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



                                    FORM 10-Q



              [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED JUNE 30, 1998



                          Commission File Number 1-9648
                                                 ------



                              NATIONAL REALTY, L.P.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)



              Delaware                                          75-2163175
    -------------------------------                          ----------------
    (State or Other Jurisdiction of                          (I.R.S. Employer
    Incorporation or Organization)                          Identification No.)



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



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


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 [ ].



Units of Limited Partner Interest                        6,321,622
---------------------------------               -------------------------------
         (Class)                                (Outstanding at July 31, 1998)





<PAGE>   2



                         PART I - FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants, but in the opinion of the management
of National Realty, L.P., all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of consolidated results of
operations, consolidated financial position and consolidated cash flows at the
dates and for the periods indicated, have been included.


                              NATIONAL REALTY, L.P.
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                        June 30,          December 31,
                                                          1998               1997
                                                       ------------      ------------
                                                            (dollars in thousands)
<S>                                                    <C>               <C>         
                   Assets

Real estate held for investment
   Land ..........................................     $     38,907      $     48,738
   Buildings and improvements ....................          337,035           386,477
                                                       ------------      ------------
                                                            375,942           435,215

   Less - accumulated depreciation ...............         (200,598)         (223,791)
                                                       ------------      ------------
                                                            175,344           211,424

Real estate held for sale, net of accumulated
   depreciation ($7,920 in 1998) .................            9,607              --

Notes and interest receivable, net of deferred
   gains of $2,431 in 1998 and $15,787 in 1997 ...           27,344            26,853

   Less - allowance for estimated losses .........           (1,910)           (1,910)
                                                       ------------      ------------
                                                             25,434            24,943

Cash and cash equivalents ........................           16,849            17,180
Accounts receivable ..............................            3,548             3,327
Prepaid expenses .................................              828             1,069
Escrow deposits and other assets (including $325
   in 1998 and $267 in 1997 from affiliates) .....            7,367             6,597
Marketable equity securities of affiliate, at
   market ........................................            2,936             2,814
Deferred financing costs .........................            2,810            12,226
                                                       ------------      ------------

                                                       $    244,723      $    279,580
                                                       ============      ============
</TABLE>



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

                                        2

<PAGE>   3



                              NATIONAL REALTY, L.P.
                     CONSOLIDATED BALANCE SHEETS - Continued





<TABLE>
<CAPTION>
                                                            June 30,         December 31,
                                                              1998              1997
                                                          ------------      ------------
                                                              (dollars in thousands)
<S>                                                       <C>               <C>         
    Liabilities and Partners' Equity (Deficit)

Liabilities
   Notes and interest payable .......................     $    288,178      $    339,102
   Accrued property taxes ...........................            5,771             6,906
   Accounts payable and other liabilities ...........            3,308             7,242
   Tenant security deposits .........................            3,110             3,163
                                                          ------------      ------------
                                                               300,368           356,413

Commitments and contingencies

Redeemable General Partner Interest .................           45,442            45,442

Partners' equity (deficit)
   General Partner ..................................            3,273             2,822
   Limited Partners (6,321,627 units in 1998 and
      6,323,438 units in 1997) ......................          (57,408)          (78,024)
   Unrealized gain on marketable equity securities
      of affiliate ..................................            2,666             2,544
                                                          ------------      ------------
                                                               (51,469)          (72,658)

   Less - Redeemable General Partner Interest .......          (49,617)          (49,617)
                                                          ------------      ------------

                                                              (101,086)         (122,275)
                                                          ------------      ------------
                                                          $    244,723      $    279,580
                                                          ============      ============
</TABLE>



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

                                        3

<PAGE>   4



                              NATIONAL REALTY, L.P.
                      CONSOLIDATED STATEMENTS OF OPERATIONS




<TABLE>
<CAPTION>
                                                  For the Three Months               For the Six Months
                                                     Ended June 30,                    Ended June 30,
                                              -----------------------------     -----------------------------
                                                  1998             1997             1998             1997
                                              ------------     ------------     ------------     ------------
                                                           (dollars in thousands, except per unit)
<S>                                           <C>              <C>              <C>              <C>
Revenues
   Rents ................................     $     26,903     $     27,889     $     55,161     $     55,609
   Interest .............................            1,283              925            2,603            1,764
                                              ------------     ------------     ------------     ------------

                                                    28,186           28,814           57,764           57,373

Expenses
   Interest .............................            8,200            8,512           16,911           17,033
   Deferred borrowing costs .............            7,739             --              7,739             --
   Depreciation .........................            2,291            2,678            4,814            5,142
   Property taxes & insurance ...........            2,766            3,100            5,612            6,118
   Utilities ............................            2,631            2,849            5,646            6,005
   Property-level payroll costs .........            1,632            1,488            3,288            3,160
   Repairs and maintenance ..............            5,556            6,705           11,470           12,377
   Other operating expenses .............            1,152            1,013            2,343            2,166
   Property management fees .............            1,165            1,191            2,374            2,384
   General and administrative ...........            1,546            1,544            3,551            3,501
                                              ------------     ------------     ------------     ------------

                                                    34,678           29,080           63,748           57,886
                                              ------------     ------------     ------------     ------------

(Loss) from operations ..................          (6,492)            (266)          (5,984)            (513)
Gain on sale of real estate .............           28,633            3,587           28,633            3,587
                                              ------------     ------------     ------------     ------------


Net income ..............................     $     22,141     $      3,321     $     22,649     $      3,074
                                              ============     ============     ============     ============


Earnings per unit
   Net income ...........................     $       3.43     $        .51     $       3.51     $        .48
                                              ============     ============     ============     ============

Weighted average units of
   limited partner interest
   used in computing earnings
   per unit .............................        6,322,531        6,329,076        6,322,984        6,328,639
                                              ============     ============     ============     ============
</TABLE>




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

                                        4

<PAGE>   5



                              NATIONAL REALTY, L.P.
              CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
                     FOR THE SIX MONTHS ENDED JUNE 30, 1998




<TABLE>
<CAPTION>
                                                                                 Accumulated        Redeemable
                                                                                    Other            General             Partners'
                                              General           Limited          Comprehensive       Partner              Equity
                                              Partner           Partners            Income           Interest            (Deficit)
                                            -------------     -------------      -------------     -------------      -------------
                                                                   (dollars in thousands, except per unit)
<S>                                         <C>               <C>                <C>               <C>                <C>           
Balance, January 1, 1998 ..............     $       2,822     $     (78,024)     $       2,544     $     (49,617)     $    (122,275)



Comprehensive income

   Unrealized gain on marketable
      equity securities of affiliate ..              --                --                  122              --                  122

   Net income .........................               451            22,198               --                --               22,649
                                                                                                                      -------------
                                                                                                                             22,771

Distributions ($.25 per unit) .........              --              (1,582)              --                --               (1,582)
                                            -------------     -------------      -------------     -------------      -------------



Balance, June 30, 1998 ................     $       3,273     $     (57,408)     $       2,666     $     (49,617)     $    (101,086)
                                            =============     =============      =============     =============      =============
</TABLE>



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

                                        5

<PAGE>   6



                              NATIONAL REALTY, L.P.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
                                                             For the Six Months
                                                               Ended June 30,
                                                         --------------------------
                                                           1998            1997
                                                         ----------      ----------
                                                           (dollars in thousands)
<S>                                                      <C>             <C>       
Cash Flows From Operating Activities
   Rents collected .................................     $   54,940      $   55,703
   Interest collected ..............................          1,618           1,438
   Interest paid ...................................        (14,609)        (14,433)
   Payments for property operations ................        (33,703)        (31,835)
   General and administrative expenses paid ........         (3,526)         (4,397)
                                                         ----------      ----------

        Net cash provided by operating activities ..          4,720           6,476


Cash Flows From Investing Activities
   Proceeds from sale of real estate ...............         40,041           4,409
   Real estate improvements ........................         (1,452)         (1,313)
   Collections on notes receivable .................         21,813           1,362
   Funding of notes receivable .....................        (10,541)         (9,106)
                                                         ----------      ----------

        Net cash provided by (used in) investing
           activities ..............................         49,861          (4,648)


Cash Flows From Financing Activities
   Proceeds from notes payable .....................          3,850           8,333
   Payments on notes payable .......................        (55,060)         (9,832)
   Receipt from escrow .............................           --            12,423
   Deferred financing costs ........................           (388)         (1,127)
   Deposits on pending financings ..................         (1,734)           --
   Exercise of warrants ............................           --                20
   Distributions to unitholders ....................         (1,582)         (1,264)
                                                         ----------      ----------

        Net cash provided by (used in) financing
           activities ..............................        (54,914)          8,553
                                                         ----------      ----------


        Net increase (decrease) in cash and cash
           equivalents .............................           (331)         10,381


Cash and cash equivalents at beginning of period ...         17,180           5,872
                                                         ----------      ----------

Cash and cash equivalents at end of period .........     $   16,849      $   16,253
                                                         ==========      ==========
</TABLE>



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

                                        6

<PAGE>   7


                              NATIONAL REALTY, L.P.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
                                                             For the Six Months
                                                               Ended June 30,
                                                         -------------------------
                                                            1998           1997
                                                         ----------     ----------
                                                           (dollars in thousands)
<S>                                                      <C>            <C>       
Reconciliation of net income to net cash
   provided by operating activities
Net income .........................................     $   22,649     $    3,074
   Adjustments to reconcile net income to net
        cash provided by operating activities
   Depreciation ....................................          4,814          5,142
   Gain on sale of real estate .....................        (28,633)        (3,587)
   Decrease in other assets ........................          9,118          1,274
   (Increase) in interest receivable ...............           (463)          (144)
   Increase in interest payable ....................            287          1,061
   (Decrease) in other liabilities .................         (3,052)          (344)
                                                         ----------     ----------

        Net cash provided by operating activities ..     $    4,720     $    6,476
                                                         ==========     ==========



Schedule of noncash financing activities

   Unrealized gain on marketable equity securities
        of affiliate ...............................     $      122     $    1,174

   Notes payable assumed by buyer upon sale of
        properties .................................          8,584           --
</TABLE>





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

                                        7

<PAGE>   8

                              NATIONAL REALTY, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1. BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements of National Realty, L.P. and
consolidated entities (the "Partnership") have been prepared in conformity with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Operating results for the six month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the Consolidated Financial
Statements and Notes thereto included in the Partnership's Annual Report on Form
10-K for the year ended December 31, 1997 (the "1997 Form 10-K").

Certain balances for 1997 have been reclassified to conform to the 1998
presentation.

NOTE 2. EARNINGS PER UNIT

Net income per unit of limited partner interest (per "unit") is presented in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
per Share". Net income per unit is computed based upon the weighted average
number of units outstanding during each period. The limited partners of National
Realty, L.P. ("National Realty") have a 99% interest and the general partner,
Syntek Asset Management, L.P. (the "General Partner" or "SAMLP"), has an
aggregate 1% interest in the net income, net loss and distributions of National
Realty. National Realty is allocated 99% of the net income or net loss of
National Operating, L.P. ("NOLP" or the "Operating Partnership"), and the
General Partner is allocated an aggregate 1% of the net income or net loss of
the Operating Partnership. The 1% General Partner interest in each of National
Realty and the Operating Partnership is equal to a 1.99% interest on a combined
basis. Accordingly, net income per unit is derived by dividing 98.01% of the net
income in each period by the respective weighted average units of limited
partner interest.

NOTE 3. NOTES RECEIVABLE

During the first and second quarters of 1998, the Partnership funded a total of
$3.8 million of a $3.9 million loan commitment to Centura Tower, Ltd. The loan
is secured by 2.244 acres of undeveloped land in Dallas, Texas. The loan bears
interest at 12.0% per annum, requires monthly payments based on net revenues
after development of the land and matures in January 2003.

During the first and second quarters of 1998, the Partnership funded $2.1
million of a $2.2 million loan commitment to Varner Road Partners, L.L.C. The
loan is secured by 129.77 acres of land in Riverside County,



                                        8

<PAGE>   9



                              NATIONAL REALTY, L.P.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 3. NOTES RECEIVABLE (Continued)

California and a pledge of the stock of the borrower. The loan bears interest at
15.0% per annum and matures in September 1999. All principal and interest are
due at maturity.

During the first and second quarters of 1998, the Partnership funded a $350,000
loan to Ellis Development Company, Inc. The loan is secured by 4.5 acres of land
in Abilene, Texas. The loan bears interest at 14.0% per annum and matures in
April 1999. All principal and interest are due at maturity.

In May 1998, the Partnership funded $713,000 of a $836,000 loan commitment to
Warwick of Summit, Inc., of which $619,000 was used to repay the $611,000 Tara
Summit loan from the Partnership. The new loan is secured by a second lien on a
shopping center in Rhode Island, by 100% of the stock of the borrower and by the
personal guarantee of the principal shareholder of the borrower. The loan bears
interest at 14.0% per annum and matures in December 1999. All principal and
interest are due at maturity. In June 1998, the Partnership funded the remaining
$123,000 of the initial loan commitment and through July 1998, an additional
$301,000 was funded, increasing the loan balance to $1.1 million.

In June 1998, the Partnership funded a $350,000 loan to RB Land & Cattle, L.L.C.
The loan is secured by a pledge of a note secured by 7,200 acres of undeveloped
land near Crowell, Texas and the personal guarantee of the borrower. The loan
bears interest at 10.0% per annum and matures in December 1998. All principal
and interest are due at maturity.

Also in June 1998, the Partnership funded a $2.4 million loan to Cuchara
Partners, Ltd. and Ski Rio Partners, Ltd. The loan is secured by (i) first lien
on approximately 1,000 acres of land in Huerfano County, Colorado, known as
Cuchara Valley Mountain Ski Resort; (ii) assignment of a $2.0 million promissory
note which is secured by approximately 2,623 acres of land in Taos County, New
Mexico, known as Ski Rio Resort; and (iii) a pledge of all related partnership
interests. The loan bears interest 16.0% per annum and matures in June 1999. All
principal and interest are due at maturity. In July 1998, the Partnership funded
an additional $1.8 million, increasing the loan balance to $4.2 million.

In the second quarter of 1998, the Partnership received a total of $21.2 million
from the payoff of three of its mortgage notes receivable. In connection with
the payoff of one of the notes, the Partnership paid off an underlying lien with
a principal balance of $14.6 million, including a prepayment penalty. The
Partnership recognized a previously deferred gain of $12.2 million related to
the 1988 sale of the property, the gain having been deferred until the
Partnership provided sales financing was paid off. The Partnership also made a
$3.5 million paydown of a mortgage partially secured by another of the paid off
notes.



                                        9

<PAGE>   10
                              NATIONAL REALTY, L.P.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 3. NOTES RECEIVABLE (Continued)

In December 1997, the Partnership funded a $3.5 million loan to Stratford &
Graham Developers, L.L.C. The loan is secured by a mortgage on 1,485 acres of
land in Riverside County, California. The loan bears interest at 15.0% per annum
and matures in July 1999. All principal and interest are due at maturity. In the
second quarter of 1998, the Partnership funded an additional $131,000, and,
through July 1998, an additional $7,000 was funded, increasing the loan balance
to $3.6 million.

In 1997, the Partnership funded a total of $1.3 million of a $1.5 million loan
to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured by (i) a
100% limited partnership interest in Bordeaux, which owns a shopping center in
Oklahoma City, Oklahoma; (ii) 100% of the stock of Bordeaux Investments One,
Inc., which owns approximately 6.5 acres of undeveloped land in Oklahoma City,
Oklahoma; and (iii) the personal guarantees of the Bordeaux partners. The loan
bears interest at 14.0% per annum, requires monthly payments of interest only at
12.0% per annum, with the deferred interest payable in December 1998, and
matures in January 1999. Through July 1998, an additional $53,000 was funded and
the loan was modified, increasing the principal balance to $1.4 million. The
Partnership has committed to fund an additional $24,000, at which time the loan
will be modified to increase the principal balance.

NOTE 4. REAL ESTATE

The Partnership had a 75% general partner interest in Southern Palms Associates
("Southern Palms"), which owned Southern Palms Shopping Center. In August 1992,
Southern Palms filed a voluntary petition in bankruptcy, seeking, among other
things, to restructure the $9.3 million nonrecourse mortgage secured by the
shopping center. In December 1993, an agreement was reached with the lender to
modify the $9.3 million first mortgage, reducing the interest rate and extending
the maturity date. In December 1997, the Partnership entered into an agreement
with the 25% general partner, which provided such partner with an option to
purchase the Partnership's 75% interest in Southern Palms. The 25% general
partner exercised his option in May 1998 and acquired the Partnership's 75%
interest in Southern Palms for $5.5 million in cash. The Partnership recognized
neither gain or loss on the sale of its partnership interest in Southern Palms.

In April 1998, the Partnership sold the Brookview Apartments, a 156 unit
apartment complex in Smyrna, Georgia, for $4.5 million. The Partnership received
$432,000 in net cash after the payment of various closing costs associated with
the sale and the purchaser's assumption of the existing $4.0 million in mortgage
debt. The Partnership paid a real estate brokerage commission of $180,000 to
Carmel Realty, Inc. ("Carmel Realty"), an affiliate of the Partnership's
Managing General Partner, based on the $4.5 million sales price of the property.
The Partnership recognized a gain of $3.1 million on the sale.



                                       10

<PAGE>   11

                              NATIONAL REALTY, L.P.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 4. REAL ESTATE (Continued)

Also in April 1998, the Partnership sold the Creekwood Apartments, a 300 unit
apartment complex in College Park, Georgia, for $5.5 million. The Partnership
received $884,000 in net cash after the payment of various closing costs
associated with the sale and the purchaser's assumption of the existing $4.6
million in mortgage debt. The Partnership paid a real estate brokerage
commission of $166,000 to Carmel Realty based on the $5.5 million sales price of
the property. The Partnership recognized a gain of $2.9 million on the sale.

Further in April 1998, the Partnership sold 338 acres of undeveloped land in
Granby, Colorado, for $800,000 in cash. The Partnership received net cash of
$792,000 after the payment of various closing costs associated with the sale.
The Partnership paid a real estate brokerage commission of $24,000 to Carmel
Realty based on the $800,000 sales price of the property. The Partnership
recognized a gain of $772,000 on the sale.

In May 1998, the Partnership sold the Alexandria Apartments, a 406 unit
apartment complex in Decatur, Georgia, for $12.4 million. The Partnership
received $3.8 million in net cash after paying off $8.2 million in mortgage
debt, including a $289,000 prepayment penalty, and the payment of various
closing costs associated with the sale. The Partnership paid a real estate
brokerage commission of $372,000 to Carmel Realty based on the $12.4 million
sales price of the property. The Partnership recognized a gain of $8.5 million
on the sale.

In June 1998, the Partnership sold Countryside Plaza, a 184,878 square foot
shopping center in Clearwater, Florida, for $4.1 million. The Partnership
received $1.8 million in net cash after paying off the existing $2.0 million in
mortgage debt and the payment of various closing costs associated with the sale.
The Partnership paid a real estate brokerage commission of $123,000 to Carmel
Realty based on the $4.1 million sales price of the property. The Partnership
recognized a gain of $1.1 million on the sale.

At June 30, 1998, the Partnership reclassified from real estate held for
investment to real estate held for sale (i) Lakewood Park Apartments, a 240 unit
apartment complex in St. Petersburg, Florida, (ii) Royal Oaks Apartments, a 300
unit apartment complex in Stone Mountain, Georgia, and (iii) Bavarian Woods
Apartments, a 259 unit apartment complex in Middleton, Ohio. All three
properties were under contract for sale at June 30, 1998.

NOTE 5. NOTES PAYABLE

In May 1998, the Partnership refinanced the mortgage debt secured by the Quail
Point Apartments in Huntsville, Alabama in the amount of $3.9 million. The
Partnership received net cash of $1.5 million after paying off $2.1 million in
existing mortgage debt, the funding of required escrows and the payment of
various closing costs associated with the financing. The new mortgage bears
interest at 7.135% per annum,



                                       11

<PAGE>   12

                              NATIONAL REALTY, L.P.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 5. NOTES PAYABLE (Continued)

requires monthly payments of principal and interest of $25,964 and matures in
June 2008. The Partnership paid a mortgage brokerage and equity refinancing fee
of $39,000 to Basic Capital Management, Inc. ("BCM"), an affiliate of the
Partnership's Managing General Partner, based on the new $3.9 million mortgage.

NOTE 6. INCOME TAXES

No federal or state income taxes have been provided for in the accompanying
Consolidated Statements of Operations as the partners include their share of
Partnership income or loss in their respective tax returns. For income or loss
allocation purposes, limited partners are allocated their proportionate share of
income or loss commencing with the calendar month subsequent to their entry into
the Partnership.

NOTE 7. LEGAL PROCEEDINGS

Moorman Settlement. The Partnership is party to a settlement agreement, dated as
of May 9, 1990, between plaintiffs Joseph B. Moorman, et al. and defendants
Robert A. McNeil, National Realty, the Operating Partnership, SAMLP, Gene E.
Phillips and William S. Friedman, and Shearson Lehman Hutton Inc.,
successor-in-interest to defendant E.F. Hutton & Company Inc., relating to the
action entitled Moorman, et al. v. Southmark Corporation, et al. Such action was
filed on September 2, 1987, in the Superior Court of the State of California,
County of San Mateo. On May 9, 1990, the Partnership agreed to settle such
action pursuant to the terms of a written agreement (the "Moorman Settlement
Agreement"). On June 29, 1990, after a hearing as to its fairness,
reasonableness and adequacy, the Moorman Settlement Agreement was granted final
court approval.

The Moorman Settlement Agreement is complex and the following summary is
qualified in its entirety by reference to the text thereof, which was previously
included as an exhibit to the Partnership's Form 10-Q for the quarter ended
March 31, 1990, as filed with the Securities and Exchange Commission. The
Moorman Settlement Agreement provides for a plan (the "Moorman Settlement Plan")
consisting of, among other things, the following: (i) the appointment and
operation of a committee (the "Oversight Committee"), to oversee the
implementation of the Moorman Settlement Plan, (ii) the appointment and
operation of an audit committee having a majority of members unaffiliated with
Messrs. Phillips and Friedman or SAMLP, (iii) the establishment of specified
annually increasing targets described below (each a "Target") for each of the
next five years through May 1995, relating to the price of the units of limited
partner interest as decreased for certain distributions to unitholders, (iv) an
agreement by SAMLP not to seek reimbursement of greater than $500,000 per year
for Messrs. Phillips' and Friedman's salaries for serving as general partners of
SAMLP, (Mr. Friedman



                                       12
<PAGE>   13



                              NATIONAL REALTY, L.P.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 7. LEGAL PROCEEDINGS (Continued)

resigned as general partner of SAMLP effective March 4, 1994) and a deferral of
such payments until such time as a Target may be met, and, if SAMLP resigns as
General Partner, a waiver of any compensation so deferred, (v) a deferral until
such time as a Target may be met of certain future annual General Partner
compensation payable, pursuant to the Partnership's governing documents, to
SAMLP or its affiliates, and, if SAMLP resigns as General Partner, a waiver of
any compensation so deferred, (vi) the required distribution to unitholders of
all the Partnership's operating cash flow in excess of certain renovation costs,
unless the Oversight Committee approves alternative uses for such operating cash
flow, (vii) the issuance of Warrants to purchase an aggregate of up to 2,019,579
units (the "Warrants") to Class Members, (viii) the contribution by certain
co-defendants of cash and notes payable to the Partnership aggregating $5.5
million (including $2.5 million to be contributed by SAMLP and its general
partners over a four-year period), (ix) the amendment of the Partnership
Agreement to reduce the vote required to remove the General Partner from a
two-thirds vote to a majority vote of the units, (x) the Partnership's
redemption of its unit purchase rights and an agreement not to adopt a similar
rights plan without Oversight Committee approval and (xi) the Partnership's
payment of certain settlement costs, including plaintiffs' attorneys' fees in
the amount of $3.4 million. The Moorman Settlement Plan remains in effect until
SAMLP has resigned as General Partner and a successor general partner is elected
and takes office, and the Warrants remained exercisable for five years from the
date of issuance and expired on February 14, 1997. Prior to their expiration a
total of 1,631 Warrants were exercised for the purchase of 1,226 units.

SAMLP, on behalf of itself and its general partners, has made the payments of
$2.5 million (including accrued interest), to the Partnership, as required by
the Moorman Settlement Agreement.

If Targets are not met for any two successive years of the Moorman Settlement
Plan or for the final year of the Moorman Settlement Plan, SAMLP will be
required to withdraw as General Partner effective at the time a successor
general partner is elected. Upon, among other things, the withdrawal of SAMLP as
General Partner and the due election and taking office of a successor, the
Moorman Settlement Plan would terminate.

The Targets for the first and second anniversary dates were not met. Since the
Targets were not met for two successive years, the Moorman Settlement Agreement
requires that SAMLP resign as General Partner, effective upon the election and
qualification of its successor. On July 8, 1992, SAMLP notified the Oversight
Committee of the failure to meet the Target for two successive years.

Upon, among other things, the withdrawal of SAMLP as General Partner and the due
election and taking office of a successor, the Moorman Settlement Plan will
terminate. Withdrawal of SAMLP as General Partner



                                       13

<PAGE>   14
                              NATIONAL REALTY, L.P.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 7. LEGAL PROCEEDINGS (Continued)

pursuant to the Moorman Settlement Agreement requires unitholders to elect a
successor general partner by majority vote. Upon the withdrawal or removal of
the General Partner without the selection of a successor, the Partnership would
be dissolved.

The Moorman Settlement Agreement provides that between the date of the
certification causing the General Partner's resignation and the date a successor
general partner takes office, the resigning General Partner shall limit its
activities, as General Partner, to the conduct of the business of the
Partnership in the ordinary course, shall not, without consent of the Oversight
Committee, purchase or sell any real estate or other assets of the Partnership
not in progress on said date, shall cooperate in the election of a successor
general partner and shall cooperate with its successor to facilitate a change in
the office of General Partner of the Partnership. The resigning General Partner
will continue to receive fees, expenses and distributions, if any, while the
solicitation is prepared.

The withdrawal of the General Partner would require the Partnership to acquire
the General Partner's interest in the Partnership (the "Redeemable General
Partner Interest") at its then fair value, and to pay certain fees and other
compensation, as provided in the Partnership Agreement and the Moorman
Settlement Agreement. Under the Moorman Settlement Agreement, payment for such
Redeemable General Partner Interest, fees and other compensation may, at the
Oversight Committee's option, be paid over a three year period pursuant to a
secured promissory note bearing interest at the prime rate and containing
commercially reasonable terms and collateral. Under the Moorman Settlement Plan,
the purchase price for Redeemable General Partner Interest would be calculated,
as of the time SAMLP withdraws as General Partner under the Partnership's
governing documents. The Managing General Partner has calculated the Redeemable
General Partner Interest at December 31, 1997 to be $49.6 million, and believes
there has been no material change in such value since such date. The Partnership
would be entitled to offset against any such payment the then outstanding
principal balance ($4.2 million at June 30, 1998) plus all accrued but unpaid
interest ($7.8 million at June 30, 1998) on the note receivable from SAMLP for
its capital contribution to the Partnership. In the accompanying Consolidated
Financial Statements, the Redeemable General Partner Interest is shown as a
reduction of Partners' Equity. The note receivable from the General Partner has
been offset against the Redeemable General Partner Interest. The Oversight
Committee previously has informed the Partnership that it calculated the amount
of such Redeemable General Partner Interest to be less than the amount
calculated by the Managing General Partner. When SAMLP withdraws as General
Partner of the Partnership, the value of the Redeemable General Partner Interest
would depend on the fair value of the Partnership's assets at the time of
calculation and there can be no assurance that the Redeemable General Partner
Interest, fees and other compensation payable on any such withdrawal will not be
substantially higher or lower than any current estimate or calculation.




                                       14

<PAGE>   15

                              NATIONAL REALTY, L.P.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 7. LEGAL PROCEEDINGS (Continued)

On December 15, 1997, National Realty, SAMLP, the Oversight Committee, Joseph B.
Moorman, Invenex and the Moorman Class Counsel executed an Agreement for
Establishment of Class Distribution Fund and Election of Successor General
Partner (the "Resolution Agreement") which provides for the nomination of an
entity affiliated with SAMLP to be the successor general partner of the
Partnership, for the establishment of a fund for the benefit of the Moorman
Class Members consisting of cash and properties owned by the Partnership and for
the resolution of all related matters under the Moorman Settlement Agreement.
Invenex is a company controlled by Ronald T. Baker, a member of the Oversight
Committee.

The Resolution Agreement was submitted to the Supervising Judge and on February
11, 1998, the Supervising Judge entered an order granting preliminary approval
of the Resolution Agreement. On July 15, 1998, National Realty, SAMLP and the
Oversight Committee executed an Agreement for Cash Distribution and Election of
Successor General Partner (the "Cash Distribution Agreement") which provides for
the nomination of an entity affiliated with SAMLP to be the successor general
partner of the Partnership, for the distribution of $11.4 million to the Moorman
Class Members and for the resolution of all related matters under the Moorman
Settlement Agreement. The Cash Distribution Agreement was submitted to the
Supervising Judge on July 23, 1998 as an alternative to the Resolution
Agreement. On July 27, 1998, Invenex withdrew the proposal for approval of the
Resolution Agreement. On August 4, 1998, the Supervising Judge entered an order
granting preliminary approval of the Cash Distribution Agreement and directed
that a notice be prepared to be mailed to the Moorman Class Members describing
the Cash Distribution Agreement. In addition, the Supervising Judge scheduled
October 16, 1998 as the date for the final hearing on any objections to the Cash
Distribution Agreement.

Pursuant to the order entered on August 4, 1998, $11.4 million will be deposited
by the Partnership into an escrow account following the final approval by the
Supervising Judge of the Cash Distribution Agreement. The actual distribution of
the cash to the Moorman Class Members will occur immediately following the
election and taking office of the successor general partner. The distribution of
the cash shall be made to the Moorman Class Members pro rata based upon the
number of units originally issued to each Moorman Class Member upon the
formation of the Partnership in 1987. The distribution of cash will be under the
control of an independent settlement administrator.

Upon final approval by the Supervising Judge, the proposal to elect the
successor general partner will be submitted to the unitholders of National
Realty for a vote. All units of the Partnership owned by affiliates of SAMLP
(approximately 60.5% of the outstanding units of the Partnership as of July 31,
1998) will be voted pro rata with the vote of the other limited partners.



                                       15
<PAGE>   16

                              NATIONAL REALTY, L.P.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 7. LEGAL PROCEEDINGS (Continued)

Upon approval by the National Realty unitholders, SAMLP shall withdraw as
General Partner and the successor general partner shall take office. If the
required approvals are obtained, it is anticipated that the successor general
partner will be elected and take office during the fourth quarter of 1998. Upon
the election and taking office of the successor general partner and the
distribution of the cash to the Moorman Class Members, the Moorman Settlement
Plan and the Oversight Committee shall be terminated.

Under the Cash Distribution Agreement, SAMLP has agreed to waive its right under
the Moorman Settlement Agreement to receive any payment from the Partnership of
the fees it is entitled to receive upon the election of a successor general
partner. As of December 31, 1997, this fee was calculated to be $49.6 million.
In addition, pursuant to the Cash Distribution Agreement, the Partnership
Agreement will be amended to provide that, upon voluntary resignation of the
general partner, the resigning general partner shall not be entitled to the
repurchase of its general partner interest under Paragraph 17.9 of the
Partnership Agreement.

Under the Cash Distribution Agreement, the successor general partner will assume
liability for the note receivable from SAMLP for its capital contribution to the
Partnership. In addition, the successor general partner will assume liability
for a note receivable which will require the repayment to the Partnership of the
total amount of cash distributed by the Partnership under the Cash Distribution
Agreement. This note will require repayment over a ten-year period, bear
interest and be guaranteed by American Realty Trust, Inc., which (as of July 31,
1998) is the owner of a 96% limited partner interest in SAMLP and approximately
54.4% of the outstanding units of the Partnership.

In the event that the Cash Distribution Agreement is disapproved by the
Supervising Judge or does not become effective pursuant to the provisions
thereof, then the parties shall be restored to their respective positions as of
December 14, 1997, all of the provisions of the Cash Distribution Agreement 
shall be voided and the Moorman Settlement Agreement shall remain in full force 
and effect.

On September 26, 1997, one of the original Moorman litigation defendants, Robert
A. McNeil, filed motions to (i) be installed as receiver for the Partnership and
(ii) disband the Oversight Committee. The Supervising Judge has continued the
hearing on these motions pending the final approval of the Cash Distribution
Agreement.

Other. The Partnership is involved in various lawsuits arising in the ordinary
course of business. Management of the Partnership is of the opinion that the
outcome of these lawsuits would have no material impact on the Partnership's
financial condition.



                                       16
<PAGE>   17

                              NATIONAL REALTY, L.P.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 8. SUBSEQUENT EVENTS

In July 1998, the Partnership paid in full two mortgage notes payable in the
total amount of $3.5 million secured by six of the Partnership's mortgage notes
receivable.

Also in July 1998, Garden Capital, L.P. ("GCLP"), a Delaware limited
partnership in which the Partnership holds a 99.3% limited partner interest,
commenced a three-phase refinancing whereby GCLP is refinancing the mortgage
debt secured by 50 of the properties held by it. Phase I consisted of 18 of the
properties, located in Arizona, Florida, Illinois, Indiana, Kansas, Missouri,
Oklahoma and Texas, which were refinanced in the total amount of $150.0
million. GCLP received net cash of $33.6 million after paying off $102.9
million in existing mortgage debt, the funding of required escrows and the
payment of various closing costs associated with the Phase I financing. The
Partnership received $32.1 million of net cash from Phase I. This new mortgage
bears interest at 6.88% per annum, requires monthly payments of principal and
interest of $1.0 million and matures in July 2003. Phase II consists of a
bridge financing of 29 of the properties, located in Arizona, Arkansas,
California, Colorado, Florida, Georgia, Kansas, Louisiana, Michigan, Missouri,
Nebraska, Ohio, Oklahoma, Tennessee, Texas and Virginia, which were refinanced
in the total amount of $86.2 million. GCLP received net cash of $1.4 million
after paying off $80.0 million in existing mortgage debt, the funding of
required escrows and the payment of various closing costs associated with the
Phase II financing. This bridge financing bears interest at a variable rate,
currently 7.1563% per annum, requires monthly payments of interest only and
matures in January 1999. The Partnership paid a mortgage brokerage and equity
refinancing fee of $2.4 million to BCM based on the two new $236.2 million
mortgages. Three additional properties are unencumbered. The new mortgage loans
require that cash flow from the 47 properties be used to fund various escrow
and reserve accounts and limits the payment of distributions to the
Partnership. GCLP expects to complete the third and final Phase in November
when the Phase II bridge loan will be converted to long term financing.

The Partnership used $13.2 million of the net cash received from the
refinancings to pay off debt secured by NOLP's interest in GCLP.

In July 1998, the Partnership completed the sale of the Lakewood Park
Apartments, a 240 unit apartment complex in St. Petersburg, Florida, for $5.5
million in cash. The property is classified as held for sale in the
accompanying June 30, 1998 Consolidated Balance Sheet. The Partnership received
net cash of $5.2 million after the payment of various closing costs associated
with the sale. The Partnership paid a real estate brokerage commission of
$165,000 to Carmel Realty based on the $5.5 million sales price of the
property. The Partnership will recognize a gain of approximately $1.5 million
on the sale.

Also in July 1998, the Partnership completed the sale of the Royal Oaks
Apartments, a 300 unit apartment complex in Stone Mountain, Georgia, for $6.8
million in cash. The property is classified as held for sale in the
accompanying June 30, 1998 Consolidated Balance Sheet. The Partnership received
net cash of $6.6 million after the payment of various closing costs associated
with the sale. The Partnership paid a



                                       17

<PAGE>   18

                              NATIONAL REALTY, L.P.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 8. SUBSEQUENT EVENTS (Continued)

real estate brokerage commission of $203,000 to Carmel Realty based on the $6.8
million sales price of the property. The Partnership will recognize a gain of
approximately $3.5 million on the sale.

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Introduction

National Realty, L.P. ("National Realty") is a Delaware limited partnership
formed on January 29, 1987, the business of which consists primarily of owning
and operating through National Operating, L.P., also a Delaware limited
partnership (the "Operating Partnership"), a portfolio of real estate. Most of
the Operating Partnership's properties were acquired in transactions consummated
on September 18, 1987, pursuant to which National Realty acquired all of the
assets, and assumed all of the liabilities, of 35 public and private limited
partnerships. National Realty and the Operating Partnership operate as an
economic unit and, unless the context otherwise requires, all references herein
to the "Partnership" shall constitute references to National Realty and the
Operating Partnership as a unit.

In November 1992, the Operating Partnership, in conjunction with a refinancing
of 52 of its apartment properties and a wraparound note receivable, transferred
such assets to Garden Capital, L.P. ("GCLP"), a Delaware limited partnership in
which the Operating Partnership holds a 99.3% limited partner interest. In July
1998, the 50 properties then owned by GCLP were refinanced, as discussed below.

Liquidity and Capital Resources

Cash and cash equivalents aggregated $16.8 million at June 30, 1998 compared to
$17.2 million at December 31, 1997. The principal reasons for this decrease in
cash are discussed in the paragraphs below.

The Managing General Partner of the Partnership's General Partner has discretion
in determining methods of obtaining funds for the Partnership's operations. The
Partnership's governing documents place no limitation on the amount of leverage
that the Partnership may incur either in the aggregate or with respect to any
particular property or other investment. At June 30, 1998, the aggregate
loan-to-value ratio of the Partnership's real estate portfolio was 49.1%,
computed on the basis of the ratio of total property-related debt to aggregate
appraised values as of June 30, 1998, as compared with a loan-to-value ratio of
43.4% at December 31, 1997.



                                       18

<PAGE>   19

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

The Partnership's principal sources of cash flow have been and will continue to
be from property operations and externally generated funds. Externally generated
funds include borrowings, proceeds from the sale of Partnership properties and
other assets and proceeds from the issuance of debt secured by Partnership
properties or mortgage notes receivable. The Partnership expects that its cash
on hand, cash flow from property operations together with externally generated
funds will be sufficient to meet the Partnership's various cash needs in 1998,
including, but not limited to the payment of distributions, debt service
obligations coming due and property maintenance and improvements, as more fully
discussed in the paragraphs below.

In November 1992, in conjunction with the transfer of the net assets of 52
apartment complexes and a wraparound note receivable to GCLP, such assets were
refinanced under a $223 million blanket mortgage loan. The blanket mortgage loan
required that cash flow from the GCLP properties be used to fund various escrow
and reserve accounts and limited the payment of distributions to the
Partnership. During the three and six months ended June 30, 1998, the
Partnership received distributions from GCLP totaling $10.0 million and $11.5
million, compared to distributions totaling $1.2 million and $2.0 million
(excluding proceeds from the released credit enhancement escrow, as described
below) received during the three and six months ended June 30, 1997.

In January 1997, GCLP replaced the credit enhancement escrow with a $18.5
million letter of credit. The letter of credit provided by a financial
institution in the amount of $18.5 million was for a term of not less than two
years and was to be used to pay operating shortfalls of GCLP's properties. The
Partnership received net cash of $11.3 million from the released credit
enhancement escrow, after the payment of various costs associated with the
letter of credit.

During the first and second quarters of 1998, the Partnership funded a $350,000
loan to Ellis Development Company, Inc. The loan is secured by 4.5 acres of land
located in Abilene, Texas.

In 1997, the Partnership funded a total of $1.3 million of a $1.5 million loan
commitment to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured
by (i) a 100% limited partnership interest in Bordeaux, which owns a shopping
center in Oklahoma City, Oklahoma; (ii) 100% of the stock of Bordeaux
Investments One, Inc., which owns approximately 6.5 acres of undeveloped land in
Oklahoma City, Oklahoma; and (iii) the personal guarantees of the Bordeaux
partners. Through July 1998, an additional $53,000 was funded and the loan was
modified, increasing the principal balance to $1.4 million. The Partnership has
committed to fund an additional $24,000, at which time the loan will be modified
to increase the principal balance. The Partnership received the required
December 31, 1997 deferred interest payment in January 1998.



                                       19
<PAGE>   20

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

In April 1998, the Partnership sold the Brookview Apartments, a 156 unit
apartment complex Smyrna, Georgia, for $4.5 million. The Partnership received
net cash of $432,000 from the sale.

Also in April 1998, the Partnership sold the Creekwood Apartments, a 300 unit
apartment complex in College Park, Georgia, for $5.5 million. The Partnership
received net cash of $884,000 from the sale.

Further in April 1998, the Partnership sold 338 acres of undeveloped land in
Granby, Colorado for $800,000 in cash. The Partnership received net cash of
$792,000 from the sale.

During the first and second quarters of 1998, the Partnership funded a total of
$3.8 million of a $3.9 million loan commitment to Centura Tower, Ltd. The loan
is secured by a mortgage on 2.244 acres of land in Dallas, Texas.

During the first and second quarters of 1998, the Partnership funded $2.1
million of a $2.2 million loan commitment to Varner Road Partners, L.L.C. The
loan is secured by 129.77 acres of land in Riverside County, California and a
pledge of the stock of the borrower.

In May 1998, the Partnership funded $713,000 of a $836,000 loan commitment to
Warwick of Summit, Inc., of which $619,000 was used to repay the $611,000 Tara
Summit loan from the Partnership. The loan is secured by a second lien on a
shopping center in Rhode Island, by 100% of the stock of the borrower and by the
personal guarantee of the of the principal shareholder of the borrower. In June
1998, the Partnership funded the remaining $123,000 of the initial loan
commitment and through July 1998, an additional $301,000 was funded, increasing
the loan balance to $1.1 million.

Also in May 1998, the Partnership sold the Alexandria Apartments, a 406 unit
apartment complex in Decatur, Georgia, for $12.4 million. The Partnership
received $3.8 million in net cash from the sale.

Further in May 1998, the Partnership refinanced the mortgage debt secured by the
Quail Point Apartments in Huntsville, Alabama in the amount of $3.9 million. The
Partnership received net cash of $1.5 million after paying off $2.1 million in
existing mortgage debt, the funding of required escrows and the payment of
various closing costs associated with the financing.

In June 1998, the Partnership sold Countryside Plaza, a 184,878 square foot
shopping center in Clearwater, Florida, for $4.1 million. The Partnership
received net cash of $1.8 million from the sale.

Also in June 1998, the Partnership funded a $350,000 loan to RB Land & Cattle,
L.L.C. The loan is secured by a pledge of a note secured by 7,200 acres of
undeveloped land near Crowell, Texas and the personal guarantee of the borrower.



                                       20

<PAGE>   21

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Further in June 1998, the Partnership funded a $2.4 million loan to Cuchara
Partners, Ltd. and Ski Rio Partners, Ltd. The loan is secured by (i) first lien
on approximately 1,000 acres of land in Huerfano County, Colorado, known as
Cuchara Valley Mountain Ski Resort; (ii) assignment of a $2.0 million promissory
note which is secured by approximately 2,623 acres of land in Taos County, New
Mexico, known as Ski Rio Resort; and (iii) a pledge of all related partnership
interests.

In the second quarter of 1998, the Partnership received a total of $21.2 million
from the payoff of three of its mortgage notes receivable. In connection with
the payoff of one of the notes, the Partnership paid off an underlying lien with
a principal balance of $14.6 million, including a prepayment penalty. The
Partnership recognized a previously deferred gain of $12.2 million related to
the 1988 sale of the property, the gain having been deferred until the
Partnership provided sales financing was paid off. The Partnership also made a
$3.5 million paydown of a mortgage partially secured by another of its paid off
notes.

In December 1997, the Partnership funded a $3.5 million loan to Stratford &
Graham Developers, L.L.C. The loan is secured by a mortgage on 1,485 acres of
land in Riverside County, California. In the second quarter of 1998, the
Partnership funded an additional $131,000.

   In July 1998, GCLP, a partnership in which the Partnership holds a 99.3%
limited partner interest, commenced a three-phase refinancing whereby GCLP is
refinancing the mortgage debt secured by the 50 properties held by it. Phase I
consisted of 18 of the properties, located in Arizona, Florida, Illinois,
Indiana, Kansas, Missouri, Oklahoma and Texas, which were refinanced in the
total amount of $150.0 million. GCLP received net cash of $33.6 million after
paying off $102.9 million in existing mortgage debt, the funding of required
escrows and the payment of various closing costs associated with the Phase I
financing. The Partnership received $32.1 million of net cash from Phase I.
Phase II consists of a bridge financing of 29 of the properties, located in
Arizona, Arkansas, California, Colorado, Florida, Georgia, Kansas, Louisiana,
Michigan, Missouri, Nebraska, Ohio, Oklahoma, Tennessee, Texas and Virginia,
were refinanced in the amount of $86.2 million. GCLP received net cash of $1.4
million after paying off $80.0 million in existing mortgage debt, the funding of
required escrows and the payment of various closing costs associated with the
Phase II financing. The new mortgage loans require that cash flow from the 47
properties be used to fund various escrow and reserve accounts and limits the
payment of distributions to the Partnership. GCLP expects to complete the third
and final Phase in November when the Phase II bridge loan will be converted to
long term financing.

The Partnership used $13.2 million of the net cash received from the
refinancings to pay off debt secured by NOLP's interest in GCLP.

In July 1998, the Partnership completed the sale of the Lakewood Park
Apartments, a 240 unit apartment complex in St. Petersburg, Florida, for
$5.5 million.  The property is classified as held for sale in the
accompanying June 30, 1998 Consolidated Balance Sheet.  The Partnership
received net cash of $5.2 million from the sale.



                                       21
<PAGE>   22

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Also in July 1998, the Partnership completed the sale of the Royal Oaks
Apartments, a 300 unit apartment complex in Stone Mountain, Georgia, for $6.8
million in cash. The property is classified as held for sale in the accompanying
June 30, 1998 Consolidated Balance Sheet. The Partnership received net cash of
$6.6 million from the sale.

In the first six months of 1998, the Partnership declared and paid quarterly
distributions aggregating $.25 per unit, or a total of $1.6 million.

The Partnership's net cash flow from property operations (rents collected less
payments for property operating expenses) decreased from $12.5 million and $23.9
million for the three and six months ended June 30, 1997 to $10.4 million and
$21.2 million for the three and six months ended June 30, 1998. This decrease is
primarily due to the sale of one apartment complex and three commercial
properties in 1997 and the sale of three apartment complexes and one commercial
property in the first half on 1998.

As discussed in NOTE 7. "LEGAL PROCEEDINGS," the Moorman litigation settlement
agreement (the "Moorman Settlement Agreement") sets forth certain aggressive,
annually increasing targets relating to the price of the Partnership's units of
limited partner interest which were not met, resulting in, among other things,
the required withdrawal of the General Partner upon election of a successor and
the resulting required purchase of the Redeemable General Partner Interest, as
defined below.

The withdrawal of the General Partner requires the Partnership to acquire the
General Partner's interest in the Partnership (the "Redeemable General Partner
Interest") at its then fair value, and to pay certain fees and other
compensation, as provided in the Partnership Agreement and the Moorman
Settlement Agreement. The Moorman Settlement Agreement provides that any payment
for such Redeemable General Partner Interest, fees and other compensation during
the pendency of the Moorman Settlement Agreement may, at the option of the
Oversight Committee (also established under the Moorman Settlement Agreement),
be made over three years pursuant to a secured promissory note bearing interest
at a financial institution's prime rate. The Managing General Partner has
calculated the fair value of the Redeemable General Partner Interest at December
31, 1997 to be $49.6 million, and believes that there has been no material
change in such value since that date. The Partnership would be entitled to
offset against such payment the then outstanding principal balance of the note
receivable ($4.2 million at June 30, 1998) plus all accrued and unpaid interest
($7.8 million at June 30, 1998) on the note receivable from the General Partner
representing its capital contribution to the Partnership. When Syntek Asset
Management, L.P. ("SAMLP") withdraws as General Partner of the Partnership, the
fair value of the Redeemable General Partner Interest would depend on the value
of the Partnership's assets at the time of calculation and there




                                       22
<PAGE>   23

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

can be no assurance that the Redeemable General Partner Interest, fees and other
compensation payable on any such withdrawal will not be substantially higher or
lower than any current estimate or calculation.

In the accompanying Consolidated Balance Sheets, the Redeemable General Partner
Interest is shown as a reduction in Partners' Equity and the note receivable
from the General Partner has been offset against the Redeemable General Partner
Interest.

On December 15, 1997, National Realty, SAMLP, the Oversight Committee, Joseph B.
Moorman, Invenex and the Moorman Class Counsel executed an Agreement for
Establishment of Class Distribution Fund and Election of Successor General
Partner (the "Resolution Agreement") which provides for the nomination of an
entity affiliated with SAMLP to be the successor general partner of the
Partnership, for the establishment of a fund for the benefit of the Moorman
Class Members consisting of cash and properties owned by the Partnership and for
the resolution of all related matters under the Moorman Settlement Agreement.
Invenex is a company controlled by Ronald T. Baker, a member of the Oversight
Committee.

The Resolution Agreement was submitted to the Supervising Judge and on February
11, 1998, the Supervising Judge entered an order granting preliminary approval
of the Resolution Agreement. On July 15, 1998, National Realty, SAMLP and the
Oversight Committee executed an Agreement for Cash Distribution and Election of
Successor General Partner (the "Cash Distribution Agreement") which provides for
the nomination of an entity affiliated with SAMLP to be the successor general
partner of the Partnership, for the distribution of $11.4 million to the Moorman
Class Members and for the resolution of all related matters under the Moorman
Settlement Agreement. The Cash Distribution Agreement was submitted to the
Supervising Judge on July 23, 1998 as an alternative to the Resolution
Agreement. On July 27, 1998, Invenex withdrew the proposal for approval of the
Resolution Agreement. On August 4, 1998, the Supervising Judge entered an order
granting preliminary approval of the Cash Distribution Agreement and directed
that a notice be prepared to be mailed to the Moorman Class Members describing
the Cash Distribution Agreement. In addition, the Supervising Judge scheduled
October 16, 1998 as the date for the final hearing on any objections to the Cash
Distribution Agreement.

Pursuant to the order entered on August 4, 1998, $11.4 million will be deposited
by the Partnership into an escrow account following the final approval by the
Supervising Judge of the Cash Distribution Agreement. The actual distribution of
the cash to the Moorman Class Members will occur immediately following the
election and taking office of the successor general partner. The distribution of
the cash shall be made to the Moorman Class Members pro rata based upon the
number of units originally issued to each Moorman Class Member upon the
formation of the Partnership in 1987. The distribution of cash will be under the
control of an independent settlement administrator.




                                       23
<PAGE>   24

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Upon final approval by the Supervising Judge, the proposal to elect the
successor general partner will be submitted to the unitholders of National
Realty for a vote. All units of the Partnership owned by affiliates of SAMLP
(approximately 60.5% of the outstanding units of the Partnership as of July 31,
1998) will be voted pro rata with the vote of the other limited partners.

Upon approval by the National Realty unitholders, SAMLP shall withdraw as
General Partner and the successor general partner shall take office. If the
required approvals are obtained, it is anticipated that the successor general
partner will be elected and take office during the fourth quarter of 1998. Upon
the election and taking office of the successor general partner and the
distribution of the cash to the Moorman Class Members, the Moorman Settlement
Plan and the Oversight Committee shall be terminated.

Under the Cash Distribution Agreement, SAMLP has agreed to waive its right under
the Moorman Settlement Agreement to receive any payment from the Partnership of
the fees it is entitled to receive upon the election of a successor general
partner. As of December 31, 1997, this fee was calculated to be $49.6 million.
In addition, pursuant to the Cash Distribution Agreement, the Partnership
Agreement will be amended to provide that, upon voluntary resignation of the
general partner, the resigning general partner shall not be entitled to the
repurchase of its general partner interest under Paragraph 17.9 of the
Partnership Agreement.

Under the Cash Distribution Agreement, the successor general partner will assume
liability for the note receivable from SAMLP for its capital contribution to the
Partnership. In addition, the successor general partner will assume liability
for a note receivable which will require the repayment to the Partnership of the
total amount of cash distributed by the Partnership under the Cash Distribution
Agreement. This note will require repayment over a ten-year period, bear
interest and be guaranteed by American Realty Trust, Inc., which (as of July 31,
1998) is the owner of a 96% limited partner interest in SAMLP and approximately
54.4% of the outstanding units of the Partnership.

In the event that the Cash Distribution Agreement is disapproved by the
Supervising Judge or does not become effective pursuant to the provision
thereof, then the properties shall be restored to their respective positions as
of December 14, 1997, all of the provisions of the Cash Distribution Agreement
shall be voided and the Moorman Settlement Agreement shall remain in full force
and effect.

On September 26, 1997, one of the original Moorman litigation defendants, Robert
A. McNeil, filed motions to (i) be installed as receiver for the Partnership and
(ii) disband the Oversight Committee. The Supervising Judge has continued the
hearing on these motions pending the final approval of the Cash Distribution
Agreement.




                                       24
<PAGE>   25

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

The outcome of this matter cannot presently be determined and the consolidated
financial statements do not include any adjustments that might result from the
outcome of this matter.

Results of Operations

The Partnership had net income of $22.1 million and $22.6 million for the three
and six months June 30, 1998 including gains on sale of real estate totaling
$28.6 million in each period. The Partnership had net income of $3.3 million and
$3.1 million for the three and six months ended June 30, 1997 including gains on
sale of real estate totaling $3.6 million in each period. These and other
factors contributing to the Partnership's net income are discussed in the
following paragraphs.

Rents decreased to $26.9 million and $55.2 million for the three and six months
ended June 30, 1998 from $27.9 million and $55.6 million for the three and six
months ended June 30, 1997. These decreases are primarily due to a decrease of
$2.3 million and $3.0 million resulting from the sale of four apartment
complexes and three commercial properties subsequent to June 30, 1997. These
decreases were partially offset by an increase of $1.3 million and $2.6 million
due to increased rental rates at the Partnership's apartments and commercial
properties. Rents are expected to continue to decrease during the remainder of
1998 as the Partnership continues to selectively sell properties.

Interest income increased to $1.3 million and $2.6 million for the three and six
months ended June 30, 1998 from $925,000 and $1.8 million for the three and six
months ended June 30, 1997. These increases are attributable to loans funded in
1997 and 1998. Interest income for the remaining six months of 1998 is expected
to be slightly lower than the first six months due to the payoff of three
mortgage loans.

Interest expense at $8.2 million and $16.9 million for the three and six months
ended June 30, 1998 approximated the $8.5 million and $17.0 million for the
three and six months ended June 30, 1997. Interest expense is expected to
decline over the remainder of 1998 as a result of the refinancing of the GCLP
debt at lower interest rates and the expected continued sale of selected
properties by the Partnership.

Deferred borrowing costs for the three and six months ended June 30, 1998, is
the unamortized borrowing costs associated with the November 1992 refinancing of
the GCLP properties. The November 1992 GCLP debt due was refinanced in July
1998, as described above. See NOTE 8. "SUBSEQUENT EVENTS."

Depreciation, property taxes and insurance, utilities, repairs and maintenance,
other property operation expenses, property management fees and general and
administrative expenses for the three and six months ended June 30, 1998 all
declined from 1997 due to the sale of four apartment complexes and three
commercial properties subsequent to June




                                       25
<PAGE>   26

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (Continued)

Results of Operations (Continued)

30, 1997 and property level payroll approximated that of 1997. These costs are
expected to continue to decrease during the remainder of 1998 as the Partnership
continues to selectively sell properties.

For the three and six months ended June 30, 1997, the Partnership recognized a
gain on the sale of real estate of $3.6 million on the sale of Tollhill East
Office Building in April 1997. For the three and six months ended June 30, 1998,
gains on sale of real estate totaled $28.6 million, $3.1 million on the sale of
Brookview Apartments in April 1998, $2.9 million on the sale of Creekwood
Apartments in April 1998, $772,000 on the sale of Indian Meadows land in April
1998, $8.5 million on the sale of Alexandria Apartments in May 1998, $1.1
million on the sale of Countryside Plaza in June 1998 and a $12.2 million
deferred gain on a 1988 property sale, on the payoff of a mortgage note
receivable secured by such property in June 1998. See NOTE 4. "REAL ESTATE" and
NOTE 3. "NOTES RECEIVABLE."

Tax Matters

National Realty is a publicly traded limited partnership and, for federal income
tax purposes, all income or loss generated by the Partnership is included in the
income tax returns of the individual partners. Under Internal Revenue Service
guidelines generally applicable to publicly traded partnerships and thus to the
Partnership, a limited partner's use of his or her share of partnership losses
is subject to special limitations.

Inflation

The effects of inflation on the Partnership's operations are not quantifiable.
Revenues from property operations generally fluctuate proportionately with
inflationary increases and decreases in housing costs. Fluctuations in the rate
of inflation also affect the sales values of the Partnership's properties and,
correspondingly, the ultimate gains to be realized by the Partnership from
property sales. To the extent that inflation affects interest rates, the
Partnership's earnings from short-term investments and the cost of new
borrowings as well as the cost of its variable rate borrowings will be affected.

Environmental Matters

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




                                       26
<PAGE>   27

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (Continued)


Environmental Matters (Continued)

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

Year 2000

The Managing General Partner has advised the Partnership that its current
computer software has been certified by the Information Technology Association
of America ("ITAA") as year 2000 compliant. The Managing General Partner has
also advised the Partnership that it has recently received and plans to install
in the third quarter of 1998 the ITAA certified year 2000 compliant operating
system for its computer hardware.

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

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See NOTE 7. "LEGAL PROCEEDINGS - Moorman Settlement," of NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS in PART I for information relating to legal proceedings.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit
Number                            Description
-------       -----------------------------------------------------

 11.0         Computation of Earnings Per Unit

 27.0         Financial Data Schedule


(b) Reports on Form 8-K:

    None.



                                       27
<PAGE>   28

                              NATIONAL REALTY, L.P.


                                 Signature Page


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.


                                       NATIONAL REALTY, L.P.

                                       By its General Partner:

                                       SYNTEK ASSET MANAGEMENT, L.P.

                                       By its General Partners:

                                       SYNTEK ASSET MANAGEMENT, INC.



Date:     August 14, 1998              By:  /s/ Randall M. Paulson
     -------------------------            ---------------------------------
                                          Randall M. Paulson
                                          Director and President


Date:     August 14, 1998              By:  /s/ Thomas A. Holland
     -------------------------            ---------------------------------
                                          Thomas A. Holland
                                          Executive Vice President and
                                          Chief Financial Officer
                                          (Principal Financial and
                                          Accounting Officer)


Date:     August 14, 1998              By:  /s/ Gene E. Phillips
     -------------------------            ---------------------------------
                                          Gene E. Phillips
                                          General Partner
                                          Syntek Asset Management, L.P.




                                       28
<PAGE>   29

                              NATIONAL REALTY, L.P.

                                   EXHIBITS TO

                          QUARTERLY REPORT ON FORM 10-Q

                       For the Quarter ended June 30, 1998




<TABLE>
<CAPTION>
Exhibit                                                    Page
Number                Description                         Number
-------   ------------------------------------------      ------
<S>       <C>                                             <C>
   11.0   Computation of Earnings Per Unit                 30

   27.0   Financial Data Schedule                          31
</TABLE>




                                       29