FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(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, 2004
                          ----------------------------------------------------

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________to _________________________

Commission file number   0-6103
                        -------------------------------------------------------

                        Watermark Investors Realty Trust
             (Exact name of registrant as specified in the charter)

                     Texas                                        75-1372785
----------------------------------------------------------   ------------------
           (State or other jurisdiction of                     (I.R.S. Employer
           incorporation or organization)                   Identification No.)
100 N. Tryon Street, Suite 5500, Charlotte, North Carolina          28202
----------------------------------------------------------   ------------------
               (Address of principal executive offices)         (Zip Code)
Registrant's telephone number, including area code  704/343-9334
                                                   ----------------------------

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

   Title of each class            Name of each exchange on which registered
          None                                       None
------------------------       -----------------------------------------------


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

                 Shares of Beneficial Interest, $1.00 par value
                 ----------------------------------------------
                                (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 and
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 (ss.229.405 of this chapter) 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]

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

          The aggregate market value of the 178,996 shares of Beneficial
Interest (voting securities) held by non-affiliates of the Registrant is not
ascertainable since no trading market presently exists for such shares.



                                        1
<PAGE>

     As of March 29, 2005, there were 542,413 shares of Beneficial Interest
                               of the Registrant.


                    DOCUMENTS INCORPORATED BY REFERENCE. None


SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This Annual Report, on Form 10-K, may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 which are not historical facts, and
involve risks and uncertainties that could cause actual results to differ
materially from those expected and projected. Such risks and uncertainties
include the following: general economic conditions and conditions specific to
the real estate industry including its cyclical nature, and competitive factors,
changes in generally accepted accounting principles, changes in federal tax laws
regarding Real Estate Investment Trusts, and the risk factors listed from time
to time in the Company's Securities and Exchange Commission filings.
Accordingly, there can be no assurance that the actual results will conform to
the forward-looking statements in the Annual Report.

                                     PART I

Item 1.           Business.

          Watermark Investors Realty Trust (herein referred to as the "Trust" or
"Watermark" or the "Registrant") was originally organized as Ryan Mortgage
Investors pursuant to the Texas Real Estate Investment Trust Act under a
Declaration of Trust dated October 13, 1971. On March 6, 1984, its name was
changed to Arlington Realty Investors pursuant to an Amendment to the
Declaration of Trust. On December 5, 1995, the Trust's name was changed to
Watermark Investors Realty Trust pursuant to an Amendment to the Declaration of
Trust. The Trust has elected to be treated as a Real Estate Investment Trust
("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. The Trust has, in the opinion of the Trust's management, qualified for
federal taxation as a REIT for each fiscal year subsequent to December 31, 1971.
Although not currently active, the Trust's primary business and only industry
segment has been investing in equity interests in real estate and related real
estate activities.

          During March 1995, the Trust formed a wholly owned subsidiary,
Watermark Texas 1, Inc., a Maryland corporation, and contributed its sole
property to such subsidiary.

Item 2.   Properties.

         As of December 31, 2004, the Trust's only significant asset was its
ownership interest in its subsidiary, Watermark Texas 1, Inc., which owns a
parcel of unimproved land consisting of approximately 4.5 acres located on
Parker Road in Houston, Harris County, Texas. On August 29, 2003, the Trustees
voted to sell the Parker Road property, and a sale agreement was executed on
October 16, 2003 between Watermark Texas 1, Inc. and The Peterson Group, Inc.,
to sell the property to the Peterson Group, Inc. for $510,000. The sales
contract was filed with Watermark's Form 10-Q for the period ended September 30,
2003, and is incorporated herein by reference. The sale was originally expected
to close in the first quarter of 2004. However, The Peterson Group elected in
January 2004 to decide to terminate the contract. As of December 31, 2004, the
Board has had no other offers to purchase the property, but continues to have an
interest in selling the property. If the Board should decide to pursue a sale of
the Parker Road property, the proceeds of the sale will most likely be used to
pay down the Trust's debts. The anticipated carrying costs associated with the
Parker Road property are currently limited to property taxes and maintenance.

Item 3.    Legal Proceedings.

          As of December 31, 2004, and thereafter through the date of this
report, the Trust was not a party, nor was any property or assets of the Trust
subject, to any material pending legal proceedings.


                                        2
<PAGE>


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

         None.

                                     PART II


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

          The Trust's shares of Beneficial Interest (the "Shares") are traded on
a sporadic basis. The Trust believes there has been no established independent
trading market for the Shares since the Shares were delisted from NASDAQ in
1988. A limited number of Shares are believed to have been traded in privately
negotiated transactions.

          No regular dividends on Shares were paid in 2004 or 2003. As of March
29, 2005, 542,413 Shares were held by approximately 300 holders of record.

Item 6.   Selected Financial Data.

          The following table sets forth a summary of certain selected financial
data of the Trust. This summary should be read in conjunction with the Notes to
Financial Statements included at Item 8.



                                 (dollars in thousands, except per share)
                                      For the Years Ended December 31,
                                   2004     2003      2002     2001     2000
                                   ----     ----      ----     ----     ----

     Statement of Operations
     -----------------------
                        Data
                        ----
      Rental Operations, net         $-       $-        $-      $ -       $-
      Real estate sales, net          -        -         -        -        -
             Interest Income          -        -         -        -        -
        Gain on Sale of Land          -        -         -        -        -
         Net earnings (loss)      $(60)    $(69)     $(44)     (36)     (38)
   Earnings (loss) per share     $(.11)   $(.13)    $(.08)   $(.07)   $(.07)
     Distributions per share        $ -       $-        $-       $-      $ -
     Weighted average shares    542,413  542,413   542,413  542,413  542,413
                 outstanding
     Balance Sheet Data
     Total assets                    21       11         5        6        9
Shareholders' equity              (429)    (369)     (300)    (256)    (220)
(deficit)


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

          Results of Operations
          ---------------------

         Watermark has had no revenues for the three years ended December 31,
2004. Watermark's sole real property consists of the Parker Road property. In
February of 1995, Watermark sold a 4,429 square foot strip of


                                        3
<PAGE>


the Parker Road property to the City of Houston, Texas, for $3,765. Watermark
did not have any rental operations in 2002, 2003, or 2004.

         Liquidity and Capital Resources
         -------------------------------

         Management currently plans for the subsidiary to sell the Parker Road
property at the first available opportunity. The anticipated carrying costs
associated with the Parker Road property are currently limited to property
taxes, insurance and maintenance. There are no other known material demands,
commitments, events or uncertainties that will result in or that are reasonably
likely to result in Watermark's liquidity increasing or decreasing in any
material way. However, in order to meet corporate expenses and the carrying
costs of the Parker Road property, Watermark will have to (i) raise additional
funds (possibly by selling or leasing the Parker Road property) or (ii) generate
additional funds (possibly by selling or leasing the Parker Road property).
There are no material commitments for capital expenditures.

         The following table sets forth certain information regarding
Watermark's significant contractual obligations, including payments due by
period, as of December 31, 2004:

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
                   Contractual Obligations                                        Payments due by period
                                                                  Total       Less       1-3 years    3-5 years   More than
                                                                           than 1 year                             5 years
<S>              <C>                                             <C>      <C>           <C>          <C>          <C>
----------------------------------------------------------------------------------------------------------------------------
                       Long-Term Debt                           $270,000    $270,000
----------------------------------------------------------------------------------------------------------------------------
                  Capital Lease Obligations
----------------------------------------------------------------------------------------------------------------------------
                      Operating Leases
----------------------------------------------------------------------------------------------------------------------------
                    Purchase Obligations
----------------------------------------------------------------------------------------------------------------------------
  Other Long-Term Liabilities Reflected on the Registrant's
                  Balance Sheet under GAAP
----------------------------------------------------------------------------------------------------------------------------
                            Total                              $270,000     $270,000
----------------------------------------------------------------------------------------------------------------------------

</TABLE>

         Inflationary Factors
         --------------------

         In recent years, inflation has neither increased Watermark's revenues
from operating assets nor beneficially affected the current value of its
remaining real estate assets to any significant degree.

         Off-Balance Sheet Arrangements
         ------------------------------

         None.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

         Management does not believe the Company has any exposure to market risk
other than the risks commonly associated with ownership of real property.

Item 8.  Financial Statements and Supplementary Data.


                                        4
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS
                          -----------------------------
                                                                         Page
                                                                         ----

Report of Independent Registered Public Accounting Firm....................6

Consolidated Balance Sheets as of December 31, 2004 and 2003...............7

Consolidated Statements of Operations for the years ended

December 31, 2004, 2003 and 2002...........................................8

Consolidated Statements of Shareholders' Equity (Deficit)

for the years ended December 31,  2004, 2003 and 2002......................9

Consolidated Statements of Cash Flows for the years ended

December 31, 2004, 2003 and 2002...........................................10

Notes to Consolidated Financial Statements.................................11

Schedule III - Real Estate Investments and Accumulated Depreciation........14

All other schedules are omitted since they are not required, are not applicable,
or the financial information required is included in the financial statements or
the notes thereto.

                                        5

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Board of Trustees and Shareholders

Watermark Investors Realty Trust

We have audited the accompanying consolidated balance sheets of Watermark
Investors Realty Trust and subsidiary as of December 31, 2004 and 2003, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the years ended December 31, 2004, 2003 and 2002. These
consolidated financial statements are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Watermark Investors Realty Trust and subsidiary as of December 31, 2004 and 2003
and the results of their operations and their cash flows for each of the years
ended December 31, 2004, 2003 and 2002, in conformity with U.S. generally
accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Trust will continue as a going concern. As discussed in Note 9 to the
consolidated financial statements, the Trust has no operating assets or
revenues, and is dependent upon the financial support of its shareholders. These
matters raise substantial doubt about the Trust's ability to continue as a going
concern. Management's plans in regard to these matters are also discussed in
Note 9. These consolidated financial statements do not include any adjustments
that might result from this uncertainty.

As more fully described in Note 2, Watermark Investors Realty Trust was
operating under a Plan of Complete Liquidation and Termination until June 30,
1994. The consolidated financial statements include adjustments to reflect
assets at their net realizable value as determined by the Trust's management.
The ultimate value of the assets will be determined at the time of sale and may
differ significantly from the value as determined by the Trust's management.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule III is presented
for the purpose of complying with the Securities and Exchange Commission's rules
and is not a required part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic consolidated financial statements and, in our opinion, fairly states,
in all material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.

FARMER, FUQUA, & HUFF, P.C.

Plano, Texas
March 20, 2005


                                        6
<PAGE>

                 WATERMARK INVESTORS REALTY TRUST AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 2004 and 2003


<TABLE>
<CAPTION>

                                     ASSETS
                                                                                              2004            2003
                                                                                              ----            ----
<S>                                                                                         <C>            <C>
Real estate                                                                               $168,588        $168,588
Less allowance for possible losses                                                       (168,588)       (168,588)
                                                                                         ---------       ---------
                                                                                          ---                ---
Cash                                                                                        21,166          10,538
                                                                                            ------          ------
                  Total assets                                                             $21,166         $10,538
                                                                                           =======         =======
                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities
         Note payable - related party                                                     $270,000        $225,000
         Accounts payable and accrued liabilities                                           14,423          18,417
         Accounts payable - related party                                                    5,000           4,000
         Accrued interest payable - related party                                          140,908         112,151
         Unclaimed dividends                                                                20,174          20,174
                                                                                            ------          ------
                  Total liabilities                                                        450,505         379,742

Shareholders' Equity (Deficit)
         Preferred shares of beneficial interest; $.01 par value; authorized,                ---             ---
                  10,000,000 shares; -0- shares issued and outstanding at December
                  31, 2004 and 2003
         Common shares of beneficial interest; $1.00 par value; authorized,                196,235         196,235
                  10,000,000 shares; 542,413 shares issued and outstanding at
                  December 31, 2004 and 2003
         Additional paid-in capital                                                         44,205          44,205
         Accumulated deficit                                                             (669,779)       (609,644)
                                                                                         ---------       ---------
                  Total shareholders' equity (deficit)                                   (429,339)       (369,204)
                                                                                         ---------       ---------
                  Total liabilities and shareholders' equity (deficit)                     $21,166         $10,538
                                                                                           =======         =======
</TABLE>

        The accompanying notes are an integral part of these statements.


                                        7
<PAGE>

                 WATERMARK INVESTORS REALTY TRUST AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  Years Ended December 31, 2004, 2003 and 2002



<TABLE>
<CAPTION>
                                                                              2004               2003                2002
                                                                              ----               ----                ----
<S>                                                                <C>                <C>               <C>

Revenues                                                              $    ---           $    ---           $    ---
--------                                                              ------------       ------------       --------------
                                                                           ---             ---                   ---
Expenses

         Interest - related party                                           28,757             25,173              20,112
         Property expenses                                                   4,402              3,592               5,585
         Legal and professional                                             26,976             40,504              18,406
                                                                            ------             ------              ------
                  Total expenses                                            60,135             69,269              44,103
                                                                            ------             ------              ------

NET LOSS                                                                 $(60,135)          $(69,269)           $(44,103)
                                                                         =========          =========           =========
Loss per share                                                           $   (.11)          $   (.13)           $   (.08)
                                                                         =========          =========           =========
Distributions per share                                                  $   ---            $   ---             $   ---
                                                                         =========          =========           =========
Weighted average shares of beneficial interest used in                     542,413            542,413             542,413
         computing loss per share                                        =========          =========           =========
</TABLE>

        The accompanying notes are an integral part of these statements.


                                        8

<PAGE>

                 WATERMARK INVESTORS REALTY TRUST AND SUBSIDIARY
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                  Years Ended December 31, 2004, 2003 and 2002





<TABLE>
<CAPTION>
                                                     Shares of          Additional          Accumulated              Total
                                                    Beneficial             Paid-in              Deficit
                                                      Interest             Capital
<S>                                                <C>                 <C>                 <C>               <C>

Balance at January 1, 2002                            $196,235             $44,205           $(496,272)         $(255,832)
                                                      ========             =======           ==========         ==========
         Net loss for the year                             ---                 ---            $(44,103)          $(44,103)
                                                      --------             -------           ----------         ----------
Balance at December 31, 2002                          $196,235             $44,205           $(540,375)           $299,935
                                                      ========             =======           ==========         ==========
              Net loss for the year                        ---                 ---            $(69,269)          $(69,269)
                                                      --------             -------           ----------         ----------
Balance at December 31, 2003                          $196,235             $44,205           $(609,644)         $(369,204)
                                                      ========             =======           ==========         ==========
              Net loss for the year                        ---                 ---            $(60,135)          $(60,135)
                                                      --------             -------           ----------         ----------
Balance at December 31, 2004                          $196,235             $44,205           $(669,779)         $(429,339)
                                                      ========             =======           ==========         ==========
</TABLE>


        The accompanying notes are an integral part of these statements.


                                        9
<PAGE>

                 WATERMARK INVESTORS REALTY TRUST AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 2004, 2003 and 2002





<TABLE>
<CAPTION>
                                                                       2004               2003                2002
                                                                       ----               ----                ----
<S>                                                                  <C>                <C>                 <C>
Cash flows from operating activities
   Net loss                                                              $(60,135)         $ (69,269)          $ (44,103)
      Adjustments to reconcile net loss to net cash used for
      operating activities                                                    ---                ---                  ---
      Increase (decrease) in accounts payable and accrued                   25,763             30,167              17,529
      liabilities                                                           ------             ------              ------

   Net cash used for operating activities                                 (34,372)           (39,102)            (26,574)
Cash flows from financing activities                                        45,000             44,900              25,000
   Proceeds from loans                                                      ______             ______               _____
Net cash provided by financing activities                                  $45,000            $44,900             $25,000
Increase (decrease) in cash                                                 10,628              5,798             (1,574)
Cash at beginning of year                                                   10,538              4,740               6,314
                                                                            ------              -----               -----
Cash at end of year                                                        $21,166            $10,538              $4,740
                                                                           =======            =======              ======
Supplemental cash flow information
   Cash paid for interest                                                  $   ---            $   ---              $  ---
                                                                           -------            -------              ------
   Cash paid for taxes                                                     $   ---            $   ---              $  ---
</TABLE>

        The accompanying notes are an integral part of these statements.


                                       10


<PAGE>

                 WATERMARK INVESTORS REALTY TRUST AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

Watermark was originally organized as Ryan Mortgage Investors pursuant to the
Texas Real Estate Investment Trust Act under a Declaration of Trust dated
October 13, 1971. On March 6, 1984, its name was changed to Arlington Realty
Investors pursuant to an Amendment to the Declaration of Trust. On December 5,
1995, the Trust's name was changed to Watermark Investors Realty Trust pursuant
to an Amendment to the Declaration of Trust. The Trust has elected to be treated
as a REIT under Sections 856 through 860 of the Internal Revenue Code. The Trust
has, in the opinion of the Trust's management, qualified for federal taxation as
a REIT for each fiscal year subsequent to December 31, 1971. Although not
currently active, the Trust's primary business and only industry segment has
been investing in equity interests in real estate and related real estate
activities. Under the Trust's Declaration of Trust and Bylaws, the Trustees, at
their option, may terminate the Trust's status as a REIT for federal income tax
purposes.

During March 1995, the Trust formed a wholly-owned subsidiary, Watermark Texas
1, Inc., a Maryland corporation, and contributed its sole property to such
subsidiary.

Principles of Consolidation
---------------------------

The consolidated financial statements include the accounts of Watermark, and its
wholly-owned subsidiary, Watermark Texas 1, Inc. All significant intercompany
transactions and accounts have been eliminated.

Real Estate
-----------

Watermark carries real estate at the lower of cost or estimated net realizable
value.

Allowance for Possible Losses
-----------------------------

Watermark provides for possible losses on real estate when such amounts are
considered necessary after making periodic reviews of the estimated net
realizable values of the real estate.

Earnings (Loss) Per Share
-------------------------

Earnings (loss) per share (EPS) are calculated in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS 128) which was
adopted in 1997 for all years presented. Basic EPS is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted EPS does not apply to Watermark
due to the absence of dilutive potential common shares. The adoption of SFAS 128
had no effect on previously reported EPS.

Consolidated Statements of Cash Flows
-------------------------------------

Watermark does not consider any of its assets to meet the definition of a cash
equivalent.


                                       11
<PAGE>

                 WATERMARK INVESTORS REALTY TRUST AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                        December 31, 2004, 2003 and 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Accounting 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 assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Legal and Other Expenses
------------------------

Legal and other expenses incurred for 2004, 2003 and 2002 include legal expenses
of approximately $14,000, $20,000 and $5,000 respectively.

Income Taxes
------------

Watermark is qualified as a REIT. To retain its REIT qualification, Watermark
must restrict its investments principally to rental properties or notes secured
by real estate, and must not realize more than 30% of its gross income from gain
on the sale of real estate assets held for less than four years. In addition,
Watermark must pay out at least 95% of its taxable income, excluding capital
gains, as dividends, provided that Watermark pays tax at corporate rates on
capital gains not distributed. No distributions were required in 2004, 2003 or
2002, due to net operating losses.

NOTE 2 - PLAN OF LIQUIDATION AND TERMINATION

Watermark operated under a Plan of Complete Liquidation and Termination approved
by the shareholders in 1985 until June 30, 1994.

NOTE 3 - REAL ESTATE

At December 31, 2004 and 2003, Watermark's only real estate asset was a parcel
of unimproved land consisting of approximately 4.5 acres located on Parker Road
in Houston, Harris County, Texas. During 1992, a provision was made to reduce
the Parker Road land to its estimated net realizable value, which was determined
to be zero at December 31, 1992. During March 1995, the Trust formed a wholly
owned subsidiary and contributed the Parker Road property to such subsidiary. At
December 31, 2004 and 2003, the Trust's only significant asset was its ownership
interest in such subsidiary.

NOTE 4 - NOTE PAYABLE
                                                               2004       2003
                                                               ----       ----
Note payable to Abbestate Holding, Inc., a related         $270,000   $225,000
party that has a common shareholder with Watermark,        ========   ========
with an interest rate of 12%, uncollateralized, with
interest and principal due August 1, 2005.


                                       12
<PAGE>

                 WATERMARK INVESTORS REALTY TRUST AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                        December 31, 2004, 2003 and 2002



NOTE 5 - FEDERAL INCOME TAXES

No Federal income taxes have been provided for financial statement purposes
because, as a REIT with no operating income, Watermark has no tax liability. At
December 31, 2004 net operating loss carryforwards of approximately $773,000
were available for tax purposes which, if not utilized, will expire at various
dates through 2025. Any deferred tax asset that would be associated with the net
operating loss carryforward has been reduced to $-0- due to recurring net
losses, no factors indicating that the trend of net losses will reverse and the
fact that if the trend did reverse, the net income from a REIT is not taxable as
long as specific REIT requirements have been met.

NOTE 6 - RELATED PARTY TRANSACTIONS

HPI Management, LP, a North Carolina limited partnership, provides
administrative and accounting services to the Trust under supervision of the
Trust's officers (two of whom are also officers of HPI Management, LP). HPI
Manangment, LP has not been compensated by the Trust for any services rendered
to the Trust until January 2001, when HPI Management, LP began charging the
Trust $1,000 per year for administrative and accounting services. This amount
has been accrued and is shown on the face of the balance sheet as A/P- related
party.

NOTE 7 - FINANCIAL INSTRUMENTS

The estimated fair values of Watermark's financial instruments at December 31,
2004 and 2003 follow:


<TABLE>
<CAPTION>

                                                           2004                                       2003
                                                           ----                                       ----
                                                   Carrying                  Fair             Carrying                Fair
                                                     Amount                 value               Amount               value
                                                     ------                 -----               ------               -----
<S>                                              <C>                   <C>                <C>                   <C>
Cash                                               $ 21,166              $ 21,166            $  10,538            $ 10,538
Note payable-related party                          270,000               270,000              225,000             225,000
</TABLE>

The fair value amounts for each of the financial instruments listed above
approximate carrying amounts due to the short maturities of these instruments.

NOTE 8 - LIQUIDATING DISTRIBUTION

The recorded par value of the outstanding common shares of beneficial interest
has been reduced by $346,178, which represents the amount of a 1993 liquidating
distribution in excess of additional paid-in capital.

NOTE 9 - GOING CONCERN

The Trust has no operating assets or revenues. Its continuation as a going
concern is dependent upon the Trust's ability to raise additional capital from
its shareholders or from third parties. The shareholders are anticipated to
continue to provide such financial support to the Trust. However, there can be
no assurances that the shareholders will continue to provide such support or
that the Trust will be successful in raising additional capital from other
sources. Further, there can be no assurance, assuming the Trust successfully
obtains such support, that the Trust will achieve profitability or positive cash
flow.



<PAGE>
                                                                  SCHEDULE III
<TABLE>
<CAPTION>


                 WATERMARK INVESTORS REALTY TRUST AND SUBSIDIARY
              REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
                        December 31, 2004, 2003 and 2002

       Description          Initial        Cost        Gross Amount    Valuation     Accumulated      Date     Depreciable
       -----------          Cost to     Capitalized      at which      Allowance    Depreciation    Acquired   Life (years)
                           Watermark    Subsequent      Carried at     ---------    ------------    --------   ------------
                           ---------        to         December 31,
                                        Acquisition        2004
                                        -----------    ------------
<S>   <C>                  <C>         <C>            <C>             <C>           <C>            <C>         <C>
 Undeveloped                $162,729      $5,859         $168,588      $(168,588)         ---       Various        ---
 land Houston, TX           ========      ======         ========      =========       =========

A summary of activity in real estate and accumulated depreciation for the three
years in the period ended December 31, 2004 is as follows:

          REAL ESTATE                                  2004               2003              2002
          -----------                                  ----               ----              ----
          Balance at beginning of year             $168,588           $168,588          $168,588

          Sales                                         ---                ---               ---

          Foreclosure additions                         ---                ---               ---

          Improvements                                  ---                ---               ---
                                                   --------           --------          --------
          Balance at end of year                   $168,588           $168,588          $168,588
                                                   ========           ========          ========
          ACCUMULATED DEPRECIATION
          ------------------------
          Balance at beginning of year             $    ---           $    ---          $    ---

          Sales                                         ---                ---               ---

          Depreciation                                  ---                ---               ---
                                                   --------           --------          --------
          Balance at end of year                   $    ---           $    ---          $    ---
                                                   ========           ========          ========
</TABLE>


                                       14
<PAGE>


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

         None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
------------------------------------------------

Watermark's principal executive officer and principal financial officer have
concluded that, as of the end of the period covered by this report, Watermark's
disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)
of the Securities Exchange Act of 1934, as amended) were effective, based on the
evaluation of these controls and procedures required by Rule 13a-15(b) or
15d-15(b) of the Securities Exchange Act of 1934, as amended.

Watermark's management is responsible for establishing and maintaining adequate
internal control over financial reporting to provide reasonable assurance
regarding the reliability of Watermark's financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of Watermark; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of Watermark are being made only in accordance with
authorizations of management and directors of Watermark; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of Watermark's assets that could have a material
effect on the financial statements.

Inherent Limitations on Effectiveness of Controls
-------------------------------------------------

Watermark's management, including the CEO and CFO, does not expect that our
disclosure controls or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that
the control system's objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures.

Changes in Internal Control Over Financial Reporting
----------------------------------------------------

There have been no changes in our internal controls over financial reporting
during the year ended December 31, 2004 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.

Item 9B. Other Information.

         None


                                       15
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

          The business affairs of the Trust are managed by, or under the
direction of, the Board of Trustees. The Trustees are responsible for the
general investment policies of the Trust and for such general supervision of the
business of the Trust conducted by officers, agents, employees, investment
advisors or independent contractors of the Trust as may be necessary to insure
that such business conforms to the provisions of the Declaration of Trust.
Pursuant to Article II, Section 2.1 of the Declaration of Trust, as amended, of
the Trust, there shall not be less than two (2), nor more than fifteen (15),
Trustees of the Trust. The number of Trustees shall be determined from time to
time by resolution of the Trustees and the current number of Trustees is set at
three (3). Trustees may succeed themselves in office and are required to be
individuals at least 21 years old not under legal disability and at least a
majority must be natural persons. Commencing with the 1996 annual meeting of
shareholders, the Board of Trustees of the Trust has been divided into three
classes, each class consists as nearly as possible of one-third of the Trustees.
The term of office of one class of Trustees expires each year. The Trustees of
the class elected at each annual meeting of shareholders hold office for a term
of three years.

          The current Trustees of the Trust (two of whom are also the executive
officers) are listed below, together with their ages, all positions and offices
with the Trust and their principal occupations, business experience and
directorships with other companies during the last five years or more.

          David S. Givner, 61, has been Trustee, President and Treasurer of the
Trust since December 5, 1995, and is also the President/Managing Director of HPI
Management, LP. Since 1992, Mr. Givner has been President and Chief Operating
Officer of various affiliates of HPI Management, LP. From 1987 until 1992, he
was Senior Vice President/Director of Leasing and Consulting Services for
Williams Real Estate Company based in New York, New York. Mr. Givner is also the
sole shareholder and the President of DAGI Corporation, a Delaware corporation
and the general partner of DAGI Limited Partnership, a Delaware limited
partnership. Mr. Givner beneficially owns 59,655 Shares through DAGI Limited
Partnership.

          Simon Mizrachi, 56, has been Trustee of the Trust since December 5,
1995 and is also the President of Midatlantic Agency, Inc. a Florida corporation
and financial consulting company. Mr. Mizrachi has served as President of
Midatlantic Agency, Inc. since 1992. Mr. Mizrachi and Midatlantic Agency, Inc.
are the sole partners of MIZ Investors Associates, a Delaware general
partnership. Mr. Mizrachi has been a director and officer of PAZ Securities,
Inc., an NASD broker/dealer firm, since 1978. Mr. Mizrachi is an officer with
PAK Investors, Inc., Pudgie's Chicken, Inc., Topaz Securities, Inc., Topaz,
Inc., Cal-Mar, Inc., TMT Hanes, Inc., and TMT Sales, Inc. Mr. Mizrachi is also
an officer of various affiliates of MIZ Investors Associates and Midatlantic
Agency, Inc. Mr. Mizrachi beneficially owns 59,655 Shares through MIZ Investors
Associates.

          Michael S. Verruto, 44, has been Trustee, Vice President and Secretary
of the Trust since December 5, 1995 and is also the Vice President/Managing
Director of HPI Management, LP and HPI Capital, Inc., a Florida corporation that
develops real estate. Since January 1990, Mr. Verruto has held various positions
with various affiliates of HPI Management, LP, all of which are active in real
estate development and management. Mr. Verruto is also the sole shareholder and
the President and Treasurer of Fletcher Napolitano Styles and Verruto Holding
Company, Inc., a Delaware corporation and the general partner of Fletcher
Napolitano Styles and Verruto Family Property Partners, L.P., a Delaware limited
partnership. Mr. Verruto beneficially owns 59,655 Shares through Fletcher
Napolitano Styles and Verruto Family Property Partners, L.P.

         Meetings and Committees of Trustees
         -----------------------------------

The business affairs of the Trust are managed by, or under the direction of, the
Board of Trustees. During the fiscal year ended December 31, 2004, the Board of
Trustees held no formal meetings and no matters were handled by unanimous
written consent. Since Watermark is currently inactive (please see discussion in
Items 1 and 2 above), the Board of Trustees has determined that there is no need
for Watermark to have a standing audit, nominating or compensation committee,
and thus no such committees are in existence.


                                       16
<PAGE>

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

Under the securities laws of the United States, the Trust's trustees, executive
officers, and any persons holding more than ten percent of the Trust's Shares
are required to report their ownership of the Shares and any changes in that
ownership to the Securities and Exchange Commission (the "Commission"). Specific
due dates for these reports have been established under applicable law and the
Trust is required to report any failure to file by these dates during 2004. To
the best knowledge of the current officers of the Trust, all of these filing
requirements were satisfied by its trustees and executive officers and ten
percent holders.

         Code of Ethics
         --------------

Since, as discussed above, Watermark is currently inactive, and thus its
directors and officers are not presently conducting ongoing operations for
Watermark, Watermark has not adopted a code of ethics.

         Audit Committee Financial Expert
         --------------------------------

Since Watermark does not have an audit committee, it does not have a financial
expert on any such committee.

         Identification of the Audit Committee
         -------------------------------------

As stated above, since Watermark is currently inactive, the Board of Trustees
has determined that there is no need to have a standing audit committee in
existence.

         Material Changes to Procedures for Board of Trustees Nominations
         ----------------------------------------------------------------

During the fiscal year ending December 31, 2004, there have been no material
changes to the procedures by which shareholders may recommend nominees to
Watermark's Board of Trustees.

Item 11. Executive Compensation.

Neither the trustees nor the officers of the Trust received salaries or other
cash compensation from the Trust for acting in such capacities during the year
ended December 31, 2004. The Trust has no retirement, annuity or pension plans
covering its trustees or officers. Based upon the Trust's current operations,
the Board of Trustees does not believe compensation will be paid or given in the
near future.

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

According to the Share transfer records of the Trust and other information
available to the Trust, the following persons were known to be the beneficial
owners, as of March 29, 2005, of more than five percent (5%) of the outstanding
Shares of the Trust:
<TABLE>
<CAPTION>

                  Name and Address                    Amount of                  Percent of Shares
                 of Beneficial Owner             Beneficial Ownership              Outstanding(1)
                 -------------------             --------------------              --------------
<S>              <C>                            <C>                            <C>

Fletcher Napolitano Styles and                        59,665(2)                       11.0(2)
Verruto Family Property Partners, L.P.(3)               Shares
100 N. Tryon Street
Suite 5500
Charlotte, NC 28202
Attn: Michael S. Verruto

MIZ Investors Associates(4)                           59,665(2)                       11.0(2)
6971 N. Federal Highway                                 Shares
Suite 203
Boca Raton, FL 33487


                                       17
<PAGE>

Attn: Simon and Joseph Mizrachi

DAGI Limited Partnership(5)                           59,665(2)                       11.0(2)
100 N. Tryon Street                                     Shares
Suite 5500
Charlotte, NC 28202
Attn: David S. Givner

Antapolis N.V.                                        184,422(2)                      34.0(2)
c/o MeesPierson Trust                                   Shares
(Curacao) N.V.
Number 6 Curacao
Netherlands Antilles
Attn: John B. Goisiraweg

</TABLE>

(1)      Based on 542,413 Shares outstanding on March 29, 2005.

(2)      Does not include shares owned by others in group that filed a Schedule
         13D dated November 10, 1994. The group consists solely of the four
         entities listed above, which collectively own 363,417 Shares or 67.0%
         of the issued and outstanding Shares.

(3)      Through his control of Fletcher Napolitano Styles and Verruto Family
         Property Partners, L.P., Michael S. Verruto is deemed the beneficial
         owner of 59,665 shares.

(4)      Through their control of MIZ Investors Associates, Simon and Joseph
         Mizrachi are deemed to share beneficial ownership of 59,665 shares.

(5)      Through his control of DAGI Limited Partnership, David S. Givner is
         deemed the beneficial owner of 59,665 shares.

          Security Ownership of Management

          According to the Share transfer records of the Trust and other
information available to the Trust, as of March 29, 2005, the current trustees
and executive officers of the trust beneficially owned the following Shares:

  Name and Offices of Beneficial         Amount of          Percent of Class(1)
               Owner                Beneficial Ownership    ----------------
  ------------------------------    --------------------
   David S. Givner, Trustee,(3)          59,665(2)                11.0(2)
      President and Treasurer
    Simon Mizrachi, Trustee(4)           59,665(2)                11.0(2)
  Michael S. Verruto, Trustee,(5)        59,665(2)                11.0(2)
   Vice President and Secretary

    All trustees and executive           178,995(2)               33.0(2)
        officers as a group


(1)      Based on 542,413 Shares outstanding on March 29, 2005.

(2)      Does not include shares owned by others in group that filed a Schedule
         13D dated November 10, 1994. The group consists solely of the four
         entities listed above, which collectively own 363,417 Shares or 67.0%
         of the issued and outstanding Shares.

(3)      Through his control of DAGI Limited Partnership, David S. Givner is
         deemed the beneficial owner of 59,665 shares.


                                       18
<PAGE>

(4)      Through their control of MIZ Investors Associates, Simon and Joseph
         Mizrachi are deemed to share beneficial ownership of 59,665 shares.

(5)      Through his control of Fletcher Napolitano Styles and Verruto Family
         Property Partners, L.P., Michael S. Verruto is deemed the beneficial
         owner of 59,665 shares.

Item 13. Certain Relationships and Related Transactions.

          Since December 5, 1995, HPI Management, LP, a North Carolina limited
partnership, has provided administrative and accounting services to the Trust
under the supervision of the Trust's officers, two of whom are also officers of
HPI Management, LP. HPI Management, LP has not been compensated by the Trust for
any services rendered to the Trust until January 2001, when HPI Management, LP
began charging the Trust $1,000 per year for administrative and accounting
services. This amount has been accrued and is shown on the face of the balance
sheet as A/P- related party.

Item 14. Principal Accounting Fees and Services.

         Audit Fees
         ----------

         The aggregate fees billed, for each of the last two fiscal years, for
professional services rendered by Watermark's principal accountant for the audit
of Watermark's annual financial statements and review of financial statements
included in Watermark's Form 10-Q or for services that are normally provided by
Watermark's accountant in connection with statutory and regulatory filings or
engagements for those fiscal years, are as follows:

               2004                                2003
              $4,250                              $4,250

         Audit-Related Fees
         ------------------

         The aggregate fees billed in each of the last two fiscal years for
assurance and related services by Watermark's principal accountant that are
reasonably related to the performance of the audit or review of Watermark's
financial statements are as follows:

               2004                                2003
                $0                                  $0

         Tax Fees
         --------

         The aggregate fees billed in each of the last two fiscal years for
professional services rendered by Watermark's principal accountant for tax
compliance, tax advice, and tax planning are as follows:

               2004                                2003
              $2,350                               $750

Preparation of Federal Income Tax Return



                                       19
<PAGE>

         All Other Fees
         --------------

         All other aggregate fees billed in each of the last two fiscal years
for products and services provided by Watermark's principal accountant are as
follows:


               2004                                2003
                $0                                  $0


Since Watermark does not have an audit committee, there are no audit committee
pre-approval policies and procedures in existence.



                                       20
<PAGE>

                                     PART IV

Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.



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

          1. Consolidated Financial Statements:

                     Balance Sheets as of December 31, 2004 and 2003.

                     Statements of Operations for the years ended December
                     31, 2004, 2003 and 2002.

                     Statements of Shareholders' Equity for the years
                     ended December 31, 2004, 2003 and 2002.

                     Statements of Cash Flows for the years ended December
                     31, 2004, 2003 and 2002.

                     Notes to Financial Statements.

          2. Schedules:

                      Schedule III - Real Estate Investments and
                      Accumulated Depreciation.

                      All other schedules are omitted since they are not
                      required, are not applicable, or the information
                      required is included in the financial statements or
                      the notes thereto.

          3. Exhibits:

                   The following documents are filed as exhibits to this report:

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

                   3.1       Declaration of Trust, as amended  (Incorporated
                             by reference to Exhibit 3.1 to Registrant's
                             Form 10-K for the year ended December 31, 1995).

                   3.2       By-laws, as amended (Incorporated by
                             reference to Exhibit 3.1 to Registrant's
                             Form 10-K for the year ended December 31, 1995).

                   10.1      Contract of Sale and Purchase of Real
                             Property, by and between Watermark Texas
                             One, Inc. and The Peterson Group, Inc.,
                             dated as of October 16, 2003, incorporated
                             by reference to Exhibit 10.1 of Watermark's
                             Form 10-Q for the quarterly period ended
                             September 30, 2003, filed on November 14,
                             2003.

                   21        List  of   Subsidiaries.   (Incorporated   by
                             reference   to  Exhibit  21  to Registrant's
                             Form 10-K for the year ended December 31, 1996).

                   31(a)     Certification of the Principal Executive
                             Officer of Watermark Investors Realty Trust,
                             pursuant to Rule 13a-14(a) or 15d-14(a), as
                             adopted pursuant to Section 302 of the
                             Sarbanes-Oxley Act of 2002 (filed herewith).



                                       21
<PAGE>

                   31(b)     Certification of the Principal Financial
                             Officer of Watermark Investors Realty Trust
                             pursuant to Rule 13a-14(a) or 15d-14(a), as
                             adopted pursuant to Section 302 of the
                             Sarbanes-Oxley Act of 2002 (filed herewith).

                   32(a)     Certification of the Principal Executive
                             Officer of Watermark Investors Realty Trust
                             furnished pursuant to 18 U.S.C. Section
                             1350, as adopted pursuant to Section 906 of
                             the Sarbanes-Oxley Act of 2002 (furnished
                             herewith).

                   32(b)     Certification of the Principal Financial
                             Officer of Watermark Investors Realty Trust
                             furnished pursuant to 18 U.S.C. Section
                             1350, as adopted pursuant to Section 906 of
                             the Sarbanes-Oxley Act of 2002 (furnished
                             herewith).

(b) Reports on Form 8-K.

         During the last quarter of the period covered by this report, no
reports on Form 8-K were filed.


                                       22
<PAGE>

SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this the 29th day
of March, 2005.

                                         WATERMARK INVESTORS REALTY TRUST



                                         By:      /s/ David S. Givner
                                            -------------------------
                                         David S. Givner
                                         Trustee, President and Treasurer

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


          Signature            Title                                   Date

/s/ David S. Givner     Trustee, President and Treasurer         March 29, 2005
-------------------     (Principal Executive Officer and
David S. Givner         Principal Financial and Accounting
                        Officer)

/s/ Michael S. Verruto  Trustee, Vice President and Secretary    March 29, 2005
----------------------
Michael S. Verruto


                                       23