1975 to June 1993. From November 1989 to June
1993, Mr. Deterding also served as Chairman of the General Electric Real Estate
Investment Company, a privately-held REIT. From 1986 to 1993, Mr. Deterding
served as a Director of GECC Financial Corporation. Since retiring from GECC in
June 1993, Mr. Deterding has worked as a private real estate consultant. He
served as a director of Patriot American Hospitality Inc. / Wyndham
International, a publicly-held REIT (or its predecessors) from September 1995 to
June 1999. He currently serves as a trustee of Fortress Investment Fund. He
holds a B.S. degree from the University of Illinois.

Bruce W. Duncan is a member of the Board of Trust Managers and has served in
such capacity since May 1998. Mr. Duncan was the Chairman, President and Chief
Executive Officer of Cadillac Fairview Corporation Limited ("Cadillac Fairview")
from 1995 until March 17, 2000. Prior to joining Cadillac Fairview, Mr. Duncan
worked for JMB Realty Corporation from 1978 to 1992, where he served as
Executive Vice President and a member of the Board of Directors. From 1992 to
1994, he was President and Co-Chief Executive Officer of JMB Institutional
Realty Corporation. From 1994 to 1995, he was with Blakely Capital, Inc. Mr.
Duncan is a member of the Board of Trustees of Starwood Hotels and Resorts
Worldwide, Inc. and is a member of the Board of Trustees of Kenyon College. He
is also a member of the Board of Directors of the Canadian Institute of Public
Real Estate Companies. Mr. Duncan holds an M.B.A. degree from the University of
Chicago and an undergraduate degree from Kenyon College.

Robert H. Lutz, Jr. is a member of the Board of Trust Managers and has served in
such capacity since the Company's inception in 1998. Since May 1994, Mr. Lutz
has also served as Chief Executive Officer of AMRESCO, INC. From May 1994
through March 2000, Mr. Lutz also served as Chairman of the Board of AMRESCO,
INC. From November 1991 to May 1994, Mr. Lutz was President of Allegiance
Realty, a real estate management company. Mr. Lutz is also a director of Felcor
Lodging Trust, a publicly-traded REIT. He holds a B.A. degree from Furman
University and an M.B.A. degree from Georgia State University.

Christopher B. Leinberger is a member of the Board of Trust Managers and has
served in such capacity since May 1998. Mr. Leinberger has been Managing
Director and co-owner of Robert Charles Lesser & Co. since 1982. Mr. Leinberger
is also a partner in Arcadia Land Company. Mr. Leinberger is Chair of the Board
of The College of Santa Fe. He is a graduate of Swarthmore College and the
Harvard Business School.

James C. Leslie is a member of the Board of Trust Managers and has served in
such capacity since May 1998. Mr. Leslie has served as President and Chief
Operating Officer of The Staubach Company since 1996, and as a director of The
Staubach Company since 1988. Mr. Leslie was President of Staubach Financial
Services from January 1992 until February 1996. Mr. Leslie is also President and
a board member of Wolverine Holding Company, and serves on the boards of Stratus
Properties, Inc. and the North Texas Chapter of the Arthritis Foundation. Mr.
Leslie holds a B.S. degree from The University of Nebraska and an M.B.A. degree
from The University of Michigan Graduate School of Business.

EXECUTIVE OFFICERS

Set forth below are the names and ages of all executive officers of the Company.
The executive officers of the Company serve at the discretion of the Board of
Trust Managers and are elected annually by the Board of Trust Managers at a
meeting held following each annual meeting of shareholders, or as soon
thereafter as necessary and convenient in order to fill vacancies or newly
created offices. Each officer holds office until his successor is duly elected
and qualified or until death, resignation or removal, if earlier.

<TABLE>
<CAPTION>
                   Name                Age                         Position
       -----------------------------  -----   -----------------------------------------------------
<S>                                   <C>     <C>
       Robert L. Adair III (1)         56     Chairman of the Board of Trust Managers and Chief
                                                Executive Officer
       Jonathan S. Pettee              41     President and Chief Operating Officer
       David M. Striph                 41     Executive Vice President and Chief Investment Officer
       Michael L. McCoy                44     Senior Vice President, General Counsel and Secretary
       Thomas R. Lewis II              37     Senior Vice President, Chief Financial and Accounting
                                                Officer and Controller
</TABLE>

(1)  See section entitled "Trust Managers" above for biographical information
     regarding Mr. Adair.


                                       35
<PAGE>   36
Jonathan S. Pettee is President and Chief Operating Officer of both the Company
and AMREIT Managers. Mr. Pettee has served as President and Chief Operating
Officer of both the Company and AMREIT Managers since November 1998; prior to
November 1998, Mr. Pettee served as Executive Vice President and Chief Operating
Officer of both the Company and AMREIT Managers. From 1996 to March 1998, Mr.
Pettee was responsible for mortgage product development, capital raising and
management of a non-investment grade portfolio of commercial mortgage-backed
securities ("CMBS") for the AMRESCO Group. Effective April 1, 2000, Mr. Pettee
will also become Executive Vice President and Chief Financial Officer of
AMRESCO, INC. Mr. Pettee has over fourteen years of experience in corporate
finance, fixed income and real estate. From 1995 to 1996, Mr. Pettee was
Managing Director for BBC Investment Advisors, a joint venture between Back Bay
Advisors and Copley Real Estate Advisors. At BBC, Mr. Pettee managed an
investment grade portfolio of CMBS. Mr. Pettee has held previous positions as
Managing Director at Copley Real Estate Advisors (1992 to 1994), where he was
responsible for managing the external financing activities for Copley's
institutional funds, and as Senior Associate at Morgan Stanley Realty (1986 to
1992), where he executed sale, financing and investment banking transactions for
the firm's clients. Mr. Pettee has a B.S. degree in Mechanical Engineering from
Cornell University and an M.B.A. degree from the Harvard Business School.

David M. Striph is Executive Vice President and Chief Investment Officer of the
Company. Mr. Striph has served as Executive Vice President and Chief Investment
Officer of the Company since February 2000. Mr. Striph is responsible for the
day-to-day management of the Company's investments, other than its CMBS
portfolio, and will be primarily responsible for the liquidation of the
Company's mortgage loan assets and its equity investments in real estate. Mr.
Striph has served as one of the Company's executive officers since November
1998. His primary responsibilities have included nationwide business development
and management of the staff responsible for the origination, underwriting and
portfolio management of high-yield commercial real estate mortgages and equity
investments. Mr. Striph was the Western Division Manager for AMRESCO, INC.'s
Real Estate Structured Finance Group from December 1996 until August 1998. Mr.
Striph has been employed by AMRESCO, INC. since 1994 serving in various
positions within the Asset Management/Loan Workout division. Mr. Striph has over
15 years of real estate lending/banking experience including owning a commercial
mortgage brokerage company for five years. Mr. Striph has a B.S. Degree from
Southern Illinois University and is a licensed real estate broker.

Michael L. McCoy is Senior Vice President, General Counsel and Secretary of the
Company and has served in such capacity since its inception in 1998. From
February 1996 through March 2000, Mr. McCoy also served as Assistant General
Counsel of AMRESCO, INC. Mr. McCoy was employed by AMRESCO, INC. in 1989. Prior
to joining AMRESCO, INC., Mr. McCoy was a Director with the law firm of Baker,
Mills & Glast, P.C., where he practiced in the areas of commercial real estate,
banking and finance. Prior to that, he was an associate with the law firm of
Carrington, Coleman, Sloman & Blumenthal. Mr. McCoy holds a J.D. degree and a
B.B.A. degree from the University of Texas at Austin.

Thomas R. Lewis II is Senior Vice President, Chief Financial and Accounting
Officer and Controller of both the Company and AMREIT Managers and has served in
such capacity since February 2000. From the Company's inception until February
2000, Mr. Lewis served as Vice President and Controller of both the Company and
AMREIT Managers. Mr. Lewis has been employed by AMRESCO, INC. since November
1995 and until April 1998 had responsibility for accounting, cash management and
reporting for its 40 institutional advisory clients. From 1993 to 1995, Mr.
Lewis served in a similar capacity as Vice President-Finance for Acacia Realty
Advisors, Inc. ("Acacia"). From 1989 to 1993, Mr. Lewis served as Senior
Controller for Prentiss Properties Limited, Inc., an affiliate of Acacia. Mr.
Lewis was employed by Price Waterhouse from 1985 to 1989. Mr. Lewis holds a
B.B.A. degree in Accounting from Texas A&M University and is a Certified Public
Accountant.

RELATIONSHIPS

There are no family relationships among any of the trust managers or executive
officers of the Company. Except as described above, none of the Company's trust
managers hold directorships in any company with a class of securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934 (the "Exchange
Act") or pursuant to Section 15(d) of the Exchange Act or any company registered
as an investment company under the Investment Company Act of 1940. There are no
arrangements or understandings between any trust manager or executive officer
and any other person pursuant to which that trust manager or executive officer
was selected.



                                       36
<PAGE>   37
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's officers and trust
managers, and persons who beneficially own more than 10% of the Company's common
shares, to file initial reports of ownership and reports of changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers, trust managers
and greater than 10% beneficial owners are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.

Based solely on a review of the copies of such reports furnished to the Company
and representations from the officers and trust managers, the Company believes
that all Section 16(a) filing requirements with respect to fiscal 1999
applicable to its officers, trust managers and greater than 10% beneficial
owners were satisfied by such persons.


ITEM 11. EXECUTIVE COMPENSATION

The Company does not pay a salary or bonus to its executive officers, nor does
it provide any other compensation or incentive programs to its executive
officers other than grants from time to time of share options under the 1998
Share Option and Award Plan, as amended. Additionally, during the period from
February 1999 through February 2000, the Company paid dividend equivalents on
all vested and unexercised share options, excluding those held by the Manager.
These dividend equivalents were equal to the dividends paid on the Company's
common shares, excluding those distributions that were characterized as a
non-taxable return of capital for tax purposes, and therefore were not
preferential. On February 24, 2000, the Board of Trust Managers terminated the
dividend equivalents program. As a result, the Company does not expect to make
any future dividend equivalent payments. The final dividend equivalent payment
relating to the Company's 1999 fourth quarter dividend was made on January 27,
2000. AMREIT Managers, at its expense, provides all personnel necessary to
conduct the business of the Company. AMREIT Managers receives various fees and
cost reimbursements for advisory and other services provided to the Company
under the terms of a Management Agreement. For a description of the Management
Agreement, see caption entitled "The Manager" in Item 13 "Certain Relationships
and Related Transactions". Excluding compensation associated with share option
awards and dividend equivalents, AMREIT Managers pays all salaries, bonuses and
other compensation to the Company's executive officers.

In the following tables, the named executive officers were determined based upon
the number of share options granted as these awards and the related dividend
equivalents were the only forms of compensation provided by the Company to its
executive officers during the year ended December 31, 1999 and the period from
May 12, 1998 (the Company's inception of operations) through December 31, 1998.
No stock appreciation rights ("SARs") were granted during either period.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                Annual Compensation
                                                        ----------------------------------

                                                                                Other
                     Name                                                       Annual
                     and                                 Salary     Bonus     Compensation
              Principal Position                 Year     ($)        ($)          ($)
----------------------------------------------   ----   --------   --------   ------------
<S>                                              <C>    <C>        <C>        <C>
Robert L. Adair III, Chairman of the Board of    1999         --         --             --
   Trust Managers and Chief Executive Officer    1998         --         --             --

Jonathan S. Pettee, President and Chief          1999         --         --             --
    Operating Officer                            1998         --         --             --

Michael L. McCoy, Senior Vice President,         1999         --         --             --
   General Counsel and Secretary                 1998         --         --             --

David M. Striph,  Executive Vice President and   1999         --         --             --
   Chief Investment Officer                      1998         --         --             --

Thomas R. Lewis II, Senior Vice President,       1999         --         --             --
   Chief Financial and Accounting Officer
   and Controller                                1998         --         --             --
<CAPTION>
                                                               Long-Term Compensation
                                                         -----------------------------------
                                                                    Number of
                                                       Restricted    Securities   Long-Term
                     Name                                Stock       Underlying   Incentive    All Other
                     and                                 Awards     Options/SARs     Plan     Compensation
              Principal Position                 Year      ($)        Granted     Payouts($)     ($)(1)
----------------------------------------------   ----    --------   ------------  ----------  ------------
<S>                                              <C>     <C>        <C>           <C>         <C>
Robert L. Adair III, Chairman of the Board of    1999          --             --         --         11,925
   Trust Managers and Chief Executive Officer    1998          --         45,000         --             --

Jonathan S. Pettee, President and Chief          1999          --             --         --          7,950
    Operating Officer                            1998          --         30,000         --             --

Michael L. McCoy, Senior Vice President,         1999          --             --         --          3,975
   General Counsel and Secretary                 1998          --         15,000         --             --

David M. Striph,  Executive Vice President and   1999          --             --         --          1,860
   Chief Investment Officer                      1998          --         10,000         --             --

Thomas R. Lewis II, Senior Vice President,       1999          --             --         --          1,590
   Chief Financial and Accounting Officer
   and Controller                                1998          --          6,000         --             --
</TABLE>

(1)  All other compensation is comprised solely of non-preferential dividend
     equivalents earned by the executive officers. Dividend equivalents were
     paid to the executive officers on August 16, 1999, November 15, 1999 and
     January 27, 2000. The payments made on these dates totaled the amounts
     shown above.

                                       37
<PAGE>   38
SHARE OPTION/SAR GRANTS IN FISCAL 1999

During fiscal 1999, no share options or SARs were granted to the Company's
executive officers.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                Number of Securities            Value of Unexercised
                                                               Underlying Unexercised           In-the-Money Options
                                 Shares                     Options at December 31, 1999      at December 31, 1999 ($)
                               Acquired on       Value      -----------------------------  -----------------------------
             Name             Exercise (#)   Realized ($)    Exercisable   Unexercisable    Exercisable    Unexercisable
  --------------------------- -------------- -------------- -------------  --------------  -------------   -------------
<S>                           <C>            <C>            <C>            <C>             <C>             <C>
  Robert L. Adair III              --             --           11,250            33,750           --              --
  Jonathan S. Pettee               --             --            7,500            22,500           --              --
  Michael L. McCoy                 --             --            3,750            11,250           --              --
  David M. Striph                  --             --            2,500             7,500          620           1,860
  Thomas R. Lewis II               --             --            1,500             4,500           --              --
</TABLE>

COMPENSATION OF TRUST MANAGERS

In lieu of the cash payment of fees to independent trust managers for attendance
at the regularly scheduled board meetings, the Company granted 2,250 restricted
common shares to each independent trust manager in May 1999. In addition, in
1999, the Company paid each independent trust manager a fee of $1,000 for each
special board meeting that he attended; these fees totaled $23,000 for all
independent trust managers.

During the period from February 1999 through February 2000, the Company granted
dividend equivalent rights to all of its trust managers. During this period,
each trust manager received cash payments equal to the Company's per share
dividend (excluding those distributions that were characterized as a non-taxable
return of capital for tax purposes) multiplied by the number of common shares
such trust manager was eligible to purchase under options that were vested at
the time the dividend was declared. Dividend equivalents totaling $60,950 were
paid to trust managers under this program. On February 24, 2000, the Board of
Trust Managers terminated the dividend equivalents program. As a result, the
Company does not expect to make any future dividend equivalent payments to its
trust managers. The final dividend equivalent payment relating to the Company's
1999 fourth quarter dividend was made on January 27, 2000.

Following the Company's next annual meeting of shareholders, the Company expects
to pay each independent trust manager an annual fee of $20,000, payable
quarterly in advance, plus $1,000 for each special board meeting that he
attends. The Company does not separately compensate those trust managers who are
affiliated with the Company or AMREIT Managers, other than through its Share
Option and Award Plan and dividend equivalents program. All trust managers are
reimbursed for their costs and expenses in attending meetings of the Board of
Trust Managers (or any committee thereof). After March 31, 2000, the Company
expects to pay Mr. Adair an annual fee of $60,000, payable quarterly in advance,
for his services as both Chairman of the Board of Trust Managers and Chief
Executive Officer.

Immediately after the closing of the Company's initial public offering, each
independent trust manager received options to purchase 20,000 common shares at
$15.00 per share (the initial public offering price). Messrs. Adair and Lutz
were each awarded options to purchase 45,000 common shares at $15.00 per share.
All of the trust managers' options vest ratably over a four-year period
commencing on the first anniversary of the date of grant.





                                       38
<PAGE>   39
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 1999, the Company's Compensation Committee consisted of Christopher B.
Leinberger, John C. Deterding and James C. Leslie, none of whom was, prior to or
during 1999, an officer or employee of the Company or any of its affiliates.
None of the Company's officers nor its affiliates' officers served as a member
of the compensation committee or similar committee or board of directors of any
entity whose members served on the Company's Compensation Committee. None of
such persons had any relationships requiring disclosure under applicable rules
and regulations.

                                       39
<PAGE>   40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of March 15, 2000, there were 10,015,111 shares of the Company's common stock
outstanding. The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of March 15, 2000 by: (1)
each person known to the Company to be the beneficial owner of more than 5% of
the Company's common stock; (2) the Company's Trust Managers; (3) the Company's
named executive officers; and (4) all Trust Managers and executive officers as a
group. Unless otherwise indicated in the footnotes, all such shares of common
stock are owned directly and the indicated person has sole voting and investment
power with respect thereto.

<TABLE>
<CAPTION>
                                                                                      Percentage of
                                                             Amount and Nature of     Common Shares
                    Name of Beneficial Owner (1)             Beneficial Ownership   Beneficially Owned
           --------------------------------------------      --------------------   ------------------
<S>                                                          <C>                    <C>
           AMRESCO, INC. ..............................         2,000,117(2)              19.02%
           FMR Corp. ..................................         1,273,394(3)              12.71%
           Farallon Capital Management, L.L.C. ........           542,100(4)               5.41%
           John C. Deterding ..........................            13,750(5)                  *
           Bruce W. Duncan ............................            27,450(5)                  *
           Christopher B. Leinberger ..................            19,000(5)                  *
           James C. Leslie ............................            18,750(5)                  *
           Robert H. Lutz, Jr .........................            32,500(6)                  *
           Robert L. Adair III ........................           102,500(7)               1.02%
           Jonathan S. Pettee .........................            22,000(8)                  *
           Michael L. McCoy ...........................            10,500(9)                  *
           David M. Striph ............................             4,250(10)                 *
           Thomas R. Lewis II .........................             4,000(10)                 *
           All Trust Managers and executive officers as
               a group (10 persons) ...................           254,700(11)              2.51%
</TABLE>

* Less than 1%.

(1)  A Person is deemed to be the beneficial owner of securities that can be
     acquired by such Person within 60 days upon the exercise of options. Each
     beneficial owner's percentage ownership was determined by assuming that
     options that are held by such Person (but not those held by any other
     Person) and which are exercisable within 60 days have been exercised.

(2)  Includes options which are exercisable by AMREIT Managers, L.P. within 60
     days to purchase 250,003 common shares. AMREIT Holdings, Inc. ("Holdings"),
     a wholly-owned subsidiary of AMRESCO, INC., owns 1,500,011 shares. AMRESCO,
     INC. owns 100 shares. The partnership interests of AMREIT Managers are
     owned by Holdings and a wholly-owned subsidiary of Holdings. The address of
     AMRESCO, INC. and AMREIT Managers is 700 North Pearl Street, Suite 1900,
     Dallas, Texas 75201. Holdings' address is 330 E. Warm Springs Road, Las
     Vegas, Nevada 89119.

(3)  The information set forth above is based solely on the Schedule 13G filed
     by FMR Corp. with the SEC on February 14, 2000. FMR Corp. reported that,
     through its subsidiaries, it had sole dispositive power with respect to all
     such shares and sole voting power with respect to 348,494 of such shares.
     FMR Corp. is the parent holding company of an investment management company
     registered under Section 203 of the Investment Advisers Act of 1940 that
     provides investment advisory and management services to its clients. FMR
     Corp. disclaims investment power or voting power over any of the securities
     referenced above; however, it may be deemed to "beneficially own" such
     securities by virtue of Rule 13d-3 under the Securities Exchange Act of
     1934 (the "Act"). FMR Corp.'s address is 82 Devonshire Street, Boston,
     Massachusetts 02109.

(4)  The information set forth above is based solely on the Schedule 13D filed
     with the SEC on January 14, 2000 by Farallon Capital Partners, L.P.,
     Farallon Capital Institutional Partners, L.P., Farallon Capital
     Institutional Partners II, L.P., Farallon Capital Institutional Partners
     III, L.P., Tinicum Partners, L.P., Farallon Capital Management, L.L.C.,
     Farallon Partners, L.L.C., Enrique H. Boilini, David I. Cohen, Joseph F.
     Downes, William F. Duhamel, Jason M. Fish, Andrew B. Fremder, Richard B.
     Freid, William F. Mellin, Stephen L. Millham, Meridee A. Moore, Thomas F.
     Steyer, Mark C. Wehrly and Fleur E. Fairman. In such Schedule 13D, Farallon
     Capital Institutional Partners, L.P. reported that it had shared voting and
     shared dispositive power over 110,900 shares, Farallon Capital
     Institutional Partners II, L.P., reported that it had shared voting power
     and shared dispositive power over 20,600 shares, Farallon Capital
     Institutional Partners III, L. P. reported that it had shared voting power
     and shared dispositive power over 31,600 shares, Tinicum Partners, L.P.
     reported that it had shared voting power and shared dispositive power over
     6,800 shares, Farallon Capital Management, L.L.C. reported that it had
     shared voting power and shared dispositive power over 234,100 shares,
     Farallon Partners, L.L.C. reported that it had shared voting power and
     shared dispositive power over 308,000 shares, Enrique H. Boilini, David I.
     Cohen, Joseph F. Downes, William F. Duhamel, Jason M. Fish, Andrew B.
     Fremder, Richard B. Freid, William F. Mellin, Stephen L. Millham, Meridee
     A. Moore, Thomas F. Steyer and Mark C. Wehrly each reported that he or she
     had shared voting power and shared dispositive power over 542,100 shares,
     and Fleur E. Fairman reported that he had shared voting power and shared
     dispositive power over 308,000 shares. The address of all such



                                       40
<PAGE>   41

     persons is One Maritime Plaza, Suite 1325, San Francisco, California 94111,
     except the address of Enrique H. Boilini is c/o Farallon Capital
     Management, L.L.C., 75 Holly Hill Lane, Greenwich, Connecticut 06830.

(5)  Includes options which are exercisable within 60 days to purchase 5,000
     common shares.

(6)  Includes options which are exercisable within 60 days to purchase 11,250
     common shares. Excludes 5,000 shares of the Company's common stock which
     are owned by Mr. Lutz's spouse as to which Mr. Lutz disclaims ownership.

(7)  Includes options which are exercisable within 60 days to purchase 11,250
     common shares.

(8)  Includes options which are exercisable within 60 days to purchase 7,500
     common shares.

(9)  Includes options which are exercisable within 60 days to purchase 3,750
     common shares.

(10) Includes options which are exercisable within 60 days to purchase 1,500
     common shares.

(11) Includes options which are exercisable within 60 days to purchase 56,750
     common shares.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

THE MANAGER

Pursuant to the terms of a Management Agreement dated as of May 12, 1998 and
subject to the direction and oversight of the Board of Trust Managers, the
Company's day-to-day operations are managed by AMREIT Managers, L.P. (the
"Manager"), an affiliate of AMRESCO, INC. ("AMRESCO") (together with its
affiliated entities, the "AMRESCO Group"). Under the terms of the Management
Agreement, the Manager performs such services and activities relating to the
assets and operations of the Company as may be required or appropriate in
accordance with the Company's policies and guidelines that are approved from
time to time and monitored by the Board of Trust Managers. Such responsibilities
include but are not necessarily limited to: (i) servicing and managing the
invested portfolio; (ii) asset/liability and risk management, hedging of
floating rate liabilities, and financing, management and disposition of the
invested portfolio, (iii) capital management and investor relations activities;
and (iv) the provision of certain administrative and managerial services such as
accounting and information technology services.

For its services during the period from May 12, 1998 (the Company's inception of
operations) through December 31, 1999, the Manager has been entitled to receive
a base management fee equal to 1% per annum of the Company's average invested
non-investment grade assets and 0.5% per annum of the Company's average invested
investment grade assets. In addition to the base management fee, the Manager has
been entitled to receive incentive compensation for each fiscal quarter in an
amount equal to 25% of the dollar amount by which all of the Company's Funds
From Operations (as defined by the National Association of Real Estate
Investment Trusts) plus gains (or minus losses) from debt restructurings and
sales of property, as adjusted, exceeds the ten-year U.S. Treasury rate plus
3.5%. In addition to the fees described above, the Manager has also been
entitled to receive reimbursement for its costs of providing certain due
diligence and professional services to the Company. The following table
summarizes the amounts charged to the Company by the Manager since May 12, 1998
under the terms of the Management Agreement (dollars in thousands):

<TABLE>
<CAPTION>
                                                                     Period from
                                                                     May 12, 1998
                                                     Year Ended        through
                                                    December 31,     December 31,
                                                        1999             1998
                                                   --------------   --------------
<S>                                                <C>              <C>
                          Base management fees     $        2,066   $          835
                          Incentive compensation               --               --
                          Reimbursable expenses               192              140
                                                   --------------   --------------

                                                   $        2,258   $          975
                                                   ==============   ==============
</TABLE>

On March 29, 2000, the Company's Board of Trust Managers approved certain
modifications to the Manager's compensation in response to the changes in the
Company's business strategy. In addition to the base management fee described
above, the Manager will be entitled to receive reimbursement for its quarterly
operating deficits, if any, beginning April 1, 2000. These reimbursements will
be equal to the excess, if any, of the Manager's operating costs




                                       41
<PAGE>   42
(including principally personnel and general and administrative expenses) over
the sum of its base management fees and any other fees earned by the Manager
from sources other than the Company. Currently, AMRESCO (through the Manager)
employs 7 people who are fully dedicated to the Company. Additionally, three of
the Company's executive officers allocate their time, as necessary, to the
Company. After March 31, 2000, two of these three officers will no longer be
employed by AMRESCO, although they will continue to serve in their present
capacities as officers of the Company. As part of the modification, the Manager
is no longer entitled to receive incentive compensation and/or a termination fee
in the event that the Management Agreement is terminated. Prior to the
modifications, the Manager could have been entitled to a termination fee in the
event that the Management Agreement was terminated by the Company without cause,
including a termination resulting from the liquidation and dissolution of the
Company. The termination fee would have been equal to the sum of the Manager's
base management fee and incentive compensation earned during the twelve-month
period immediately preceding the termination. During the period from January 1,
2000 through March 31, 2000, the Manager is entitled to receive the fees and
reimbursements provided for under the original terms of the Management
Agreement.

The Company relies primarily on the facilities, personnel and resources of the
Manager and other members of the AMRESCO Group to conduct its operations;
accordingly, it does not maintain separate office space. The executive offices
of the Company, the Manager and AMRESCO are located at 700 North Pearl Street,
Suite 1900, Dallas, Texas 75201. The Manager uses the proceeds from its base
management fee and incentive fees in part to pay salaries and bonuses to the
officers of its general partner and other employees of the Manager who,
notwithstanding that certain of them are also officers of the Company, receive
no compensation directly from the Company other than grants of stock options
from time to time and, in 1999, the dividend equivalents related to such
options.

The Manager has options to purchase 1,000,011 common shares; 70% of the options
are exercisable at an option price of $15.00 per share (the "IPO Price") and the
remaining 30% of the options are exercisable at an option price of $18.75 per
share. The options vest in four equal installments on May 12, 1999, May 12,
2000, May 12, 2001 and May 12, 2002.

The initial term of the Management Agreement expires on May 12, 2000. During its
initial two-year term, the Management Agreement is not terminable by the Manager
or the Company, except as a result of a breach by the Manager of its obligations
thereunder or other specified events constituting "cause" as defined therein.
The Management Agreement may be renewed at the end of the initial term (and each
successive term thereafter) for a period of one year, upon review and approval
by a majority of the independent trust managers. If the independent trust
managers do not vote to terminate or renew the Management Agreement at least 90
days prior to the end of the then current period, the Management Agreement will
automatically renew for a one-year period. The Manager has the right, at any
time after the initial term, to terminate the Management Agreement upon 180 days
prior written notice to the Company. The Company has the right, at any time
after the initial term, to terminate the Management Agreement upon 90 days prior
written notice to the Manager.

RIGHT OF FIRST REFUSAL / CORRESPONDENT AGREEMENT

Subject to certain limited exceptions, AMRESCO has granted to the Company a
right of first refusal with respect to the first $100 million of targeted
mortgage loan investments which are identified by or to any member of the
AMRESCO Group during any calendar quarter and all mortgage-backed securities
(other than mortgage-backed securities issued in securitizations sponsored in
whole or in part by any member of the AMRESCO Group). Additionally, the Company
is a party to an Amended and Restated Correspondent Agreement with Holliday
Fenoglio Fowler, L.P. ("HFF") pursuant to which HFF endeavors to present to the
Company (on a non-exclusive basis) investment opportunities identified by HFF
which meet the investment criteria and objectives of the Company. HFF was a
member of the AMRESCO Group until March 17, 2000, at which time all of its
assets and several of AMRESCO's other business platforms were sold to Lend Lease
(US) Services, Inc. ("Lend Lease"). Lend Lease established a new limited
partnership, HFF, L.P., into which all of HFF's assets were transferred at
closing. HFF, L.P. subsequently changed its name to Holliday Fenoglio Fowler,
L.P. ("New HFF"). Substantially all of the employees of HFF became employees of
New HFF. The Amended and Restated Correspondent Agreement was assigned to New
HFF, which assumed the obligations arising from this agreement after the closing
of the transaction with Lend Lease.

TRANSACTIONS WITH MEMBERS OF THE AMRESCO GROUP

AMREIT Holdings, Inc. ("Holdings"), a wholly-owned subsidiary of AMRESCO,
currently owns 1,500,011 shares, or approximately 15% of the Company's
outstanding common stock. Holdings acquired 1,000,011 shares at the IPO Price of
$15.00 per share pursuant to a private placement; the remaining 500,000 shares
were acquired through the IPO.




                                       42
<PAGE>   43

AMRESCO owns 100 shares of the Company's outstanding common shares; these shares
were acquired on February 2, 1998 in connection with the initial capitalization
of the Company.

Concurrent with the commencement of its operations on May 12, 1998, the Company
acquired two loans from AMRESCO Funding Corporation ("AFC"), a wholly-owned
subsidiary of AMRESCO, for $5.4 million. Prior to the closing of the IPO, the
Company issued a non-binding commitment to purchase such loans under the terms
described below. The purchase price equated to (i) the outstanding principal
balance of the loans as of the date of purchase, plus (ii) accrued and unpaid
interest to the date of purchase, less (iii) the unamortized portion of the loan
commitment fees related thereto. These loans had been originated by AFC on
February 20, 1998 and March 30, 1998.

On September 30, 1998, the Company acquired eight loans from AMRESCO Commercial
Finance, Inc. ("ACFI"), a wholly-owned subsidiary of AMRESCO, for an aggregate
cash purchase price of $34.3 million. The eight loans were acquired at a price
which equated to the outstanding principal balance of the loans as of the date
of purchase, plus accrued and unpaid interest to the date of purchase.
Immediately following the purchase, the Company sold to ACFI a contractual right
to collect from the Company an amount equal to the economic equivalent of all
amounts collected from five of the loans in excess of (i) $17.9 million and (ii)
a return on this amount, or so much of it as was outstanding from time to time,
equal to 12% per annum. The aggregate cash sales price for these contractual
rights was $5.0 million. As additional consideration, ACFI agreed to immediately
reimburse the Company for any additional advances which were required to be made
under the five loan agreements. The transactions were underwritten in strict
conformance with the existing policies approved by the independent trust
managers regarding transactions with the AMRESCO Group and were the result of
negotiations between the Company's Chief Investment Officer and representatives
of ACFI. The transactions were reviewed and approved by the independent trust
managers at the next succeeding meeting of the Board of Trust Managers. To
minimize any potential perceived conflicts of interest, it was determined at
that time that any future acquisition or sale of assets involving a member of
the AMRESCO Group would require the prior approval of a majority of the
independent trust managers of the Investment Committee of the Board of Trust
Managers.

On January 14, 1999, and in accordance with the terms of its contract with the
Company, ACFI purchased one of the loans that it had previously sold to the
Company that was more than 30 days past due. The proceeds, totaling $4.6
million, were applied as a reduction of the amount upon which the Company earned
a 12% return, as described above. The sales price equated to the Company's net
investment in the loan at the sale date under the terms of the originally
negotiated agreement. On November 1, 1999, in accordance with the terms of its
contract with the Company, ACFI acquired the then remaining loans pursuant to
the terms of the originally negotiated agreement. In connection with this most
recent sale, amounts due to ACFI totaling $5.8 million were fully extinguished.
Additionally, ACFI's contingent reimbursement obligations were discharged.

Holliday Fenoglio Fowler, through the Correspondent Agreement described above,
presents to the Company on a non-exclusive basis investment opportunities
meeting specified criteria. Mark D. Gibson, who was a member of the Company's
Board of Trust Managers through February 24, 2000, is also an executive managing
director of Holliday Fenoglio Fowler. Mr. Gibson also served on the Executive
Committee of AMRESCO until March 2000. During 1999, Holliday Fenoglio Fowler
represented two of the Company's borrowers and four of the Company's subsidiary
partnerships in the closing of their respective transactions. The borrowers and
subsidiary partnerships paid fees to Holliday Fenoglio Fowler for its services
in accordance with the terms of separate agreements with Holliday Fenoglio
Fowler. Other than as described above, the Company had no obligation, agreement
or understanding with Holliday Fenoglio Fowler to pay it any fee or other
compensation in connection with any transaction involving the Company. In the
borrower's transactions, some or all of the fees may have been paid out of the
loan proceeds advanced to the borrower by the Company. In the subsidiary
partnership transactions, some or all of the fees may have been paid out of the
proceeds from the capital contributions made to the partnerships by the Company.
The aggregate amount of fees paid to Holliday Fenoglio Fowler in connection with
transactions closed by the Company in 1999 was $531,823. Mr. Gibson did not
receive any compensation in connection with the closings of these transactions.




                                       43
<PAGE>   44
                                     PART IV

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

         (a)   1. Financial Statements

                  Included herein at pages F-1 through F-22.

               2. Financial Statement Schedules

                  All schedules for which provision is made in Regulation S-X
                  are either not required to be included herein under the
                  related instructions or are inapplicable or the related
                  information is included in the audited financial statements or
                  notes thereto.

               3. Exhibits

The following exhibits are filed as part of this Annual Report on Form 10-K:

                  Exhibit No.

                  2.1         Agreement and Plan of Merger, dated as of August
                              4, 1999, by and between the Company and Impac
                              Commercial Holdings, Inc. (filed as Exhibit 2.1 to
                              the Registrant's Quarterly Report on Form 10-Q for
                              the quarterly period ended June 30, 1999, which
                              exhibit is incorporated herein by reference).

                  4.1         Rights Agreement, dated as of February 25, 1999,
                              between the Company and The Bank of New York, as
                              Rights Agent, which includes: as Exhibit A
                              thereto, the Form of Statement of Designation of
                              Series A Junior Participating Preferred Shares,
                              par value $.01 per share, of the Company; as
                              Exhibit B thereto, the Form of Right Certificate;
                              and as Exhibit C thereto, the Summary of Rights to
                              Purchase Preferred Shares (filed as Exhibit 1 to
                              the Registrant's Current Report on Form 8-K dated
                              February 25, 1999, which exhibit is incorporated
                              herein by reference).

                  10.1        Amended and Restated Interim Warehouse and
                              Security Agreement dated as of May 4, 1999, by and
                              among Prudential Securities Credit Corporation and
                              AMRESCO Capital Trust, AMREIT I, Inc., AMREIT II,
                              Inc., ACT Equities, Inc. and ACT Holdings, Inc.
                              (filed as Exhibit 10.1 to the Registrant's
                              Quarterly Report on Form 10-Q for the quarterly
                              period ended March 31, 1999, which exhibit is
                              incorporated herein by reference).

                  10.2        Warrant Agreement dated as of May 4, 1999 between
                              AMRESCO Capital Trust and Prudential Securities
                              Incorporated (filed as Exhibit 10.2 to the
                              Registrant's Quarterly Report on Form 10-Q for the
                              quarterly period ended March 31, 1999, which
                              exhibit is incorporated herein by reference).

                  10.3        Management Agreement, dated as of May 12, 1998, by
                              and between AMRESCO Capital Trust and AMREIT
                              Managers, L.P. (filed as Exhibit 10.3 to the
                              Registrant's Quarterly Report on Form 10-Q for the
                              quarterly period ended September 30, 1999, which
                              exhibit is incorporated herein by reference).

                  11          Computation of Per Share Earnings.

                  21          Subsidiaries of the Registrant.

                  27          Financial Data Schedule.



                                       44
<PAGE>   45

                  99.1        Termination Agreement, dated January 4, 2000,
                              between AMRESCO Capital Trust and Impac Commercial
                              Holdings, Inc. (filed as Exhibit 99.1 to the
                              Registrant's Current Report on Form 8-K dated
                              January 4, 2000 and filed with the Commission on
                              January 6, 2000, which exhibit is incorporated
                              herein by reference).


         (b)      Reports on Form 8-K. The following reports on Form 8-K were
                  filed with respect to events occurring during the quarterly
                  period for which this report is filed:

                  None






                                       45
<PAGE>   46
                                   SIGNATURES

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

                              AMRESCO CAPITAL TRUST


                            By: /s/ Michael L. McCoy
                            ------------------------
                                Michael L. McCoy
               Senior Vice President, General Counsel & Secretary

Date:    March 30, 2000

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

               Date                                  Signature

          March 30, 2000                    /s/ Robert L. Adair III
                                    --------------------------------------------
                                                Robert L. Adair III
                                      Chairman of the Board of Trust Managers
                                            and Chief Executive Officer
                                           (Principal Executive Officer)

          March 30, 2000                    /s/ Thomas R. Lewis II
                                    --------------------------------------------
                                                 Thomas R. Lewis II
                                       Senior Vice President, Chief Financial
                                        and Accounting Officer & Controller
                                    (Principal Financial and Accounting Officer)

          March 30, 2000                    /s/ John C. Deterding
                                    --------------------------------------------
                                                 John C. Deterding
                                              Independent Trust Manager

          March 30, 2000                    /s/ Bruce W. Duncan
                                    --------------------------------------------
                                                  Bruce W. Duncan
                                              Independent Trust Manager

          March 30, 2000                    /s/ Christopher B. Leinberger
                                    --------------------------------------------
                                             Christopher B. Leinberger
                                              Independent Trust Manager

          March 30, 2000                    /s/ James C. Leslie
                                    --------------------------------------------
                                                  James C. Leslie
                                              Independent Trust Manager

          March 30, 2000                    /s/ Robert H. Lutz, Jr.
                                    --------------------------------------------
                                                Robert H. Lutz, Jr.
                                                   Trust Manager



                                       46
<PAGE>   47
                              AMRESCO CAPITAL TRUST

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                            Page No.
                                                                                            --------
<S>                                                                                         <C>
FINANCIAL STATEMENTS

  Independent Auditors' Report .......................................................        F-2

  Consolidated Balance Sheets - December 31, 1999 and 1998............................        F-3

  Consolidated Statements of Income - For the Year Ended December 31, 1999 and the
    Period from February 2, 1998 (Date of Initial Capitalization) through December
    31, 1998 .........................................................................        F-4

  Consolidated Statements of Changes in Shareholders' Equity - For the Year Ended
    December 31, 1999 and the Period from February 2, 1998 (Date of Initial
    Capitalization) through December 31, 1998.........................................        F-5

  Consolidated Statements of Cash Flows - For the Year Ended December 31, 1999 and
    the Period from February 2, 1998 (Date of Initial Capitalization) through
    December 31, 1998 ................................................................        F-6

  Notes to Consolidated Financial Statements..........................................        F-7
</TABLE>






                                      F-1
<PAGE>   48
                          INDEPENDENT AUDITORS' REPORT


To the Board of Trust Managers and Shareholders
     of AMRESCO Capital Trust

We have audited the accompanying consolidated balance sheets of AMRESCO Capital
Trust and its subsidiaries (the Company) as of December 31, 1999 and 1998 and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the year ended December 31, 1999 and the period from February
2, 1998 (date of initial capitalization) through December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AMRESCO Capital Trust and its
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the year ended December 31, 1999 and the
period from February 2, 1998 through December 31, 1998, in conformity with
generally accepted accounting principles.


/S/ DELOITTE & TOUCHE LLP

Dallas, Texas
February 3, 2000 (March 29, 2000 as to Note 17)



                                      F-2
<PAGE>   49
                              AMRESCO CAPITAL TRUST
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                          December 31,    December 31,
                                                                                             1999             1998
                                                                                          ------------    ------------
<S>                                                                                       <C>             <C>
ASSETS
   Mortgage loans held for investment, net ............................................   $     96,032    $     96,976
   Acquisition, development and construction loan arrangements accounted for as real
   estate or investments in joint ventures ............................................         44,097          39,550
                                                                                          ------------    ------------
   Total loan investments .............................................................        140,129         136,526
   Allowance for loan losses ..........................................................         (4,190)         (1,368)
                                                                                          ------------    ------------
   Total loan investments, net of allowance for losses ................................        135,939         135,158
   Commercial mortgage-backed securities - available for sale (at fair value) .........         24,569          28,754
   Real estate, net of accumulated depreciation of $866 and $56, respectively .........         50,376          10,273
   Investments in unconsolidated partnerships and subsidiary ..........................         11,765           3,271
   Receivables and other assets .......................................................          3,991           3,681
   Cash and cash equivalents ..........................................................          4,604           9,789
                                                                                          ------------    ------------
      TOTAL ASSETS ....................................................................   $    231,244    $    190,926
                                                                                          ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
  Accounts payable and other liabilities ..............................................   $      2,697    $        941
  Amounts due to affiliates ...........................................................            566           6,268
  Repurchase agreement ................................................................          9,856              --
  Line of credit ......................................................................         60,641          39,338
  Non-recourse debt on real estate ....................................................         34,600           7,500
  Dividends payable ...................................................................          4,407           4,002
                                                                                          ------------    ------------
      TOTAL LIABILITIES ...............................................................        112,767          58,049
                                                                                          ------------    ------------
  Minority interests ..................................................................            526           2,611
                                                                                          ------------    ------------
COMMITMENTS AND CONTINGENCIES (NOTE 3)

SHAREHOLDERS' EQUITY:
  Preferred stock, $.01 par value, 49,650,000 shares authorized, no shares issued .....             --              --
  Series A junior participating preferred stock, $.01 par value, 350,000 shares
      authorized, no shares issued ....................................................             --              --
  Common stock, $.01 par value, 200,000,000 shares authorized, 10,015,111 and
      10,006,111 shares issued and outstanding, respectively ..........................            100             100
  Additional paid-in capital ..........................................................        140,998         140,941
  Unearned stock compensation .........................................................           (282)           (848)
  Accumulated other comprehensive income (loss) .......................................        (10,812)         (6,475)
  Distributions in excess of accumulated earnings .....................................        (12,053)         (3,452)
                                                                                          ------------    ------------
      TOTAL SHAREHOLDERS' EQUITY ......................................................        117,951         130,266
                                                                                          ------------    ------------
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................................   $    231,244    $    190,926
                                                                                          ============    ============
</TABLE>


See notes to consolidated financial statements.


                                      F-3
<PAGE>   50
                              AMRESCO CAPITAL TRUST
                        CONSOLIDATED STATEMENTS OF INCOME
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                     Period from
                                                                                     February 2,
                                                                                        1998
                                                                      Year Ended       through
                                                                      December 31,   December 31,
                                                                          1999           1998
                                                                      ------------   ------------
<S>                                                                   <C>            <C>
REVENUES:
  Interest income on mortgage loans ...............................   $     14,568   $      4,278
  Income from commercial mortgage-backed securities ...............          3,699          1,563
  Operating income from real estate ...............................          4,858            392
  Equity in earnings of unconsolidated subsidiary, partnerships
    and other real estate ventures ................................             17            588
  Interest income from short-term investments .....................            251          1,924
                                                                      ------------   ------------
    TOTAL REVENUES ................................................         23,393          8,745
                                                                      ------------   ------------

EXPENSES:
  Interest expense ................................................          5,593            567
  Management fees .................................................          2,206          1,187
  General and administrative ......................................          1,437          1,294
  Abandoned merger costs ..........................................          1,737             --
  Depreciation ....................................................          1,252            100
  Participating interest in mortgage loans ........................          1,084            277
  Provision for loan losses .......................................          3,322          1,368
                                                                      ------------   ------------
    TOTAL EXPENSES ................................................         16,631          4,793
                                                                      ------------   ------------

INCOME BEFORE GAINS AND MINORITY INTERESTS ........................          6,762          3,952

   Gain associated with repayment of ADC loan arrangement .........            584             --
                                                                      ------------   ------------

INCOME BEFORE MINORITY INTERESTS ..................................          7,346          3,952

   Minority interests .............................................             26             --
                                                                      ------------   ------------

NET INCOME ........................................................   $      7,320   $      3,952
                                                                      ============   ============


EARNINGS PER COMMON SHARE:
   Basic ..........................................................   $       0.73   $       0.56
                                                                      ============   ============
   Diluted ........................................................   $       0.73   $       0.56
                                                                      ============   ============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
   Basic ..........................................................         10,000          7,027
                                                                      ============   ============
   Diluted ........................................................         10,012          7,031
                                                                      ============   ============
</TABLE>


See notes to consolidated financial statements.



                                      F-4
<PAGE>   51
                             AMRESCO CAPITAL TRUST
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                  FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE
                 PERIOD FROM FEBRUARY 2, 1998 (DATE OF INITIAL
                   CAPITALIZATION) THROUGH DECEMBER 31, 1998
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                            Common Stock
                                                           $.01 Par Value
                                                         ---------------------  Additional     Unearned
                                                         Number of               Paid-in         Stock
                                                          Shares      Amount     Capital     Compensation
                                                         ---------  ----------  ----------   ------------
<S>                                                      <C>        <C>         <C>          <C>
Initial capitalization, February 2, 1998.........             100         --   $      1

Additional paid-in capital, February 11,
  1998...........................................              --         --         25

Issuance of common shares through IPO,
  net of offering expenses,
  May 12, 1998...................................       9,000,000      $  90    124,601

Issuance of common shares through Private
  Placement, May 12, 1998........................       1,000,011         10     14,990

Issuance of trust managers' restricted
  shares.........................................           6,000         --         90         $    (90)

Total nonowner changes in equity:

     Net income..................................

     Unrealized losses on securities
       available for sale........................

Comprehensive loss...............................


Compensatory options granted.....................                                 1,234           (1,234)

Amortization of unearned trust manager                                                                56
  compensation ..................................

Amortization of compensatory options ............                                                    420

Dividends declared ($0.74 per common
  share) ........................................
                                                      -----------      -----   --------           ------
Balance at December 31, 1998.....................      10,006,111        100    140,941             (848)

Issuance of trust managers' restricted
  shares.........................................           9,000         --         91              (91)

Issuance of warrants.............................                                   400

Decrease in fair value of compensatory options...                                  (434)             434

Total nonowner changes in equity:

     Net income..................................

     Unrealized losses on securities
       available for sale........................

Comprehensive income.............................


Amortization of unearned trust manager
  compensation...................................                                                     91

Amortization of compensatory options.............                                                    132

Dividends declared ($1.59 per common share)......
                                                      -----------      -----   --------           ------
Balance at December 31, 1999.....................      10,015,111      $ 100   $140,998         $   (282)
                                                      ===========      =====   ========         ========
<CAPTION>

                                                       Accumulated    Distributions in    Total
                                                           Other        Excess of        Nonowner      Total
                                                       Comprehensive    Accumulated      Changes    Shareholders'
                                                       Income (Loss)     Earnings       in Equity     Equity
                                                       -------------  ---------------- -----------  --------------
<S>                                                    <C>            <C>              <C>          <C>
Initial capitalization, February 2, 1998.........                                                     $      1

Additional paid-in capital, February 11,
  1998...........................................                                                           25

Issuance of common shares through IPO,
  net of offering expenses,
  May 12, 1998...................................                                                      124,691

Issuance of common shares through Private
  Placement, May 12, 1998........................                                                       15,000

Issuance of trust managers' restricted
  shares.........................................                                                           --

Total nonowner changes in equity:

     Net income..................................                        $  3,952       $  3,952         3,952

     Unrealized losses on securities
       available for sale........................        $ (6,475)                        (6,475)       (6,475)
                                                                                        --------
Comprehensive loss...............................                                       $ (2,523)
                                                                                        ========

Compensatory options granted.....................                                                           --

Amortization of unearned trust manager                                                                      56
  compensation...................................

Amortization of compensatory options.............                                                          420

Dividends declared ($0.74 per common                                       (7,404)                      (7,404)
  share).........................................
                                                         --------        --------                     --------
Balance at December 31, 1998.....................          (6,475)         (3,452)                     130,266

Issuance of trust managers' restricted
  shares.........................................                                                           --

Issuance of warrants............. ...............                                                          400

Decrease in fair value of compensatory options...                                                           --

Total nonowner changes in equity:

     Net income..................................                           7,320       $  7,320         7,320

     Unrealized losses on securities
       available for sale........................          (4,337)                        (4,337)       (4,337)
                                                                                        --------
Comprehensive income.............................                                       $  2,983
                                                                                        ========

Amortization of unearned trust manager
  compensation ..................................                                                           91

Amortization of compensatory options ............                                                          132

Dividends declared ($1.59 per common share)......                         (15,921)                     (15,921)
                                                         --------        --------                     --------
Balance at December 31, 1999.....................        $(10,812)       $(12,053)                    $117,951
                                                         ========        ========                     ========
</TABLE>

See notes to consolidated financial statements.




                                      F-5
<PAGE>   52

                              AMRESCO CAPITAL TRUST
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                                     Period from
                                                                                                                   February 2, 1998
                                                                                                  Year Ended           through
                                                                                                December 31, 1999  December 31, 1998
                                                                                                -----------------  -----------------
<S>                                                                                             <C>              <C>
Cash Flows from Operating Activities:
   Net income ................................................................................. $         7,320  $           3,952
   Adjustments to reconcile net income to net cash provided by operating activities:
      Provision for loan losses ...............................................................           3,322              1,368
      Depreciation ............................................................................           1,252                100
      Gain associated with repayment of ADC loan arrangement ..................................            (584)                --
      Loss on sale of interest rate cap .......................................................               5                 --
      Amortization of prepaid assets ..........................................................             234                162
      Discount amortization on commercial mortgage-backed securities ..........................            (329)              (173)
      Amortization of compensatory stock options and unearned trust manager compensation ......             223                476
      Amortization of loan commitment fees ....................................................          (1,050)              (180)
      Receipt of loan commitment fees .........................................................             427              1,507
      Increase in receivables and other assets ................................................            (592)            (3,659)
      Decrease (increase) in interest receivable related to commercial mortgage-backed
      securities...............................................................................              74               (345)
      Increase in accounts payable and other liabilities ......................................           1,756                941
      Increase in minority interests ..........................................................              26                 --
      Increase in amounts due to affiliates ...................................................           1,226                736
      Equity in earnings of unconsolidated subsidiary, partnerships and other real estate
         ventures..............................................................................             (17)              (588)
      Distributions from unconsolidated subsidiary, partnership and other real estate
         venture ..............................................................................             124                588
                                                                                                ---------------  -----------------
           Net cash provided by operating activities ..........................................          13,417              4,885
                                                                                                ---------------  -----------------

Cash Flows from Investing Activities:
   Acquisition of mortgage loans ..............................................................              --            (25,807)
   Investments in mortgage loans ..............................................................         (44,622)           (73,059)
   Investments in ADC loan arrangements .......................................................         (24,688)           (37,269)
   Sale of mortgage loans to affiliate ........................................................          13,340                 --
   Principal collected on mortgage loans ......................................................          26,252                563
   Principal and interest collected on ADC loan arrangement ...................................          11,513                 --
   Investments in real estate .................................................................         (40,913)           (10,329)
   Investments in unconsolidated partnerships and subsidiary ..................................          (2,684)            (3,501)
   Distributions from unconsolidated subsidiary and partnership ...............................             344                 --
   Distributions from ADC joint ventures ......................................................              --                285
   Purchase of commercial mortgage-backed securities ..........................................              --            (34,480)
                                                                                                ---------------  -----------------
           Net cash used in investing activities ..............................................         (61,458)          (183,597)
                                                                                                ---------------  -----------------

Cash Flows from Financing Activities:
   Proceeds from borrowings under line of credit ..............................................          39,162             39,338
   Repayment of borrowings under line of credit ...............................................         (17,859)                --
   Proceeds from borrowings under repurchase agreement ........................................          12,103              5,123
   Repayment of borrowings under repurchase agreement .........................................          (2,247)            (5,123)
   Proceeds from financing provided by affiliate ..............................................             907              5,532
   Proceeds from non-recourse debt on real estate .............................................          27,100              7,500
   Purchase of interest rate cap ..............................................................            (110)                --
   Proceeds from sale of interest rate cap ....................................................              30                 --
   Deferred financing costs associated with line of credit ....................................            (120)                --
   Deferred financing costs associated with non-recourse debt on real estate ..................            (594)              (184)
   Net proceeds from issuance of common stock .................................................              --            139,717
   Dividends paid to common shareholders ......................................................         (15,516)            (3,402)
                                                                                                ---------------  -----------------
           Net cash provided by financing activities ..........................................          42,856            188,501
                                                                                                ---------------  -----------------

Net increase (decrease) in cash and cash equivalents ..........................................          (5,185)             9,789

Cash and cash equivalents, beginning of period ................................................           9,789                 --
                                                                                                ---------------  -----------------
Cash and cash equivalents, end of period ...................................................... $         4,604  $           9,789
                                                                                                ===============  =================

Supplemental Information:
   Interest paid, net of amount capitalized ................................................... $         4,980  $             365
                                                                                                ===============  =================
   Income taxes paid .......................................................................... $            25  $              --
                                                                                                ===============  =================
   Minority interest contributions associated with ADC loan arrangements ...................... $            --  $           2,611
                                                                                                ===============  =================
   Minority interest distribution associated with ADC loan arrangement ........................ $         2,111  $              --
                                                                                                ===============  =================
   Receivables transferred in satisfaction of amounts due to affiliate ........................ $         1,238  $              --
                                                                                                ===============  =================
   Amounts due to affiliate discharged in connection with sales of mortgage loans ............. $         6,597  $              --
                                                                                                ===============  =================
   Issuance of warrants in connection with line of credit ..................................... $           400  $              --
                                                                                                ===============  =================
   Dividends declared, paid in following year ................................................. $         4,407  $           4,002
                                                                                                ===============  =================
</TABLE>


See notes to consolidated financial statements.




                                      F-6
<PAGE>   53
                              AMRESCO CAPITAL TRUST
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

1. ORGANIZATION AND RELATIONSHIPS

AMRESCO Capital Trust (the "Company"), a real estate investment trust ("REIT"),
was organized under the laws of the State of Texas. The Company was formed to
take advantage of certain mid- to high-yield lending and investment
opportunities in real estate related assets, including various types of
commercial mortgage loans (including, among others, participating loans,
mezzanine loans, acquisition loans, construction loans, rehabilitation loans and
bridge loans), commercial mortgage-backed securities, commercial real estate,
equity investments in joint ventures and/or partnerships, and certain other real
estate related assets. The Company was initially capitalized on February 2, 1998
and commenced operations on May 12, 1998, concurrent with the completion of its
initial public offering ("IPO") of 9,000,000 common shares and private placement
of 1,000,011 common shares (the "Private Placement").

Pursuant to the terms of a Management Agreement dated as of May 12, 1998 and
subject to the direction and oversight of the Board of Trust Managers, the
Company's day-to-day operations are managed by AMREIT Managers, L.P. (the
"Manager"), an affiliate of AMRESCO, INC. ("AMRESCO") (together with its
affiliated entities, the "AMRESCO Group"). For its services, the Manager is
entitled to receive a base management fee equal to 1% per annum of the Company's
Average Invested Non-Investment Grade Assets, as defined, and 0.5% per annum of
the Company's Average Invested Investment Grade Assets, as defined. In addition
to the base management fee, the Manager is entitled to receive incentive
compensation in an amount equal to 25% of the dollar amount by which Funds From
Operations (as defined by the National Association of Real Estate Investment
Trusts), as adjusted, exceeds a certain threshold. The Manager is also entitled
to receive reimbursement for its costs of providing certain services to the
Company. The base management fee, reimbursable expenses and incentive fee, if
any, are payable quarterly in arrears. Immediately after the closing of the IPO,
the Manager was granted options to purchase 1,000,011 common shares; 70% of the
options are exercisable at an option price of $15.00 per share and the remaining
30% of the options are exercisable at an option price of $18.75 per share.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and a majority-owned partnership. The Company accounts
for its investment in AMREIT II, Inc., a taxable subsidiary, using the equity
method of accounting, and thus reports its share of income or loss based on its
ownership interest. The Company uses the equity method of accounting due to the
non-voting nature of its ownership interest and because the Company is entitled
to substantially all of the economic benefits of ownership of AMREIT II, Inc.
The Company owns non-controlling interests in two partnerships; the Company
accounts for these investments using the equity method of accounting and thus
reports its share of income or loss based on its ownership interests. All
significant intercompany balances and transactions have been eliminated in
consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities at the date of the
financial statements and revenues and expenses for the reporting period.
Significant estimates include the valuation of commercial mortgage-backed
securities, the provision for loan losses and the determination of the fair
value of certain share option awards and warrants. Actual results may differ
from those estimates.

ACQUISITION, DEVELOPMENT AND CONSTRUCTION (ADC) LOAN ARRANGEMENTS

The Company provides financing through certain real estate loan arrangements
that, because of their nature, qualify as either real estate or joint venture
investments for financial reporting purposes. Using the guidance set forth in
the Third Notice to Practitioners issued by the AICPA in February 1986 entitled
"ADC Arrangements" (the "Third Notice"), the Company evaluates each investment
to determine whether loan, joint venture or real estate accounting is
appropriate; such determination affects the Company's balance sheet
classification of these investments and the recognition of revenues



                                      F-7
<PAGE>   54

derived therefrom. The Third Notice was issued to address those real estate
acquisition, development and construction arrangements where a lender has
virtually the same risks and potential rewards as those of real estate owners or
joint venturers. EITF 86-21, "Application of the AICPA Notice to Practitioners
regarding Acquisition, Development, and Construction Arrangements to Acquisition
of an Operating Property" expanded the applicability of the Third Notice to
loans on operating real estate.

The Company accounts for its loan investments classified as real estate in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 67, "Accounting for Costs and Initial Rental Operations of Real
Estate Projects" and SFAS No. 66, "Accounting for Sales of Real Estate",
consistent with its accounting for direct real estate investments. Depreciation
on buildings and improvements is provided under the straight-line method over an
estimated useful life of 39 years for office buildings and 27.5 years for
multi-family projects.

The Company accounts for its loan investments classified as joint ventures in
accordance with the provisions of Statement of Position 78-9, "Accounting for
Investments in Real Estate Ventures" and thus reports its share of income or
loss under the equity method of accounting based on its preferential ownership
interest.

MORTGAGE LOANS

Mortgage loans are stated at face value, net of deferred origination and
commitment fees and associated direct costs, if any. Loan origination and
commitment fees and incremental direct costs, if any, are deferred and
recognized over the life of the loan as an adjustment of yield using the
interest method.

PROVISION FOR LOAN LOSSES

The Company provides for estimated loan losses by establishing an allowance for
losses through a charge to earnings. Management performs a periodic evaluation
of the allowance with consideration given to economic conditions and trends,
collateral values and other relevant factors. ADC loan arrangements are
considered in the allowance for loan losses.

Impairment on a loan-by-loan basis is determined by assessing the probability
that a borrower will not be able to fulfill the contractual terms of its loan
agreement. If a loan is determined to be impaired, the amount of the impairment
is measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or by the fair value of the collateral
less estimated costs to sell if those costs are expected to reduce the cash
flows available to repay or otherwise satisfy the loan. The allowance for loan
losses is adjusted accordingly. The recognition of income on impaired loans is
dependent upon their classification as either mortgage loans, real estate or
joint venture investments. Interest income on impaired mortgage loans is
recognized using a cash-basis method while income recognition related to ADC
loan arrangements is dependent upon the facts and circumstances specific to each
investment.

REAL ESTATE

Real estate is stated at cost, net of accumulated depreciation. Costs associated
with the acquisition, development and construction of a real estate project are
capitalized as a cost of that project during its construction period. In
accordance with SFAS No. 34, "Capitalization of Interest Cost", interest on the
Company's borrowings is capitalized to the extent such asset qualifies for
capitalization. When a real estate project is substantially completed and held
available for occupancy, rental revenues and operating costs are recognized as
they accrue. Depreciation on buildings and improvements is provided under the
straight-line method over an estimated useful life of 39 years. Depreciation on
land improvements is provided using the 150% declining-balance method over an
estimated useful life of 15 years. Maintenance and repair costs are charged to
operations as incurred, while significant capital improvements and replacements
are capitalized. Leasing commissions and leasehold improvements are deferred and
amortized on a straight-line basis over the terms of the related leases. Other
deferred charges are amortized over terms applicable to the expenditure.

The Company will record impairment losses on direct real estate investments when
events and circumstances indicate that the assets might be impaired and the
estimated undiscounted cash flows to be generated by those assets are less than
the carrying amounts of those assets. The Company periodically reviews its real
estate holdings to determine if its carrying costs will be recovered from future
operating cash flows. In cases where the Company does not expect to recover its
carrying costs, the Company recognizes an impairment loss. No such impairment
losses have been recognized to date.



                                      F-8
<PAGE>   55
LEASES

The Company, having retained substantially all of the risks and benefits of
ownership, accounts for its leases as operating leases. Rental income is
recognized over the terms of the leases as it is earned.

COMMERCIAL MORTGAGE-BACKED SECURITIES

The Company's investments in commercial mortgage-backed securities ("CMBS") are
classified as available for sale and are carried at estimated fair value as
determined by quoted market rates. Any unrealized gains or losses are excluded
from earnings and reported as a component of accumulated other comprehensive
income (loss) in shareholders' equity. If a decline in fair value is deemed to
be other than temporary, it is charged to earnings during the period such
determination is made. Income from CMBS is recognized based on the effective
interest method using the anticipated yield over the expected life of the
investments.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consists of cash on hand and highly liquid investments
with maturities of three months or less at the date of purchase.

STOCK-BASED COMPENSATION

The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for stock option awards
granted to its officers and trust managers. Pro forma disclosures of net income
and earnings per common share as if the fair value based method of accounting
had been applied are included in Note 8.

Stock options awarded to the Manager and certain other members of the AMRESCO
Group and warrants granted to an affiliate of one of the Company's lenders are
accounted for under the fair value method prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation" and related Interpretations.

EARNINGS PER COMMON SHARE

Basic earnings per common share ("EPS") excludes dilution and is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS gives effect to all
dilutive potential common shares that were outstanding during the period.

INCOME TAXES AND DISTRIBUTIONS

The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the
Company will generally not be subject to federal income tax on that portion of
its ordinary income or capital gain that is currently distributed to its
shareholders if it distributes at least 95% of its annual REIT taxable income
and it complies with a number of other organizational and operational
requirements. AMREIT II, Inc. is subject to federal income tax on its taxable
income at regular corporate rates.

The Company pays quarterly dividends to its shareholders which are designed to
allow the Company to qualify as a REIT under the Code. Earnings and profits,
which will determine the taxability of distributions to shareholders, differs
from income reported for financial reporting purposes due primarily to
differences in methods of accounting for ADC loan arrangements and stock-based
compensation awards and the nondeductibility, for tax purposes, of the Company's
loan loss reserve. As a result, net income under generally accepted accounting
principles is not necessarily an indicator of distributions to be made by the
Company.

PRESENTATION

Certain prior period amounts have been reclassified to conform with the current
year's presentation.




                                      F-9
<PAGE>   56
3. LOAN INVESTMENTS

At December 31, 1999 and 1998, the Company had commitments to fund $168,923,000
(under 13 loans) and $209,632,000 (under 21 loans), of which $143,644,000 and
$136,791,000, respectively, was outstanding. As of December 31, 1999 and 1998,
the Company's loan investments are summarized as follows (dollars in thousands):

<TABLE>
<CAPTION>
              Scheduled
             Maturity/ Date
 Date of      of Repayment,                                                               Commitment Amount
 Initial       Sale or                                               Collateral       -------------------------
Investment      Other           Location        Property Type         Position            1999         1998
------------   ----------   ----------------   -----------------   ----------------   -----------   -----------
<S>            <C>          <C>                <C>                 <C>                <C>           <C>
 05/12/98      03/31/01     Richardson, TX     Office              Second Lien        $    14,700   $    14,700
 06/01/98      06/01/01     Houston, TX        Office              First Lien              11,800        11,800
 06/22/98      06/19/00     Wayland, MA        Office              First Lien              45,000        45,000
 07/02/98      06/30/00     Washington, D.C.   Office              First Lien               7,000         7,000
 07/10/98      07/31/00     Pasadena, TX       Apartment           First Lien               3,350         3,350
 09/01/98      11/30/99     Los Angeles, CA    Mixed Use           First Lien                  --        18,419
 09/30/98      05/28/99     San Antonio, TX    Residential Lots    First Lien                  --         3,266
 09/30/98      Various      San Antonio, TX/   Residential Lots    First Lien               8,400         8,400
                                 Sunnyvale, TX
 09/30/98      05/27/99     Galveston, TX      Apartment           First Lien                  --         3,664
 09/30/98      11/01/99     Ft. Worth, TX      Apartment           Ptrshp Interests            --         2,650
 09/30/98      01/14/99     Austin, TX         Office              First Lien                  --         6,325
 09/30/98      11/01/99     Dallas, TX         Medical Office      First Lien                  --         3,015
 09/30/98      11/01/99     Norwood, MA        Industrial/Office   First Lien                  --         8,765
 10/01/98      12/31/99     Richardson, TX     Office              First Lien                  --           567
 12/29/98      02/03/99     San Antonio, TX    Residential Lots    First Lien                  --           255
 05/18/99      05/19/01     Irvine, CA         Office              First Lien              15,260            --
 07/29/99      07/28/01     Lexington, MA      R&D/Bio-Tech        First Lien               5,213            --
 08/19/99      08/15/01     San Diego, CA      Medical Office      First Lien               5,745            --
                                                                                      -----------   -----------
Mortgage loans held for investment                                                        116,468       137,176
                                                                                      -----------   -----------
 05/12/98      02/25/99     Columbus, OH       Mixed Use           Second Lien                 --         7,000
 06/12/98      06/30/00     Pearland, TX       Apartment           First Lien              12,827        12,827
 06/17/98      06/30/00     San Diego, CA      R&D/Bio-Tech        First Lien               5,560         5,560
 06/19/98      06/18/00     Houston, TX        Office              First Lien              24,000        24,000
 07/01/98      07/01/01     Dallas, TX         Office              Ptrshp Interests        10,068        10,068
 09/30/98      03/01/99     Richardson, TX     Office              First Lien                  --        13,001
                                                                                      -----------   -----------
ADC loan arrangements                                                                      52,455        72,456
                                                                                      -----------   -----------

Total loan investments                                                                $   168,923   $   209,632
                                                                                      ===========   ===========
<CAPTION>
              Scheduled
             Maturity/ Date
 Date of      of Repayment,                                            Amount Outstanding       Interest        Interest
 Initial       Sale or                                              -------------------------      Pay           Accrual
Investment      Other           Location        Property Type          1999           1998         Rate           Rate
------------   ----------   ----------------   -----------------    -----------   -----------   -----------    -----------
<S>            <C>          <C>                <C>                  <C>           <C>            <C>           <C>
 05/12/98      03/31/01     Richardson, TX     Office               $    13,709   $    10,811          10.0%          12.0%
 06/01/98      06/01/01     Houston, TX        Office                    11,079        10,034          12.0%          12.0%
 06/22/98      06/19/00     Wayland, MA        Office                    39,134        24,962          10.5%          10.5%
 07/02/98      06/30/00     Washington, D.C.   Office                     6,409         5,489          10.5%          10.5%
 07/10/98      07/31/00     Pasadena, TX       Apartment                  2,993         2,614          10.0%          14.0%
 09/01/98      11/30/99     Los Angeles, CA    Mixed Use                     --        17,418          10.0%          12.0%
 09/30/98      05/28/99     San Antonio, TX    Residential Lots              --         2,059          16.0%          16.0%
 09/30/98      Various      San Antonio, TX/   Residential Lots           3,555         1,637          10.0%          14.0%
                                 Sunnyvale, TX
 09/30/98      05/27/99     Galveston, TX      Apartment                     --         3,664          10.0%          15.0%
 09/30/98      11/01/99     Ft. Worth, TX      Apartment                     --         2,649          10.5%          16.0%
 09/30/98      01/14/99     Austin, TX         Office                        --         6,314          10.0%          16.0%
 09/30/98      11/01/99     Dallas, TX         Medical Office                --         2,364          10.0%          13.0%
 09/30/98      11/01/99     Norwood, MA        Industrial/Office             --         7,733          10.0%          12.5%
 10/01/98      12/31/99     Richardson, TX     Office                        --           300          9.97%          15.0%
 12/29/98      02/03/99     San Antonio, TX    Residential Lots              --           255          16.0%          16.0%
 05/18/99      05/19/01     Irvine, CA         Office                    13,057            --          10.0%          12.0%
 07/29/99      07/28/01     Lexington, MA      R&D/Bio-Tech               2,753            --          11.5%          14.5%
 08/19/99      08/15/01     San Diego, CA      Medical Office             4,048            --          11.5%          11.5%
                                                                    -----------   -----------
Mortgage loans held for investment                                       96,737        98,303
                                                                    -----------   -----------
 05/12/98      02/25/99     Columbus, OH       Mixed Use                     --         6,839          15.0%          15.0%
 06/12/98      06/30/00     Pearland, TX       Apartment                 12,291         4,237          10.0%          11.5%
 06/17/98      06/30/00     San Diego, CA      R&D/Bio-Tech               4,732         3,994          10.0%          13.5%
 06/19/98      06/18/00     Houston, TX        Office                    21,622         6,682          12.0%          12.0%
 07/01/98      07/01/01     Dallas, TX         Office                     8,262         6,459          10.0%          15.0%
 09/30/98      03/01/99     Richardson, TX     Office                        --        10,277          10.0%          14.0%
                                                                    -----------   -----------
ADC loan arrangements                                                    46,907        38,488
                                                                    -----------   -----------

Total loan investments                                              $   143,644   $   136,791
                                                                    ===========   ===========
</TABLE>

During the year ended December 31, 1999, six of the Company's loans were fully
repaid, three loan originations were closed and four loans were sold to AMRESCO
Commercial Finance, Inc. ("ACFI"), a member of the AMRESCO Group; additionally,
one loan was reclassified, net of a $500,000 charge-off, to investment in
unconsolidated subsidiary following the subsidiary's acquisition (through
foreclosure on February 25, 1999) of the partnership interests of one of the
Company's borrowers.

At December 31, 1999, amounts outstanding under acquisition/rehabilitation
loans, construction loans, acquisition loans and land development loans totaled
$53,660,000, $47,622,000, $38,807,000 and $3,555,000, respectively. For all loan
investments, payments of interest only are due monthly at the interest pay rate.
All principal and all remaining accrued and unpaid interest are due at the
scheduled maturities of the loans. One loan provides for the payment of accrual
rate interest quarterly. At December 31, 1999, three of the 13 loan investments
provide the Company with the opportunity for profit participation in excess of
the contractual interest accrual rates.



                                      F-10
<PAGE>   57



At December 31, 1999 and 1998, the loan investments are classified as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                         1999                         1998
                                                              --------------------------    -------------------------
                                                                 Loan         Balance         Loan         Balance
                                                                Amount         Sheet          Amount        Sheet
                                                              Outstanding      Amount       Outstanding     Amount
                                                              -----------    -----------    -----------   -----------
<S>                                                           <C>            <C>            <C>           <C>
     Mortgage loans held for investment, net ..............   $    96,737    $    96,032    $    98,303   $    96,976

     Real estate, net .....................................        38,645         36,906         25,191        26,873
     Investment in real estate ventures ...................         8,262          7,191         13,297        12,677
                                                              -----------    -----------    -----------   -----------
        Total ADC loan arrangements .......................        46,907         44,097         38,488        39,550
                                                              -----------    -----------    -----------   -----------

     Total loan investments ...............................   $   143,644        140,129    $   136,791       136,526
                                                              ===========                   ===========

     Allowance for loan losses ...........................................        (4,190)                      (1,368)
                                                                             -----------                  -----------

     Total loan investments, net of allowance for losses .................   $   135,939                  $   135,158
                                                                             ===========                  ===========
</TABLE>

The differences between the outstanding loan amounts and the balance sheet
amounts are due primarily to loan commitment fees, interest fundings, minority
interests, capitalized interest and accumulated depreciation.

ADC loan arrangements accounted for as real estate consisted of the following at
December 31, 1999 and 1998 (in thousands):

<TABLE>
<CAPTION>
                                                              1999              1998
                                                         --------------    --------------
<S>                                                      <C>               <C>
                    Land .............................   $        4,648    $        6,118
                    Buildings and improvements .......           32,744             3,196
                    Construction in progress .........               --            17,603
                                                         --------------    --------------
                       Total .........................           37,392            26,917
                    Less: Accumulated depreciation ...             (486)              (44)
                                                         --------------    --------------

                                                         $       36,906    $       26,873
                                                         ==============    ==============
</TABLE>

A summary of activity for mortgage loans and ADC loan arrangements accounted for
as real estate or investments in joint ventures for the year ended December 31,
1999 and the period from February 2, 1998 through December 31, 1998 is as
follows (in thousands):

<TABLE>
<CAPTION>
                                                         1999                                       1998
                                         --------------------------------------    -------------------------------------
                                          Mortgage     ADC Loan                    Mortgage      ADC Loan
                                           Loans      Arrangements     Total         Loans      Arrangements    Total
                                         ----------    ----------    ----------    ----------    ----------   ----------
<S>                                      <C>           <C>           <C>           <C>           <C>          <C>
Balance, beginning of period .........   $   98,303    $   38,488    $  136,791    $       --    $       --   $       --
Investments in loans .................       44,622        26,617        71,239        98,866        38,488      137,354
Collections of principal .............      (26,252)      (11,359)      (37,611)         (563)           --         (563)
Cost of mortgages sold ...............      (19,936)           --       (19,936)           --            --           --
Foreclosure (partnership interests) ..           --        (6,839)       (6,839)           --            --           --
                                         ----------    ----------    ----------    ----------    ----------   ----------

Balance, end of period ...............   $   96,737    $   46,907    $  143,644    $   98,303    $   38,488   $  136,791
                                         ==========    ==========    ==========    ==========    ==========   ==========
</TABLE>

During the year ended December 31, 1999 and the period from February 2, 1998
through December 31, 1998, the activity in the allowance for loan losses was as
follows (in thousands):

<TABLE>
<CAPTION>
                                                         1999           1998
                                                      -----------    -----------
<S>                                                   <C>            <C>
                    Balance, beginning of period ..   $     1,368    $        --
                    Provision for losses ..........         3,322          1,368
                    Charge-offs ...................          (500)            --
                    Recoveries ....................            --             --
                                                      -----------    -----------

                    Balance, end of period ........   $     4,190    $     1,368
                                                      ===========    ===========
</TABLE>



                                      F-11
<PAGE>   58
At December 31, 1999, an ADC loan arrangement with a recorded investment of
$7,191,000 was impaired. The allowance for loan losses related to this
investment totaled $4,190,000 at December 31, 1999. At December 31, 1999, the
amount outstanding under this loan totaled $8,262,000. At December 31, 1998, the
outstanding amount and recorded investment of this loan totaled $6,459,000 and
$6,018,000, respectively. The loan was not deemed to be impaired as of December
31, 1998; accordingly, no specific allowance for loan losses had been
established at that date. No income has been recognized on this ADC loan
investment since its origination in 1998. The loan was performing as of December
31, 1999 and 1998.

An ADC loan arrangement with a recorded investment of $6,659,000 was
non-performing as of December 31, 1998. The allowance for loan losses related to
this investment totaled $500,000 at December 31, 1998. The average recorded
investment in this ADC loan arrangement was $5,970,000 during the period from
May 12, 1998 (inception of operations) through December 31, 1998. At December
31, 1998, the amount outstanding under this loan totaled $6,839,000. No income
was recognized after the loan investment became non-performing. On February 25,
1999, an unconsolidated taxable subsidiary of the Company assumed control of the
borrower (a partnership) through foreclosure of the partnership interests.

As of December 31, 1999, the Company had outstanding commitments to fund
approximately $25,279,000 under 13 loans. The Company is obligated to fund these
commitments to the extent that the borrowers are not in violation of any of the
conditions established in the loan agreements. Commitments generally have fixed
expiration dates or other termination clauses and may require the payment of a
fee if amounts are repaid to the Company during certain prepayment lock-out
periods. A portion of the commitments could expire without being drawn upon and
therefore the total commitment amounts do not necessarily represent future cash
requirements. At December 31, 1999, approximately 50% of the Company's committed
loan investments were collateralized by properties located in Texas.
Additionally, approximately 76% of the Company's loan commitments were secured
by office properties.

4. COMMERCIAL MORTGAGE-BACKED SECURITIES

As of December 31, 1999 and 1998, the Company held five commercial
mortgage-backed securities ("CMBS") which were acquired at an aggregate purchase
price of $34,480,000. The Company's CMBS available for sale are carried at
estimated fair value. At December 31, 1999 and 1998, the aggregate amortized
cost and estimated fair value of CMBS, by underlying credit rating, were as
follows (in thousands):

<TABLE>
<CAPTION>
                                                    1999
                        ----------------------------------------------------------------------
                                     Aggregate     Aggregate        Aggregate       Aggregate
                          Security   Amortized    Unrealized        Unrealized         Fair
                           Rating      Cost          Gains           Losses           Value
                        ---------- ------------   ------------    ------------    ------------
<S>                                <C>            <C>             <C>             <C>
                             BB-   $      4,271   $         --    $     (1,140)   $      3,131
                             B           19,664             --          (4,854)         14,810
                             B-          11,319             --          (4,691)          6,628
                                   ------------   ------------    ------------    ------------

                                   $     35,254   $         --    $    (10,685)   $     24,569
                                   ============   ============    ============    ============
</TABLE>

<TABLE>
<CAPTION>
                                                      1998
                        ----------------------------------------------------------------------
                                     Aggregate     Aggregate        Aggregate       Aggregate
                          Security   Amortized    Unrealized        Unrealized         Fair
                           Rating      Cost          Gains           Losses           Value
                        ---------- ------------   ------------    ------------    ------------
<S>                                <C>            <C>             <C>             <C>
                             BB-   $      4,233   $         --    $       (618)   $      3,615
                             B           19,489             --          (2,952)         16,537
                             B-          11,277             --          (2,675)          8,602
                                   ------------   ------------    ------------    ------------

                                   $     34,999   $         --    $     (6,245)   $     28,754
                                   ============   ============    ============    ============
</TABLE>

Additionally, at December 31, 1999 and 1998, the Company had recorded unrealized
losses (net of tax effects) of $127,000 and $230,000, respectively, related to
CMBS owned by AMREIT II, Inc. The mortgage loans underlying the Company's CMBS
are diverse in nature; no particular concentrations exist by property type or
location. At December 31, 1999, the weighted average maturity and weighted
average duration of the Company's CMBS was 12 years and 5.3 years, respectively.



                                      F-12
<PAGE>   59

5. REAL ESTATE

On October 23, 1998, the Company (through a majority-owned partnership) acquired
an interest in the first of five newly constructed, grocery-anchored shopping
centers in the Dallas/Fort Worth (Texas) area, an 82,730 square foot facility in
Arlington, Texas. In connection with this acquisition and other partnership
formation activities, the Company contributed $3.4 million of capital to the
partnership; the balance of the acquisition price was financed with a $7.5
million non-recourse loan (Note 6). On April 30, 1999, the Company (through the
majority-owned partnership) acquired interests in three additional
grocery-anchored shopping centers. These properties, which were acquired by
subsidiary partnerships at an aggregate purchase price of $30.2 million, include
an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square foot
facility in Fort Worth, Texas and an 85,611 square foot facility in Grapevine,
Texas. Through the majority-owned partnership, the Company acquired an interest
in an additional grocery-anchored shopping center on August 25, 1999. The newly
constructed property, an 87,540 square foot facility in Richardson, Texas, was
acquired by a subsidiary partnership at a purchase price of $10.7 million. In
connection with the acquisitions that occurred in 1999, the subsidiary
partnerships which hold title to these assets obtained non-recourse financing
aggregating $19.5 million and $7.6 million, respectively, from an unaffiliated
third party (Note 6). Immediately prior to the closings, the Company contributed
$11.4 million and $3.4 million, respectively, of capital to the partnership. The
proceeds from these contributions were used, in part, to fund the balance of the
acquisition costs, to pay costs associated with the financing and to provide
initial working capital to the title-holding partnerships. The majority-owned
partnership owns, directly or indirectly, all of the equity interests in the
title-holding subsidiary partnerships.

Real estate, which is comprised entirely of amounts derived from the Company's
partnership investment, consisted of the following at December 31, 1999 and 1998
(in thousands):

<TABLE>
<CAPTION>
                                                           1999            1998
                                                       ------------    ------------
<S>                                                    <C>             <C>
                   Land ............................   $     14,386    $      2,353
                   Buildings and improvements ......         36,856           7,976
                                                       ------------    ------------
                      Total ........................         51,242          10,329
                   Less: Accumulated depreciation ..           (866)            (56)
                                                       ------------    ------------

                                                       $     50,376    $     10,273
                                                       ============    ============
</TABLE>

6. DEBT AND FINANCING FACILITIES

Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $400 million Interim Warehouse and Security Agreement (the "Line
of Credit") with Prudential Securities Credit Corporation ("PSCC"). Subject to
certain limitations, borrowings under the facility can be used to finance the
Company's structured loan and equity real estate investments. Prior to the
modifications discussed below, borrowings under the Line of Credit bore interest
at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per annum
depending upon the type of asset, its loan-to-value ratio and the advance rate
selected by the Company. Advance rates on eligible assets ranged from 50% to 95%
depending upon the asset's characteristics.

Effective as of May 4, 1999, the Company (and certain of its subsidiaries)
entered into an Amended and Restated Interim Warehouse and Security Agreement
(the "Amended Line of Credit") with PSCC; the agreement amended the Company's
existing Line of Credit. The Amended Line of Credit includes the following
modifications: (1) a reduction in the size of the committed facility from $400
million to $300 million; (2) the elimination of the requirement that assets
financed with proceeds from the facility must be securitizable; (3) a reduction
in the amount of capital the Company must fund with respect to construction and
rehabilitation loans before PSCC is required to begin advancing funds; (4) an
extension of the maturity date from July 1, 2000 to November 3, 2000; and (5)
the modification to, and addition of, certain sublimits on specified types of
loans and assets. Under the Amended Line of Credit, borrowings bear interest at
LIBOR plus 1.25% per annum to the extent such borrowings do not exceed the
Company's Tangible Net Worth, as defined; borrowings in excess of the Company's
Tangible Net Worth bear interest at LIBOR plus 3%. At December 31, 1999 and
1998, the weighted average interest rate under this facility was 7.73% per annum
and 6.65% per annum, respectively.



                                      F-13
<PAGE>   60
As compensation for entering into the Amended Line of Credit and extending the
maturity date, the Company granted warrants to Prudential Securities
Incorporated, an affiliate of PSCC, to purchase 250,002 common shares of
beneficial interest at $9.83 per share. The exercise price represents the
average closing market price of the Company's common shares for the ten-day
period ending on May 3, 1999. The warrants were issued in lieu of a commitment
fee or other cash compensation. The estimated fair value of the warrants,
totaling $400,000, was measured at the grant date and is being amortized to
interest expense over the 18-month term of the facility using the straight-line
method.

Borrowings under the facility are secured by a first lien security interest on
all assets funded with proceeds from the Amended Line of Credit. The Amended
Line of Credit contains several covenants; among others, the more significant
covenants include the maintenance of a $100 million consolidated Tangible Net
Worth; maintenance of a Coverage Ratio, as defined, of not less than 1.4 to 1;
and limitation of Total Indebtedness, as defined, to no more than 400% of
shareholders' equity.

To reduce the impact that rising interest rates would have on its floating rate
line of credit indebtedness, the Company entered into an interest rate cap
agreement with a major international financial institution. The cap agreement,
which became effective on January 1, 1999, had a notional amount of $33.6
million. Prior to its termination, the agreement entitled the Company to receive
from the counterparty the amounts, if any, by which one month LIBOR exceeded
6.0%. No amounts were ever due from the counterparty under the terms of this
agreement. The premium paid for this cap, totaling $52,000, was amortized on a
straight-line basis as an adjustment of interest incurred until the agreement
was terminated.

On July 2, 1999, the Company terminated the $33.6 million (notional) interest
rate cap agreement at a loss of $5,000. Concurrently, the Company entered into a
new cap agreement to reduce the impact that rising interest rates would have on
its floating rate indebtedness. The new agreement, which became effective on
August 1, 1999, has a notional amount of $59.0 million. Until its expiration on
November 1, 2000, the agreement entitles the Company to receive from the
counterparty the amounts, if any, by which one month LIBOR exceeds 6.25%. The
premium paid for this cap, totaling $110,000, is being amortized on a
straight-line basis over the life of the agreement as an adjustment of interest
incurred. As of December 31, 1999, the unamortized premium is included in
receivables and other assets in the consolidated balance sheet. During the
period from August 1, 1999 through December 31, 1999, amounts due from the
counterparty under this agreement totaled $13,000.

Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $100 million Master Repurchase Agreement (the "Repurchase
Agreement") with PSCC; subsequently, PSCC was replaced by Prudential-Bache
International, Ltd. ("PBI"), an affiliate of PSCC, as lender. Borrowings under
the Repurchase Agreement can be used to finance a portion of the Company's
portfolio of mortgage-backed securities. The Repurchase Agreement provides that
the Company may borrow a varying percentage of the market value of the purchased
mortgage-backed securities, depending on the credit quality of such securities.
Borrowings under the Repurchase Agreement bear interest at rates ranging from
LIBOR plus 0.20% per annum to LIBOR plus 1.5% per annum depending upon the
advance rate and the credit quality of the securities being financed. Borrowings
under the facility are secured by an assignment to PBI of all mortgage-backed
securities funded with proceeds from the Repurchase Agreement. The Repurchase
Agreement matures on June 30, 2000. At December 31, 1999, the weighted average
interest rate under this facility was 7.62% per annum. At December 31, 1998,
there were no borrowings under the Repurchase Agreement.

Under the terms of the Amended Line of Credit and the Repurchase Agreement, PSCC
and PBI, respectively, retain the right to mark the underlying collateral to
market value. A reduction in the value of its pledged assets may require the
Company to provide additional collateral or fund margin calls. From time to
time, the Company may be required to provide such additional collateral or fund
margin calls.

Five consolidated title-holding partnerships are indebted under the terms of
five non-recourse loan agreements with Jackson National Life Insurance Company.
All five loans bear interest at 6.83% per annum. The interest rates on the first
four loans were adjusted in connection with the placement of the fifth loan on
August 25, 1999. Prior to that time, a $7.5 million loan bore interest at 7.28%
per annum while three loans aggregating $19.5 million bore interest at 6.68% per
annum. The loans require interest only payments through January 1, 2002;
thereafter, interest and principal payments are due based upon 25-year
amortization schedules. The loans, which mature on January 1, 2014, prohibit any
prepayment of the outstanding principal prior to January 1, 2006. Thereafter,
prepayment is permitted at any time, in whole or in part, upon payment of a
yield maintenance premium of at least 1% of the then outstanding principal
balance.



                                      F-14
<PAGE>   61
Total interest incurred during the year ended December 31, 1999 and the period
from May 12, 1998 (inception of operations) through December 31, 1998, was
$6,186,000 and $624,000, of which $593,000 and $57,000, respectively, was
capitalized.

Obligations under various financing arrangements were as follows at December 31,
1999 and 1998 (in thousands):

<TABLE>
<CAPTION>
                                                             1999           1998
                                                         ------------   ------------
<S>                                                      <C>            <C>
                   Repurchase agreement ..............   $      9,856   $         --
                   Line of credit ....................         60,641         39,338
                   Non-recourse debt on real estate ..         34,600          7,500
                                                         ------------   ------------

                                                         $    105,097   $     46,838
                                                         ============   ============
</TABLE>

Future scheduled principal repayments on debt and financing facilities at
December 31, 1999 are as follows (in thousands):

<TABLE>
<S>                                                      <C>
                 2000 ............................       $ 70,497
                 2001 ............................             --
                 2002 ............................            499
                 2003 ............................            581
                 2004 ............................            622
                 2005 and thereafter .............         32,898
                                                         --------
                                                         $105,097
                                                         ========
</TABLE>

7. RELATED PARTY TRANSACTIONS

The Company's day-to-day operations are managed by the Manager, a member of the
AMRESCO Group. During the year ended December 31, 1999 and the period from May
12, 1998 (inception of operations) through December 31, 1998, base management
fees charged to the Company totaled $2,066,000 and $835,000, respectively.
Reimbursable expenses charged to the Company during these periods totaled
$192,000 and $140,000, respectively. Since its inception, no incentive fees have
been charged to the Company. Reimbursable expenses are included in general and
administrative expenses in the Company's consolidated statements of income. As
of December 31, 1999 and 1998, base management fees due to the Manager totaled
$544,000 and $415,000, respectively. Reimbursable expenses due to the Manager
totaled $22,000 and $44,000 at December 31, 1999 and 1998, respectively. Base
management fees and reimbursable expenses due to the Manager are included in
amounts due to affiliates in the consolidated balance sheets.

Subject to certain limited exceptions, AMRESCO has granted to the Company a
right of first refusal with respect to the first $100 million of targeted
mortgage loan investments which are identified by or to any member of the
AMRESCO Group during any calendar quarter and all mortgage-backed securities
(other than mortgage-backed securities issued in securitizations sponsored in
whole or in part by any member of the AMRESCO Group). Additionally, the Company
is a party to an Amended and Restated Correspondent Agreement with Holliday
Fenoglio Fowler, L.P. ("HFF") pursuant to which HFF endeavors to present to the
Company (on a non-exclusive basis) investment opportunities identified by HFF
which meet the investment criteria and objectives of the Company.

Concurrent with the commencement of its operations on May 12, 1998, the Company
acquired two loans from AMRESCO Funding Corporation, a member of the AMRESCO
Group. On September 30, 1998, the Company acquired eight loans from ACFI at an
aggregate cash purchase price of $34,292,000, including accrued interest of
$812,000. Immediately following the purchase, the Company sold to ACFI a
contractual right to collect from the Company an amount equal to the economic
equivalent of all amounts collected from five of the loans in excess of (i)
$17,958,000 and (ii) a return on this amount, or so much of it as was
outstanding from time to time, equal to 12% per annum. The aggregate cash sales
price of $5,020,000 had the effect of reducing the Company's credit exposure
with respect to such loans. As additional consideration, ACFI agreed to
immediately reimburse the Company for any additional advances that were required
to be made under the five loan agreements. The proceeds received from ACFI were
accounted for as a financing. As of December 31, 1998, amounts due to ACFI,
which totaled $5,809,000, were included in amounts due to affiliates in the
consolidated balance sheet.



                                      F-15
<PAGE>   62

In January 1999 and November 1999, the Company sold one loan and three loans,
respectively, to ACFI. Prior to their sale, these investments had been subject
to the ACFI economic interest described above. The fifth loan was fully repaid
by the borrower in May 1999. The proceeds from the sales totaled $13,340,000. In
connection with the most recent sale, amounts due to ACFI were fully
extinguished; additionally, ACFI's reimbursement obligations were discharged.
The sales were recorded as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                   January 1999    November 1999      Total
                                   ------------    -------------   ------------
<S>                                <C>             <C>             <C>
Cash ...........................   $      4,585    $      8,755    $     13,340
Mortgage loans .................         (6,314)        (13,622)        (19,936)
Receivables and other assets ...           (280)           (958)         (1,238)
Amounts due to affiliates ......          2,009           5,825           7,834
                                   ------------    ------------    ------------

Gain (loss) ....................   $         --    $         --    $         --
                                   ============    ============    ============
</TABLE>

8. STOCK-BASED COMPENSATION

Under the Company's 1998 Share Option and Award Plan, as amended (the "Plan"),
the Company may grant restricted common shares and options to purchase common
shares in amounts up to an aggregate of 15% of the Company's outstanding common
shares plus 500,000 shares (or 2,000,017 common shares currently). The aggregate
number of incentive stock options which may be granted under the Plan is limited
to 1,000,000 shares.

On May 12, 1998, the Company granted to its trust managers and officers
non-qualified options to purchase 352,000 common shares at an exercise price of
$15.00 per share (the IPO price). The options vest ratably over a four-year
period beginning one year after the date of grant. The Company applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for these awards. As the awards had no intrinsic
value at the grant date, no compensation cost has been recognized. Had the
Company determined compensation cost associated with these options consistent
with the fair value methodology of SFAS No. 123, the Company's net income and
earnings per common share for the year ended December 31, 1999 and the period
from February 2, 1998 (date of initial capitalization) through December 31, 1998
would have been reduced to the following pro forma amounts (in thousands, except
per share data):

<TABLE>
<CAPTION>
                                                                          Period from
                                                                        February 2, 1998
                                                      Year Ended            through
                                                   December 31, 1999   December 31, 1998
                                                   -----------------   -----------------
<S>                                                 <C>                <C>
           Net income:
               As reported ......................   $          7,320   $          3,952
               Pro forma ........................   $          7,138   $          3,831

           Basic earnings per common share:
               As reported ......................             $ 0.73             $ 0.56
               Pro forma ........................             $ 0.71             $ 0.54

           Diluted earnings per common share:
               As reported ......................             $ 0.73             $ 0.56
               Pro forma ........................             $ 0.71             $ 0.54
</TABLE>

The estimated fair value of the options granted to the Company's officers and
trust managers, approximating $2.20 per share, was measured at the grant date
using the Cox-Ross-Rubinstein option pricing model with the following
assumptions: risk free interest rate of 5.64%; expected life of four years;
expected volatility of 25%; and dividend yield of 8%. Subsequent to the grant
date, the fair value of the options is not adjusted for changes in these
assumptions nor for changes in the price of the Company's stock.

On May 12, 1998, the Company granted to the Manager and certain employees of the
AMRESCO Group non-qualified options to purchase 1,000,011 and 141,500 common
shares, respectively. Seventy percent of the Manager's options and those options
awarded to the other members of the AMRESCO Group are exercisable at $15.00 per
share (the IPO price);



                                      F-16
<PAGE>   63

the remaining thirty percent of the Manager's options are exercisable at an
option price of $18.75 per share. The options vest in four equal installments on
May 12, 1999, May 12, 2000, May 12, 2001 and May 12, 2002. On November 3, 1998
and February 25, 1999, the Company granted to certain employees of the AMRESCO
Group non-qualified options to purchase 4,000 and 2,000 common shares,
respectively; the options vest ratably over a four-year period beginning one
year after the date of grant. The Company accounts for these options under SFAS
No. 123 and the interpretation thereof provided by EITF 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services"; accordingly, compensation cost is
recognized over the four-year vesting period. For purposes of recognizing
compensation costs during the financial reporting periods prior to the
measurement (or vesting) date, the share option awards are measured as of each
financial reporting date at their then-current fair value. Changes in those fair
values between reporting dates are attributed in accordance with the provisions
of FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans". As of December 31, 1999 and 1998,
the estimated fair value of the options granted to the Manager and certain
employees of the AMRESCO Group approximated $0.71 per share and $1.10 per share,
respectively. The fair value of the options granted was estimated using the
Cox-Ross-Rubinstein option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                                       1999                1998
                                                                  --------------       --------------
<S>                                                               <C>                  <C>
               Risk free interest rate........................    5.97% to 6.17%       4.54% to 4.59%
               Expected life .................................     4 to 7 years         4 to 7 years
               Expected volatility............................               35%                 40%
               Dividend yield.................................               12%                 10%
</TABLE>

During the year ended December 31, 1999, compensation cost associated with these
options was adjusted to reflect the decline in estimated fair value (from
December 31, 1998) of approximately $0.39 per share. During the year ended
December 31, 1999 and the period from May 12, 1998 (inception of operations)
through December 31, 1998, management fees included compensatory option charges
totaling $140,000 and $352,000, respectively. During these same periods, general
and administrative expenses included compensatory option charges totaling
$(8,000) and $68,000, respectively.

A summary of the status of the Company's stock options as of December 31, 1999
and 1998 and the changes during the year ended December 31, 1999 and the period
from May 12, 1998 (inception of operations) through December 31, 1998 is as
follows:

<TABLE>
<CAPTION>
                                                          Compensatory                    Non-compensatory
                                                            Options                          Options
                                                   -----------------------------   -----------------------------
                                                                    Weighted                        Weighted
                                                     Number of       Average        Number of        Average
                                                      Shares      Exercise Price     Shares       Exercise Price
                                                   ------------   --------------   ------------   --------------
<S>                                                <C>            <C>              <C>            <C>
        Granted on May 12, 1998                       1,141,511    $      15.99         352,000    $      15.00
        Granted on November 3, 1998                       4,000            7.88              --              --
        Exercised                                            --              --              --              --
        Forfeited                                       (21,500)         (15.00)             --              --
        Expired                                              --              --              --              --
                                                   ------------    ------------    ------------    ------------

        Options outstanding at December 31, 1998      1,124,011           15.98         352,000           15.00

        Granted on February 25, 1999                      2,000            8.75              --              --
        Exercised                                            --              --              --              --
        Forfeited                                        (4,250)         (12.06)        (13,500)         (15.00)
        Expired                                              --              --              --              --
                                                   ------------    ------------    ------------    ------------

        Options outstanding at December 31, 1999      1,121,761    $      15.98         338,500    $      15.00
                                                   ============    ============    ============    ============
</TABLE>

As of December 31, 1999, the 1,460,261 options outstanding have a weighted
average exercise price of $15.75 and a weighted average remaining contractual
life of 8.38 years. At December 31, 1999, 405,378 options were exercisable at a
weighted average exercise price of $14.98. No options were exercisable as of
December 31, 1998.

In lieu of cash compensation for their services and participation at regularly
scheduled meetings of the Board of Trust Managers, the Company granted 2,250 and
1,500 restricted common shares to each of its four independent trust managers on




                                      F-17
<PAGE>   64

May 11, 1999 and May 12, 1998, respectively. The grant-date fair value of these
restricted common shares was $10.13 and $15.00 per share, respectively. The
associated compensation cost is recognized over the one-year service period.

At December 31, 1999, 524,756 shares were available for grant in the form of
restricted common shares or options to purchase common shares.

On February 25, 1999, the Board of Trust Managers approved the payment of
dividend equivalents on all vested and unexercised share options excluding those
held by the Manager. Dividend equivalents were equal to the dividends paid on
the Company's common shares from time to time, excluding those distributions
that were characterized as a non-taxable return of capital for tax purposes.
During the year ended December 31, 1999, dividend equivalent costs totaled
$114,000 and are included in general and administrative expenses in the
consolidated statement of income.

As described in Note 6, the Company granted warrants to Prudential Securities
Incorporated to purchase 250,002 common shares of beneficial interest at $9.83
per share. The estimated fair value of the warrants, totaling $400,000, was
measured at the grant date (May 4, 1999) using the Cox-Ross-Rubinstein option
pricing model with the following assumptions: risk free interest rate of 5.23%;
expected life of three years (the warrants have a 7-year term); expected
volatility of 35%; and dividend yield of 12%. During the year ended December 31,
1999, $178,000 of warrant costs were amortized to interest expense.

9. COMMON STOCK

The Company was initially capitalized through the sale of 100 of its common
shares to AMRESCO on February 2, 1998 for $1,000. On May 12, 1998, the Company
completed its IPO of 9,000,000 shares of common stock. Concurrently, the Private
Placement of 1,000,011 common shares was completed with AMREIT Holdings, Inc.
("Holdings"), a wholly-owned subsidiary of AMRESCO. The net proceeds from the
IPO and the Private Placement, after the underwriters' discount and offering
expenses, aggregated approximately $139.7 million. The price to the public and
to Holdings was $15.00 per share and the proceeds to the Company from the IPO
and the Private Placement were $14.00 per share (after the underwriter's
discount and advisory fee) and $15.00 per share, respectively. Holdings
currently owns 1,500,011 shares, or approximately 15% of the Company's
outstanding common stock. In addition to the 1,000,011 shares acquired pursuant
to the Private Placement, Holdings purchased 500,000 shares through the IPO.

10. EARNINGS PER SHARE

A reconciliation of the numerator and denominator used in computing basic
earnings per share and diluted earnings per share for the year ended December
31, 1999 and the period from February 2, 1998 (date of initial capitalization)
through December 31, 1998, is as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                       Period from
                                                                                        February 2,
                                                                                          1998
                                                                      Year Ended         through
                                                                      December 31,      December 31,
                                                                          1999             1998
                                                                     --------------   --------------
<S>                                                                  <C>              <C>
               Net income available to common shareholders           $        7,320   $        3,952
                                                                     ==============   ==============
               Weighted average common shares outstanding                    10,000            7,027
                                                                     ==============   ==============

               Basic earnings per common share                       $         0.73   $         0.56
                                                                     ==============   ==============

               Weighted average common shares outstanding                    10,000            7,027
               Effect of dilutive securities:
                   Restricted shares                                             12                4
                   Net effect of assumed exercise of stock options               --               --
                                                                     --------------   --------------
               Adjusted weighted average shares outstanding                  10,012            7,031
                                                                     ==============   ==============

               Diluted earnings per common share                     $         0.73   $         0.56
                                                                     ==============   ==============
</TABLE>



                                      F-18
<PAGE>   65
During the year ended December 31, 1999 and the period from May 12, 1998
(inception of operations) through December 31, 1998, options to purchase
1,460,261 and 1,476,011 common shares, respectively, and warrants to purchase
250,002 and 0 common shares, respectively, were outstanding. The options related
to 1,456,261 shares and the warrants for the year ended December 31, 1999 and
options related to 1,472,011 shares for the period from May 12, 1998 (inception
of operations) through December 31, 1998 were not included in the computation of
diluted earnings per share because the exercise prices related thereto were
greater than the average market price of the Company's common shares.

The Company had no earnings prior to the commencement of its operations on May
12, 1998. When calculated for the period from May 12, 1998 (inception of
operations) through December 31, 1998, the Company's basic and diluted earnings
were $0.39 per common share.

11. DISTRIBUTIONS

The Company has adopted a policy of paying quarterly dividends on its common
shares. During the year ended December 31, 1999 and the period from May 12, 1998
(inception of operations) through December 31, 1998, the Company declared
dividends totaling $15,921,000 (or $1.59 per share) and $7,404,000 (or $0.74 per
share), respectively. For federal income tax purposes, $1.42 per share and $0.17
per share were reported to the Company's shareholders as ordinary income and
non-taxable return of capital, respectively, for the year ended December 31,
1999. All 1998 dividends were reported as ordinary income (for federal income
tax purposes) to the Company's shareholders. Information regarding the
declaration and payment of dividends by the Company since its inception of
operations is as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                                       Dividend per
                             Declaration             Record             Payment          Dividend        Common
                                 Date                 Date               Date               Paid          Share
                            -----------------   -----------------   ----------------    ------------   ------------
<S>                         <C>                 <C>                 <C>                 <C>            <C>
 1998
 Period from May 12, 1998
   through June 30, 1998    July 23, 1998       July 31, 1998       August 17, 1998     $      1,001   $       0.10
 Third Quarter              October 22, 1998    October 31, 1998    November 16, 1998          2,401           0.24
 Fourth Quarter             December 15, 1998   December 31, 1998   January 27, 1999           4,002           0.40
                                                                                        ------------   ------------

                                                                                        $      7,404   $       0.74
                                                                                        ============   ============

 1999
 First Quarter              April 22, 1999      April 30, 1999      May 17, 1999        $      3,602   $       0.36
 Second Quarter             July 22, 1999       July 31, 1999       August 16, 1999            3,906           0.39
 Third Quarter              October 21, 1999    October 31, 1999    November 15, 1999          4,006           0.40
 Fourth Quarter             December 15, 1999   December 31, 1999   January 27, 2000           4,407           0.44
                                                                                        ------------   ------------

                                                                                        $     15,921   $       1.59
                                                                                        ============   ============
</TABLE>

12. LEASING ACTIVITIES

As of December 31, 1999, the future minimum lease payments to be received by the
Company (through a majority-owned partnership) under noncancellable operating
leases, which expire on various dates through 2024, are as follows (in
thousands):

<TABLE>
<S>                                                  <C>
                       2000 .....................    $    4,957
                       2001 .....................         4,985
                       2002 .....................         5,017
                       2003 .....................         5,024
                       2004 .....................         4,503
                       2005 and thereafter ......        68,915
                                                     ----------

                                                     $   93,401
                                                     ==========
</TABLE>

Approximately 84% of the future minimum lease payments disclosed above are due
from a regional grocer.




                                      F-19
<PAGE>   66

13. RECONCILIATION OF FINANCIAL STATEMENT NET INCOME TO TAX BASIS INCOME

A reconciliation of the Company's financial statement net income to its tax
basis income for the year ended December 31, 1999 and the period from February
2, 1998 (date of initial capitalization) through December 31, 1998 is as
follows:

<TABLE>
<CAPTION>
                                                                                                 Period from
                                                                                                 February 2,
                                                                                                   1998
                                                                                 Year Ended        through
                                                                                 December 31,    December 31,
                                                                                    1999            1998
                                                                                 ------------    ------------
<S>                                                                              <C>             <C>
           Consolidated financial statement net income .......................   $      7,320    $      3,952

           Difference  attributable to differences in methods of accounting
              for ADC loan arrangements ......................................          3,598           1,713
           Equity in losses (earnings) from unconsolidated subsidiary ........            223             (58)
           Dividends received from unconsolidated subsidiary .................             45              58
           Interest capitalized under SFAS No. 34 ............................           (593)            (57)
           Adjustments for restricted stock and compensatory options .........            223             476
           Provision for loan losses .........................................          3,322           1,368
           Other .............................................................             21              43
                                                                                 ------------    ------------

           Tax basis income ..................................................   $     14,159    $      7,495
                                                                                 ============    ============
</TABLE>

For the period from May 12, 1998 (inception of operations) through December 31,
1998, the Company retained a portion of its REIT taxable income in excess of the
95% requirement; as a result, such income was subject to tax at regular
corporate rates. These taxes, totaling approximately $20,000, were included in
general and administrative expenses in the consolidated statement of income for
the period from February 2, 1998 (date of initial capitalization) through
December 31, 1998.

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No.
107"), requires disclosure of the estimated fair values of financial instruments
whether or not such financial instruments are recognizable in the balance sheet.
For purposes of the statement, fair value is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties
other than in a forced or liquidation sale. With the exception of real estate,
the Company's unconsolidated investments and minority interests, substantially
all of the Company's assets and liabilities are considered financial instruments
for purposes of SFAS No. 107. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts. The fair value estimates were
derived based upon pertinent information available to management as of December
31, 1999 and 1998. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
the dates presented.

With the exception of two floating rate mortgage loans originated during the
year ended December 31, 1999, mortgage loans and ADC loan arrangements accounted
for as real estate or investments in joint ventures have fixed rates which
approximate rates that the Company would quote currently for investments with
similar terms and risk characteristics; accordingly, their estimated fair values
approximate their net carrying values. However, there is not an active secondary
trading market for these types of investments; as a result, the estimates of
fair value are not necessarily indicative of the amounts the Company could
realize in a current market exchange. Furthermore, the Company generally intends
to hold these financial instruments to maturity and realize their recorded
values.

Commercial mortgage-backed securities are carried at estimated fair value based
on quoted market prices.


                                      F-20
<PAGE>   67
The estimated fair values of cash and cash equivalents, receivables and other
assets (including the Company's interest rate caps), accounts payable and other
liabilities, amounts due to affiliates and dividends payable approximate their
carrying values due to the short-term nature of these financial instruments.

The estimated fair values of the line of credit and repurchase agreement
indebtedness approximate their carrying values due to the variable rate nature
of these facilities. At December 31, 1999 and 1998, the estimated fair value of
the fixed rate non-recourse debt on real estate approximated $30.8 million and
$7.5 million, respectively.

15. SEGMENT INFORMATION

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), requires enterprises to report certain financial
and descriptive information about their reportable operating segments. SFAS No.
131 also requires certain enterprise-wide disclosures regarding products and
services, geographic areas and major customers.

The Company, as an investor in real estate related assets, operates in only one
reportable segment. Within this segment, the Company makes asset allocation
decisions based upon its diversification strategies and changes in market
conditions. The Company does not have, nor does it rely upon, any major
customers. All of the Company's investments are secured directly or indirectly
by real estate properties located in the United States; accordingly, all of its
revenues were derived from U.S. operations.

16. RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 requires that an entity recognize all derivatives as either
assets or liabilities in its balance sheet and that it measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
(that is, gains and losses) is dependent upon the intended use of the derivative
and the resulting designation. SFAS No. 133 generally provides for matching the
timing of gain or loss recognition on the hedging instrument with the
recognition of (1) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (2) the earnings effect of
the hedged forecasted transaction. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 137
deferred the effective date of SFAS No. 133 such that it is now effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000, although
earlier application is encouraged. The Company has not yet assessed the impact
that SFAS No. 133 will have on its financial condition or results of operations.

17. SUBSEQUENT EVENTS

On February 24, 2000, the Company's Board of Trust Managers terminated the
dividend equivalents program described in Note 8.

On March 29, 2000, the Company's Board of Trust Managers adopted a Plan of
Liquidation and Dissolution. The plan, which requires shareholder approval,
provides for the complete liquidation and dissolution of the Company.

On March 29, 2000, the Company's Board of Trust Managers approved certain
modifications to the Manager's compensation effective as of April 1, 2000. In
addition to its base management fee, the Manager will be entitled to receive
reimbursements for its quarterly operating deficits, if any, beginning April 1,
2000. Pursuant to the modifications, the Manager will no longer be entitled to
receive incentive compensation and/or a termination fee in the event that the
Management Agreement is terminated.




                                      F-21
<PAGE>   68
18. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of unaudited quarterly results of operations for the
year ended December 31, 1999 and the period from February 2, 1998 (date of
initial capitalization) through December 31, 1998 (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                          Year Ended December 31, 1999
                                                -------------------------------------------------
                                                  First        Second       Third       Fourth
                                                 Quarter      Quarter      Quarter      Quarter
                                                ----------   ----------   ----------   ----------
<S>                                             <C>          <C>          <C>          <C>
Revenues ....................................   $    4,473   $    5,743   $    6,301   $    6,876
Gain associated with repayment of ADC loan
   arrangement ..............................   $      584   $       --   $       --   $       --
Net income (loss) ...........................   $    2,344   $    2,707   $    2,344   $      (75)
Earnings (loss) per common share:
   Basic ....................................   $     0.23   $     0.27   $     0.24   $    (0.01)
   Diluted ..................................   $     0.23   $     0.27   $     0.24   $    (0.01)
</TABLE>

<TABLE>
<CAPTION>
                                  Period from February 2, 1998 through December 31, 1998
                                ----------------------------------------------------------
                                Period from
                                February 2,
                                    1998
                                   through         Second         Third         Fourth
                                March 31, 1998     Quarter       Quarter        Quarter
                                --------------  ------------   ------------   ------------
<S>                              <C>            <C>            <C>            <C>
Revenues .....................   $         --   $      1,261   $      2,992   $      4,492
Net income ...................   $         --   $        757   $      1,272   $      1,923
Earnings per common share:
   Basic .....................   $         --   $       0.14   $       0.12   $       0.19
   Diluted ...................   $         --   $       0.14   $       0.12   $       0.19
</TABLE>

The Company had no earnings prior to the commencement of its operations on May
12, 1998. When calculated for the period from May 12, 1998 (inception of
operations) through June 30, 1998, the Company's basic and diluted earnings were
$0.08 per common share during the second quarter of 1998.



                                      F-22
<PAGE>   69
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                 EXHIBIT
                 NUMBER       DESCRIPTION
                 ------       -----------
<S>                           <C>
                  2.1         Agreement and Plan of Merger, dated as of August
                              4, 1999, by and between the Company and Impac
                              Commercial Holdings, Inc. (filed as Exhibit 2.1 to
                              the Registrant's Quarterly Report on Form 10-Q for
                              the quarterly period ended June 30, 1999, which
                              exhibit is incorporated herein by reference).

                  4.1         Rights Agreement, dated as of February 25, 1999,
                              between the Company and The Bank of New York, as
                              Rights Agent, which includes: as Exhibit A
                              thereto, the Form of Statement of Designation of
                              Series A Junior Participating Preferred Shares,
                              par value $.01 per share, of the Company; as
                              Exhibit B thereto, the Form of Right Certificate;
                              and as Exhibit C thereto, the Summary of Rights to
                              Purchase Preferred Shares (filed as Exhibit 1 to
                              the Registrant's Current Report on Form 8-K dated
                              February 25, 1999, which exhibit is incorporated
                              herein by reference).

                  10.1        Amended and Restated Interim Warehouse and
                              Security Agreement dated as of May 4, 1999, by and
                              among Prudential Securities Credit Corporation and
                              AMRESCO Capital Trust, AMREIT I, Inc., AMREIT II,
                              Inc., ACT Equities, Inc. and ACT Holdings, Inc.
                              (filed as Exhibit 10.1 to the Registrant's
                              Quarterly Report on Form 10-Q for the quarterly
                              period ended March 31, 1999, which exhibit is
                              incorporated herein by reference).

                  10.2        Warrant Agreement dated as of May 4, 1999 between
                              AMRESCO Capital Trust and Prudential Securities
                              Incorporated (filed as Exhibit 10.2 to the
                              Registrant's Quarterly Report on Form 10-Q for the
                              quarterly period ended March 31, 1999, which
                              exhibit is incorporated herein by reference).

                  10.3        Management Agreement, dated as of May 12, 1998, by
                              and between AMRESCO Capital Trust and AMREIT
                              Managers, L.P. (filed as Exhibit 10.3 to the
                              Registrant's Quarterly Report on Form 10-Q for the
                              quarterly period ended September 30, 1999, which
                              exhibit is incorporated herein by reference).

                  11          Computation of Per Share Earnings.

                  21          Subsidiaries of the Registrant.

                  27          Financial Data Schedule.

                  99.1        Termination Agreement, dated January 4, 2000,
                              between AMRESCO Capital Trust and Impac Commercial
                              Holdings, Inc. (filed as Exhibit 99.1 to the
                              Registrant's Current Report on Form 8-K dated
                              January 4, 2000 and filed with the Commission on
                              January 6, 2000, which exhibit is incorporated
                              herein by reference).
</TABLE>