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 [FEE REQUIRED]
For the fiscal year ended          December 31, 1997
                         ------------------------------------------------------

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

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.)


227 West Trade Street, Suite 2320, 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.
[     ]

         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 25, 1998, 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 Section 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.

         At December  31,  1997,  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. The Trust has held the Parker Road
property  for sale for  several  years,  has listed the  property  with  various
brokers  over that time  period,  and  inquired of the City of Houston as to the
desire  of the  City  to  acquire  such  property  for a park  site.  Management
presently  intends  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.

Item 3.  Legal Proceedings.

         At December 31, 1997, 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.

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

         None.


                                        2

<PAGE>

                                     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 1996 or 1997.  As of March
25,  1998,  542,413  Shares  were held by  approximately  300 holders of record.
(dollars in thousands, except per share)

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.

<TABLE>
<CAPTION>

                                                            For the Years Ended December 31,
                                 --------------------------------------------------------------------------------------
                                     1997               1996              1995            1994             1993
                                     ----               ----              ----            ----             ----
<S>                              <C>                 <C>              <C>            <C>               <C>

Statement of Operations
Data
Rental Operations, net             $      -           $      -         $      -        $     70          $      -
Real estate sales, net                    -                  -                -               -                 -
Interest Income                           -                  -                -               -                22
Gain on Sale of Land                      -                  -                4               -                 -
Net earnings <loss>                     <31>               <31>             <99>            <44>                7
Earnings <loss> per share          $   <.06>          $   <.06>        $   <.18>       $   <.09>         $    .01

Distributions per share            $      -           $      -         $      -        $      -          $   2.80
Weighted average shares             542,413            542,413          542,413         505,172           498,985
outstanding
Balance Sheet Data
------------------
Total assets                              1                 12                1              33               116
(deficit)                              <118>          $    <87>        $    <56>       $     <1>         $     <1>
</TABLE>


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

Results of Operations

         Watermark's  primary revenue sources for the three years ended December
31, 1997, were interest income and sales of real estate.  Watermark's properties
consisted of the Parker Road  property.  In February of 1995,  Watermark  sold a
4,429  square  foot strip of land to the City of  Houston,  Texas,  for  $3,765.
Watermark did not have any rental operations in 1995, 1996 or 1997.

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

                                        3

<PAGE>

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 (either by selling or leasing the Parker Road property) or (ii)
generate  additional  funds  (either  by selling  or  leasing  the  Parker  Road
property). There are no material commitments for capital expenditures.

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.


                                        4

<PAGE>


Item 8.  Financial Statements and Supplementary Data.

                          INDEX TO FINANCIAL STATEMENTS

                                                                           Page

Report of Farmer, Fuqua, Hunt & Munselle, P.C.
         Independent Auditors.................................................6

Consolidated Balance Sheets as of December 31, 1997 and 1996..................7

Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995..............................................8

Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1997, 1996 and 1995..........................9

Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.............................................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>


                          INDEPENDENT AUDITORS' REPORT

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, 1997 and 1996, and the
related  consolidated  statements of operations,  shareholders' equity (deficit)
and cash flows for the years  ended  December  31,  1997,  1996 and 1995.  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  generally   accepted  auditing
standards.  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, 1997 and 1996
and the results of their  operations  and their cash flows for each of the years
ended December 31, 1997,  1996 and 1995, in conformity  with 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 10 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 10. 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 our 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, HUNT & MUNSELLE, P.C.
Dallas, Texas
April 4, 1998

                                        6

<PAGE>



                 WATERMARK INVESTORS REALTY TRUST AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1997 and 1996



                                     ASSETS

<TABLE>
<CAPTION>

                                                                              1997               1996
                                                                              ----               ----

<S>                                                                     <C>                 <C>   
Real estate                                                               $  168,588          $  168,588
Less allowance for possible losses                                          (168,588)           (168,588)
                                                                          ----------           ----------
                                                                                  --                  --
                                                                                  --                  --
Cash                                                                              74              12,152
                                                                          ----------          ----------
                                                                          $       74          $   12,152
                                                                          ==========          ==========

                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities
    Note payable - related party                                          $   70,350          $   60,000
    Accounts payable and accrued liabilities                                  17,478              16,860
        Accrued interest payable - related party                              10,306               2,584
    Unclaimed dividends                                                       20,174              20,174
                                                                            --------           ---------
                                                                             118,308              99,618

Shareholders' Equity (Deficit)
    Preferredshares of  beneficial  interest;  $.01 par value;  authorized,
       10,000,000 shares; -0- shares issued and outstanding at
       December 31, 1997 and 1996                                                ---                 ---
    Common shares of beneficial interest; $1.00 par value; authorized,
       10,000,000 shares; 542,413 shares issued and outstanding at
       December 31, 1997 and 1996                                            196,235             196,235
    Additional paid-in capital                                                44,205              44,205
    Accumulated deficit                                                     (358,674)           (327,906)
                                                                            ---------           ---------
                                                                            (118,234)            (87,466)
                                                                            ---------           ---------
                                                                          $       74          $   12,152
                                                                           ==========          ==========

</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, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                                   1997                  1996                 1995
                                                                   ----                  ----                 ----
<S>                                                         <C>                      <C>                <C>
Revenues
         Gain on sale of land                                 $     ---             $     ---            $   3,765
                                                               --------              --------            ---------
                                                                    ---                   ---                3,765
                                                               --------              --------            ---------
Expenses

         Interest - related party                                 7,722                 2,584                  ---
         Property expenses                                        6,805                 7,967                4,722
         Legal and professional                                  16,241                20,948               98,457
                                                               --------              --------             --------
                                                                 30,768                31,499              103,179
                                                               --------              --------             --------

NET LOSS                                                      $(30,768)             $(31,499)            $(99,414)
                                                               ========              ========             ========
Loss per share                                                    (.06)             $   (.06)            $   (.18)
                                                               ========              ========             ========
Distributions per share                                       $    ---              $    ---             $    ---
                                                               ========              ========             ========
Weighted average shares of beneficial interest used in
         computing loss per share                               542,413               542,413              542,413
                                                               ========              ========             ========

</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, 1997, 1996 and 1995

<TABLE>
<CAPTION>

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

Balance at January 1, 1995                              $196,235             $    ---            $(196,993)           $    (758)
         Contribution by Shareholders                        ---               44,205                   ---              44,205
         Net loss for the year                               ---                  ---              (99,414)             (99,414)
                                                        --------              -------             ---------             --------
Balance at December 31, 1995                             196,235               44,205             (296,407)             (55,967)
         Net loss for the year                               ---                  ---              (31,499)             (31,499)
                                                        --------              -------             ---------             --------
Balance at December 31, 1996                             196,235               44,205             (327,906)             (87,466)
                                                        --------              -------             ---------             --------
         Net loss for the year                               ---                  ---              (30,768)             (30,768)
                                                        --------              -------             ---------             --------
Balance at December 31, 1997                            $196,235             $ 44,205            $(358,674)           $(118,234)
                                                        ========              =======             =========           ==========

</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, 1997, 1996 and 1995

<TABLE>
<CAPTION>


                                                                       1997                 1996                  1995
                                                                       ----                 ----                  ----
<S>                                                              <C>                 <C>                   <C> 

Cash flows from operating activities
   Net loss                                                        $(30,768)           $ (31,499)            $ (99,414)
   Adjustments to reconcile net loss to net cash used for
      operating activities
      Gain on sale of real estate                                       ---                  ---                (3,765)
      Increase (decrease) in accounts payable and accrued
      liabilities                                                     8,340              (17,229)               23,002
      Expenses paid directly by shareholder                             ---                  ---                44,205
                                                                    --------            ---------             ---------
   Net cash used for operating activities                           (22,428)             (48,728)              (35,972)
Cash flows from investing activities
   Proceeds from sale of real estate                                    ---                  ---                 3,765
                                                                    --------            ---------             ---------
   Net cash provided by investing activities                            ---                  ---                 3,765
Cash flows from financing activities
   Proceeds from loans                                               10,350               60,000                   ---
                                                                    --------            ---------             ---------
   Net cash provided by financing activities                         10,350               60,000                   ---
                                                                    --------            ---------             ---------
Increase (decrease) in cash                                         (12,078)              11,272               (32,207)
Cash at beginning of year                                            12,152                  880                33,087
                                                                    --------            ---------             ---------
Cash at end of year                                                $     74            $  12,152             $     880
                                                                    --------            =========             =========
Supplemental cash flow information                                 $     ---           $     ---             $     ---
                                                                    --------            ---------             ---------
   Cash paid for interest
</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, 1997, 1996 and 1995


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

Watermark  Investors Realty Trust  (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 Real Estate  Investment  Trust
("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, 1997, 1996 and 1995


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 1997, 1996 and 1995 include legal expenses
of approximately $5,900, $9,700, and $62,000, 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 1997, 1996 or
1995, due to net operating losses.


NOTE 2 - PLAN OF LIQUIDATION AND TERMINATION

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


NOTE 3 - REAL ESTATE

At December 31, 1997 and 1996,  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  Park  Road  property  to  such
subsidiary.  At December 31, 1997 and 1996, the Trust's only  significant  asset
was its ownership interest in such subsidiary.

During  February  1995,  the Trust sold a 4,429 square foot strip of land on the
south side of the Parker Road property to the City of Houston, Texas for $3,765.


NOTE 4 - NOTE PAYABLE

Note payable to Abbestate Holding, Inc., a related party, with an interest rate
of 12%, uncollateralized, with interest and principal due August 1, 1998.

                                                        1997           1996
                                                        ----           ----

                                                      $70,350        $60,000
                                                       ======         ======


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, 1997, net operating loss  carryforwards of  approximately  $876,000
were available for tax purposes which,  if not utilized,  will expire at various
dates through 2010.

                                       12

<PAGE>



                 WATERMARK INVESTORS REALTY TRUST AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                        December 31, 1997, 1996 and 1995

NOTE 6 - RELATED PARTY TRANSACTIONS

From November 10, 1993 to December 5, 1995, Davister Corp. ("Davister") provided
office  space and legal,  administrative  and  accounting  services to the Trust
under  the  supervision  of the  Trust's  officers  at that  time (who were also
officers of Davister or one of its affiliates).  Davister was not compensated by
the Trust for any services rendered during this period.

Since  December  5, 1995,  HPI  Capital,  LLC has  provided  administrative  and
accounting  services to the Trust under supervision of the Trust's officers (two
of whom are also officers of HPI Capital,  LLC).  HPI Capital,  LLC has not been
compensated by the Trust for any services rendered to the Trust.

NOTE 7 - FINANCIAL INSTRUMENTS

The estimated fair values of Watermark's  financial  instruments at December 31,
1997 and 1996 follow:

<TABLE>
<CAPTION>

                                                  1997                                         1996
                                                  ----                                         ----
<S>                                <C>                 <C>                     <C>                <C>  

                                     Carrying             Fair                   Carrying             Fair
                                      amount              value                   amount              value
                                     --------            -------                 --------            -------
Cash                                 $    74             $    74                 $12,152             $12,152
Note payable-related party            70,350              70,350                  60,000              60,000
</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 - RECLASSIFICATIONS

Certain  reclassifications  have  been  made to the 1996  and 1995  consolidated
financial statements to conform to the 1997 presentation.


NOTE 10 - 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  anticipate that they
will 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.


                                       13

<PAGE>


                                                                   SCHEDULE III


                 WATERMARK INVESTORS REALTY TRUST AND SUBSIDIARY
              REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
                        December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>

                                           Cost        Gross Amount
                                       Capitalized       at which
                            Initial     Subsequent      Carried at
                            Cost to         to         December 31,     Valuation     Accumulated      Date      Depreciable
       Description         Watermark   Acquisition         1997         Allowance    Depreciation    Acquired   Life (years)
       -----------         ---------   -----------        ------        ---------    ------------    --------   ------------
<S>                      <C>          <C>              <C>            <C>           <C>             <C>        <C>

Undeveloped                $162,729       $5,859         $168,588       $(168,588)        ---         Various        ---
land Houston, TX           ========       ======         ========       ==========       =====
</TABLE>


A summary of activity in real estate and accumulated  depreciation for the three
years in the period ended December 31, 1997 is as follows:

<TABLE>
<S>                                               <C>                    <C>               <C>   


REAL ESTATE                                            1997                 1996                1995
-----------                                            ----                 ----                ----

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>


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

         None.

                                    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

                                       14

<PAGE>



class  of  Trustees  expires  each  year.  After  the  1996  annual  meeting  of
shareholders,  the  Trustees  of the class  elected  at each  annual  meeting of
shareholders thereafter shall 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,  53, has been Trustee,  President and Treasurer of the
Trust since December 5, 1995, and is also the President/Managing Director of HPI
Capital,  LLC.  Since 1992,  Mr. Givner has been  President and Chief  Operating
Officer of various affiliates of HPI Capital,  LLC. 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,  49, 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, 37, has been Trustee,  Vice President and Secretary
of the Trust  since  December  5,  1995 and is also the Vice  President/Managing
Director of HPI Capital,  LLC, a North Carolina limited  liability  company that
develops real estate. Since January 1990, Mr. Verruto has held various positions
with various  affiliates  of HPI  Capital,  LLC, 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, 1997, the Board of
Trustees  held no formal  meetings  and no  matters  were  handled by  unanimous
written consent.
The  Board  of  Trustees  has no  standing  audit,  nominating  or  compensation
committee.

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  1997.  To
the  best  knowledge  of the  current  officers  of the  Trust,  based  upon the
representations  of its  former  trustees  and  executive  officers  and its ten
percent  holders  and  copies  of the  reports  that they  have  filed  with the
Commission,  all of these filing requirements were satisfied by its trustees and
executive officers and ten percent holders.


                                       15

<PAGE>


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, 1997.  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.

                                       16

<PAGE>



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

Security Ownership of Certain Beneficial Owners

         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 25, 1998, 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                Outstanding1
<S>                                                          <C>                               <C>  

Fletcher Napolitano Styles and                                       59,6652                          11.02
Verruto Family Property Partners, L.P.3                              Shares
227 W. Trade Street
Suite 2320
Charlotte, NC 28202
Attn: Michael S. Verruto

MIZ Investors Associates4                                            59,6652                          11.02
6971 N. Federal Highway                                              Shares
Suite 203
Boca Raton, FL 33487
Attn: Simon and Joseph Mizrachi

DAGI Limited Partnership5                                            59,6652                          11.02
227 W. Trade Street                                                  Shares
Suite 2320
Charlotte, NC 28202
Attn: David S. Givner

Antapolis N.V.                                                      184,4222                          34.02
c/o MeesPierson Trust                                                Shares
(Curacao) N.V.
Number 6 Curacao
Netherlands Antilles
Attn: John B. Goisiraweg

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

1Based on 542,413 Shares outstanding on March 25, 1998.

2Does 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.

3Through 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.

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

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


                                       17

<PAGE>



Security Ownership of Management

         According  to the  Share  transfer  records  of  the  Trust  and  other
information  available to the Trust, as of March 25, 1998, the current  trustees
and executive officers of the trust beneficially owned the following Shares:


</TABLE>
<TABLE>
<CAPTION>

  Name and Offices of Beneficial                Amount of
               Owner                       Beneficial Ownership             Percent of Class1
<S>                                       <C>                              <C>   

    David S. Givner, Trustee,3                   59,6652                          11.02
      President and Treasurer
     Simon Mizrachi, Trustee4                    59,6652                          11.02
   Michael S. Verruto, Trustee,5                 59,6652                          11.02
   Vice President and Secretary

    All trustees and executive                   178,9952                         33.02
        officers as a group
</TABLE>

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

1Based on 542,413 Shares outstanding on March 25, 1998.

2Does 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.

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

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

5Through 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 Capital,  LLC 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 Capital,  LLC). HPI Capital,  LLC
has not been compensated by the Trust for any services rendered to the Trust.


                                       18

<PAGE>


                                     PART IV

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

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

     1.   Consolidated Financial Statements:

               Balance Sheets as of December 31, 1997 and 1996.

               Statements of Operations  for the years ended  December 31, 1997,
               1996 and 1995.

               Statements of  Shareholders'  Equity for the years ended December
               31, 1997, 1996 and 1995.

               Statements  of Cash Flows for the years ended  December 31, 1997,
               1996 and 1995.

               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).

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

        27         Financial Data Schedule

(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.


                                       19

<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 14th day
of April, 1998.

                        WATERMARK INVESTORS REALTY TRUST


                        /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     April 14, 1998
---------------------------  (Principal Executive Officer and
     David S. Givner          Principal Financial and Accounting
                              Officer)

 /s/ Michael S. Verruto      Trustee, Vice President and          April 14, 1998
---------------------------  Secretary
     Michael S. Verruto



                                       20

<PAGE>



                                                                     Exhibit 21