<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549


                                   FORM 10-Q


        [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1996
                                                      ------------------

                         Commission File Number 1-9948
                                                ------


                             AMERICAN REALTY TRUST, INC.           
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


             Georgia                                          54-0697989     
   -------------------------------                      ---------------------
   (State or Other Jurisdiction of                        (I.R.S. Employer
   Incorporation or Organization)                        Identification No.)
                                              

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


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


Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.  Yes  X    No 
                                               ---      ---

                     APPLICABLE ONLY TO CORPORATE ISSUERS:


Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.


Common Stock, $.01 par value                     6,457,188            
----------------------------          ---------------------------------
          (Class)                     (Outstanding at November 1, 1996)


                                       1
<PAGE>   2
                         PART I.  FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS

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


                          AMERICAN REALTY TRUST, INC.
                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                        September 30,          December 31,                
                                                            1996                   1995                     
                                                        -------------          ------------                
                                                             (dollars in thousands)                     
<S>                                                    <C>                   <C>
                     Assets                          
                     ------                          
                                                     
Notes and interest receivable                        
Performing..........................................   $        51,392       $       51,840
Nonperforming, nonaccruing..........................             1,827                1,827
                                                       ---------------       --------------
                                                                53,219               53,667
                                                     
Less - allowance for estimated losses...............            (3,926)              (3,926)
                                                       ---------------       -------------- 
                                                                49,293               49,741
                                                     
Real estate held for sale, net of accumulated        
  depreciation ($5,098 in 1996 and 1995)............            60,403               32,627
                                                     
Less - allowance for estimated losses...............            (3,328)              (3,328)
                                                       ---------------       -------------- 
                                                                57,075               29,299
                                                     
Real estate held for investment, net of accumulated  
  depreciation ($3,678 in 1996 and $2,646 in 1995)..            31,924               30,125
                                                     
Marketable equity securities, at market value.......             1,947                2,093
Cash and cash equivalents...........................             1,097                1,054
Investments in equity investees.....................            54,335               41,072
Other assets (including $2,954 in 1996 from
  affiliate)........................................             9,454                8,649
                                                       ---------------       --------------
                                                     
                                                       $       205,125       $      162,033
                                                       ===============       ==============
</TABLE>


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


                                       2
<PAGE>   3
                          AMERICAN REALTY TRUST, INC.
                    CONSOLIDATED BALANCE SHEETS - Continued





<TABLE>
<CAPTION>
                                                           September 30,         December 31,
                                                                1996                1995 
                                                         ----------------      ---------------
                                                                 (dollars in thousands)
<S>                                                      <C>                   <C>
      Liabilities and Stockholders' Equity            
      ------------------------------------            
                                                      
Liabilities                                           
Notes and interest payable.........................      $       107,613       $       61,163
Margin borrowings..................................               36,843               34,017
Accounts payable and other liabilities (including     
  $123 in 1996 and $4,584 in 1995 to affiliate)....                7,640               12,698
                                                         ---------------       --------------
                                                      
                                                                 152,096              107,878
                                                      
                                                      
Minority interest..................................                1,097                1,097
                                                      
                                                      
Commitments and contingencies                         
                                                      
                                                      
Stockholders' equity                                  
Preferred stock, authorized 20,000,000 shares,        
  issued and outstanding                              
  4,000 shares Series B, 10% cumulative, $2.00        
    par value                                                          8                  -
  15,489 shares Series C, 10% cumulative, $2.00       
    par value....................................                     31                  -
Common stock, $.01 par value; authorized              
  16,667,000 shares, 6,739,540 shares in 1996         
  and 5,858,328 in 1995 issued.....................                   68                   59
Paid-in capital....................................               68,623               66,719
Accumulated (deficit)..............................              (16,795)             (13,720)
Treasury stock at cost, 282,352 shares.............                   (3)                 -  
                                                         ---------------       --------------
                                                      
                                                                  51,932               53,058
                                                         ---------------       --------------
                                                      
                                                         $       205,125       $      162,033
                                                         ===============       ==============
</TABLE>                                              





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





                                       3
<PAGE>   4
                          AMERICAN REALTY TRUST, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                   For the Three Months                 For the Nine Months                 
                                                   Ended September 30,                  Ended September 30,                 
                                             ------------------------------       -------------------------------                
                                                1996                1995             1996                 1995                  
                                             ----------          ----------       ----------           ----------                 
                                                           (dollars in thousands, except per share)
<S>                                          <C>                 <C>              <C>                  <C>                
Revenues                                                                                                               
 Rents....................................   $    5,339          $    5,154       $   14,733           $   14,245      
 Interest.................................        1,143               1,173            3,416                3,753      
 Other....................................          824                 739            1,293                  700      
                                             ----------          ----------       ----------           ----------      
                                                  7,306               7,066           19,442               18,698      
                                                                                                                       
Expenses                                                                                                               
 Property operations......................        3,600               3,004           11,166               10,216      
 Interest.................................        4,240               2,393           10,656                6,149      
 Advisory and servicing fees to 
   affiliate..............................          392                 328            1,093                  871      
 General and administrative...............          618                 382            1,855                1,609      
 Depreciation and amortization............          429                 416            1,319                1,258      
 Equity in losses of investees............          702               1,410            3,122                4,369      
 Minority interest........................          -                   -                -                    671      
                                             ----------          ----------       ----------           ----------      
                                                  9,981               7,933           29,211               25,143      
                                             ----------          ----------       ----------           ----------      
                                                                                                                       
(Loss) before gain on sale of real 
 estate and extraordinary gain............       (2,675)               (867)          (9,769)              (6,445)     
Gain on sale of real estate...............        3,324               1,596            7,799                2,544      
                                             ----------          ----------       ----------           ----------      
                                                                                                                       
Income (loss) before extraordinary gain...          649                 729           (1,970)              (3,901)     
Extraordinary gain........................          121                 431              381                  758      
                                             ----------          ----------       ----------           ----------      
Net income (loss).........................          770               1,160           (1,589)              (3,143)     
                                                                                                                       
Preferred dividend requirement............          (48)                -                (65)                 -        
                                             ----------          ----------       ----------           ----------      
Net income (loss) applicable to Common 
 shares...................................   $      722          $    1,160       $   (1,654)          $   (3,143)     
                                             ==========          ==========       ==========           ==========      
                                                                                                                       
                                                                                                                       
Earnings per share                                                                                                     
 Income (loss) before extraordinary gain..   $      .09          $      .13       $     (.32)          $     (.67)    
 Extraordinary gain.......................          .02                 .07              .06                  .13     
                                             ----------          ----------       ----------           ----------     
                                                                                                                       
 Net income (loss) applicable to Common 
  shares..................................   $      .11          $      .20       $     (.26)          $     (.54)    
                                             ==========          ==========       ==========           ==========     
                                                                                                                       
                                                                                                                       
Weighted average Common shares used in 
 computing earnings per share.............    6,596,074           5,858,328        6,357,447            5,858,328      
                                             ==========          ==========       ==========           ==========      
</TABLE>
        

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


                                       4
<PAGE>   5
                          AMERICAN REALTY TRUST, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 For the Nine Months Ended September 30, 1996

<TABLE>
<CAPTION>                  

                            Series B    Series C            
                            Preferred   Preferred    Common    Treasury     Paid-in    Accumulated     Stockholders'
                              Stock       Stock      Stock       Stock      Capital     (Deficit)         Equity    
                            ---------   ---------   --------   --------    --------    -----------     -------------
                                                          (dollars in thousands)
<S>                          <C>         <C>        <C>         <C>        <C>          <C>             <C>

Balance, January 1, 1996..   $   -       $   -      $    59     $   -      $ 66,719     $ (13,720)      $ 53,058
                                                                    
Common Stock issued.......       -           -            9         -            (9)           -              -
                                                                    
Series B Preferred Stock                                            
  issued..................         8         -          -           -           392            -             400
                                                                     
Series C Preferred Stock                                              
  issued..................       -            30        -           -         1,470            -           1,500
                                                                   
Common Stock cash dividend                                         
  ($.20 per share)........       -           -          -           -            -         (1,320)        (1,320)
                                                                   
Redemption of share                                                
  purchase rights ($.015                                           
  per right per share)....       -           -          -           -            -           (101)          (101)
                                                                   
Series B Preferred Stock                                           
  cash dividend distribu-                                          
  tion ($3.96 per share)..       -           -          -           -            -            (16)           (16)
                                                                   
Series C Preferred Stock                                           
  stock dividend..........       -             1        -           -            48           (49)            -
                                                                   
Treasury stock, at cost...       -           -          -           (3)           3            -              -
                                                                   
Net (loss)................       -           -          -           -            -         (1,589)        (1,589)
                             -------     -------    -------    -------     --------     ---------       --------
                                                            
Balance, September 30,                                      
  1996....................   $     8     $    31    $    68    $    (3)    $ 68,623     $ (16,795)      $ 51,932
                             =======     =======    =======    =======     ========     =========       ========

</TABLE>


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


                                       5
<PAGE>   6
                          AMERICAN REALTY TRUST, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                               For the Nine Months
                                                                               Ended September 30,    
                                                                           ---------------------------
                                                                              1996             1995   
                                                                           -----------     -----------
                                                                             (dollars in thousands)
<S>                                                                        <C>             <C>
Cash Flows From Operating Activities
  Rents collected.....................................................     $    14,760     $    15,228   
  Interest and dividends collected....................................           3,197           4,579   
  Distributions received from equity investees' operating cash flow...           8,626           1,219   
  Payments for property operations....................................         (11,628)        (11,220)  
  Interest paid.......................................................          (5,881)         (6,154)  
  Advisory and servicing fees paid to affiliate.......................          (1,093)           (871)  
  General and administrative expenses paid............................          (2,169)         (1,626)  
  Other...............................................................             417             191   
                                                                           -----------     -----------   
                                                                                                         
     Net cash provided by operating activities........................           6,229           1,346   
                                                                                                         
                                                                                                         
Cash Flows From Investing Activities                                                                     
  Collections on notes receivable.....................................             640           1,423   
  Notes receivable funded.............................................            (100)           (430)  
  Proceeds from sale of real estate...................................           6,740          12,312   
  Proceeds from sale of marketable equity securities..................          22,564          11,307   
  Purchases of marketable equity securities...........................         (21,271)        (13,832)  
  Investment in equity investees......................................         (14,219)         (6,794)  
  Purchases of real estate............................................          (5,658)        (14,076)  
  Earnest money deposits..............................................            (526)            -     
  Real estate improvements............................................          (1,901)         (1,827)  
                                                                           -----------     -----------   
                                                                                                         
     Net cash (used in) investing activities..........................         (13,731)        (11,917)  
                                                                                                         
                                                                                                         
Cash Flows From Financing Activities                                                                     
  Proceeds from notes payable.........................................          48,153          23,700   
  Payments on notes payable...........................................         (29,486)        (17,840)  
  Deferred borrowing costs............................................          (3,019)         (1,200)  
  Net repayment of advances from affiliates...........................          (7,530)            (23)  
  Margin borrowings, net..............................................             464           6,896   
  Proceeds from issuance of Series B preferred stock..................             400             -     
  Distributions to stockholders.......................................          (1,437)            -     
                                                                           -----------     -----------   
     Net cash provided by financing activities........................           7,545          11,533   
                                                                                                         
     Net increase in cash and cash equivalents........................              43             962   
                                                                                                         
Cash and cash equivalents, beginning of period........................           1,054             193   
                                                                           -----------     -----------   
                                                                                               
Cash and cash equivalents, end of period..............................     $     1,097     $     1,155
                                                                           ===========     ===========
</TABLE>


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


                                       6
<PAGE>   7
                          AMERICAN REALTY TRUST, INC.
               CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued


<TABLE>
<CAPTION>
                                                                              For the Nine Months
                                                                               Ended September 30,    
                                                                           --------------------------
                                                                              1996            1995   
                                                                           -----------     ----------
                                                                             (dollars in thousands)
<S>                                                                        <C>              <C>
Reconciliation of net (loss) to net cash provided by operating 
  activities
  Net (loss)...........................................................    $   (1,589)      $  (3,143)
  Adjustments to reconcile net (loss) to net cash provided by 
     operating activities                                                          
     Extraordinary gain................................................          (381)           (758)
     Depreciation and amortization.....................................         1,319           1,258
     Gain on sale of real estate.......................................        (7,799)         (2,544)
     Distributions from equity investees' operating cash flow..........         8,626           1,219
     Equity in losses of investees.....................................         3,122           4,369
     Unrealized (gain) loss on marketable equity securities............          (598)            408
     (Increase) decrease in interest receivable........................           (93)             64
     Decrease in other assets..........................................         2,151             955
     Increase (decrease) in interest payable...........................           844            (173)
     (Decrease) in accounts payable and other liabilities..............          (131)           (475)
     Other.............................................................           758             166
                                                                           ----------       ---------
                                                                                               
       Net cash provided by operating activities.......................    $    6,229       $   1,346
                                                                           ==========       =========


Schedule of noncash financing activities

Issuance of 15,489 shares of Series C Preferred
  Stock with a liquidation value of $1.5 million.......................    $       31       $     -
</TABLE>


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


                                       7
<PAGE>   8
                          AMERICAN REALTY TRUST, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.      BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements of American Realty Trust,
Inc. and consolidated entities (the "Company") have been prepared in conformity
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Operating results for the nine month period ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.  For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K").

Certain balances for 1995 have been reclassified to conform to the 1996
presentation.  Shares and per share data have been restated for the two for one
forward share split effected January 2, 1996.

NOTE 2.      SYNTEK ASSET MANAGEMENT, L.P.

In August 1996, the Company purchased a pool of assets from Southmark
Corporation ("Southmark") for $3.1 million.  See NOTE 4. "REAL ESTATE."
Included in the asset pool was Southmark's 19.2% limited partnership interest
in Syntek Asset Management, L.P. ("SAMLP").  Such purchase increased the
Company's limited partner interest in SAMLP from 76.8% to 96%.  SAMLP is the
general partner of National Realty, L.P. ("NRLP") and National Operating, L.P.
("NOLP"), the operating partnership of NRLP.  Gene E. Phillips, a Director and
Chairman of the Board of the Company until November 16, 1992, is a general
partner of SAMLP, and until March 4, 1994, William S. Friedman, a Director and
President of the Company until December 31, 1992, was also general partner of
SAMLP.

NRLP, SAMLP and Messrs. Phillips and Friedman were among the defendants in a
class action lawsuit arising from the formation of NRLP.  An agreement settling
such lawsuit for the above mentioned defendants became effective on July 5,
1990.  The settlement agreement provided for, among other things, the
appointment of an NRLP oversight committee; the establishment of specified
annually increasing targets for five years relating to the price of NRLP's
units of limited partner interest; a limitation and deferral or waiver of
NRLP's reimbursement to SAMLP of certain future salary costs; a deferral or
waiver of certain future compensation to SAMLP; the required distribution to
unitholders of all of NRLP's cash from operations in excess of certain
renovation costs unless the NRLP oversight committee approves alternative uses
for such cash from operations; the issuance of unit purchase warrants to
members of the plaintiff class; and the contribution by the then individual
general partners of $2.5 million to NRLP over a four-year period.  In
accordance with the indemnification provisions of SAMLP's agreement of limited
partnership, SAMLP agreed to indemnify Messrs.  Phillips and


                                       8
<PAGE>   9
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 2.      SYNTEK ASSET MANAGEMENT, L.P. (Continued)

Friedman, the individual general partners, at the time, of SAMLP, for the $2.5
million payment to NRLP.  The final annual installment of principal and
interest was paid by SAMLP in May 1994.

The settlement agreement provides for the resignation and replacement of SAMLP
as general partner if the unit price targets are not met for two consecutive
anniversary dates.  NRLP did not meet the unit price targets for the first and
second anniversary dates.  On July 8, 1992, SAMLP notified the NRLP oversight
committee of the failure of NRLP to meet the unit price targets for two
successive years and that it expects to resign as general partner of NRLP and
NOLP.

The withdrawal of SAMLP as general partner would require NRLP to purchase
SAMLP's general partner interest (the "Redeemable General Partner Interest") at
its then fair value, and to pay certain fees and other compensation as provided
in the partnership agreement.  Syntek Asset Management, Inc. ("SAMI"), the
managing general partner of SAMLP, has calculated the fair value of such
Redeemable General Partner Interest to be $36.2 million at September 30, 1996,
before reduction for the principal balance ($4.2 million at September 30, 1996)
and accrued interest ($5.9 million at September 30, 1996) on the note
receivable from SAMLP for its original capital contribution to the partnership.

In January 1995, NRLP, SAMLP and the NRLP oversight committee executed an
Implementation Agreement which provides for the nomination of a successor
general partner to succeed SAMLP and for the resolution of all related matters
under the class action settlement.  On February 20, 1996, the parties to the
Implementation Agreement executed an Amended and Restated Implementation
Agreement.

Provided that the successor general partner is elected pursuant to the terms of
the amended and restated Implementation Agreement, SAMLP shall receive
$12,471,500 from NRLP.  This amount represents a compromise settlement of the
net amounts owed by NRLP to SAMLP upon SAMLP's withdrawal as general partner
and any amounts which SAMLP and its affiliates may owe to NRLP.  This amount
shall be paid to SAMLP pursuant to a promissory note in accordance with the
terms set forth in the Amended and Restated Implementation Agreement.

The Amended and Restated Implementation Agreement has been submitted to the
Judge appointed to supervise the class action settlement (the "Supervising
Judge") for tentative approval and approval of the notice to be sent to the
original class members.  On September 23, 1996, the Supervising Judge entered
an order granting tentative approval of the Amended and Restated Implementation
Agreement and the form of notice.  However, the order reserved jurisdiction to
determine other matters which must be resolved prior to final approval.  Upon
final approval by the Supervising Judge, the proposal to elect the successor
general partner will be submitted to the NRLP unitholders for a vote.  In
addition, the unitholders will vote upon amendments to NRLP's partner-


                                       9
<PAGE>   10
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 2.      SYNTEK ASSET MANAGEMENT, L.P. (Continued)

ship agreement which relate to the proposed compensation of the successor
general partner and other related matters.

The Amended and Restated Implementation Agreement provides that SAMLP, and its
affiliates owning units in NRLP, shall not vote to remove the successor general
partner, except for removal with cause, for a period of 36 months from the date
the successor general partner takes office.

Upon approval by NRLP's unitholders, SAMLP shall resign as general partner of
NRLP and NOLP and the successor general partner shall take office.  If the
required approvals are obtained, it is anticipated that the successor general
partner may be elected and take office during the first quarter of 1997.

Upon the election and taking office of the successor general partner, the class
action settlement and the NRLP oversight committee shall be terminated.  If the
successor general partner nominee is not elected, the existing settlement shall
remain in full force and effect and all of the provisions of the Amended and
Restated Implementation Agreement shall be voided, including the compromise
settlement referred to above.

On September 3, 1996, Joseph B. Moorman filed a Motion for Orders Compelling
Enforcement of the Moorman Settlement Agreement, Appointment of a Receiver and
Collateral Relief with the Superior Court of California in and for the County
of San Mateo.  The motion alleges that the settling defendants had failed or
refused to perform their obligations under the Moorman Settlement Agreement.
The motion requested that SAMLP be removed as general partner and a receiver be
appointed to manage the Partnership.  The motion also requested that the
Company be ordered to deliver to the court all NRLP units which had been
purchased by the Company since August 7, 1991.  A hearing was held on this
motion on October 4, 1996, and the court took the matter under submission.  No
ruling has been made on this matter.

NOTE 3.      NOTES AND INTEREST RECEIVABLE

In February 1996, the Company refinanced the $7.8 million of debt
collateralized by a mortgage note receivable with a balance of $18.3 million at
September 30, 1996, which is secured by the Las Vegas Shopping Center in Las
Vegas, Nevada, for $12.0 million.  The Company received net refinancing
proceeds of $2.3 million after the payoff of the existing debt, payment of
closing costs associated with the refinancing and making a $1.5 million paydown
on the term loan secured by land in Las Colinas, in exchange for that lender's
release of its participation interest in the note receivable.  The new loan
bears interest at 15% per annum, requires monthly principal and interest
payments of $152,000 and matures February 6, 1998.  The Company paid Basic
Capital Management, Inc. ("BCM"), the Company's advisor, a mortgage brokerage
and equity refinancing fee of $120,000 based upon the $12.0 million
refinancing.


                                       10
<PAGE>   11
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 3.      NOTES AND INTEREST RECEIVABLE (Continued)

In August 1990, the Company foreclosed on its fourth lien note receivable
secured by the Continental Hotel and Casino in Las Vegas, Nevada.  The Company
acquired the hotel and casino property at foreclosure subject to first and
second lien mortgages totaling $10.0 million and a disputed third lien
mortgage.  In June 1992, the Company sold the hotel and casino to the third
lien holder accepting as partial payment a $22.0 million wraparound mortgage
note receivable.  The Company's wraparound mortgage note receivable had a
principal balance of $22.7 million at September 30, 1996.

In April 1996, the underlying liens relating to this wraparound mortgage note
receivable were refinanced for $16.8 million.  The Company received net cash of
$11.2 million after the payoff of the two underlying liens then totaling $2.9
million, the payment of various closing costs associated with the refinancing
and making a $1.4 million paydown on the term loan secured by land in Las
Colinas, Texas, in exchange for that lender's release of its participation
interest in the wraparound note receivable.  Such paydown was credited against
the term loan payments that would have otherwise been due in May and November
1996.  The new loan bears interest at 16.5% per annum, requires monthly
interest only payments at a rate of 12.5% with the remaining 4% being deferred
and added to principal.  The loan matures April 16, 1998.  The Company paid BCM
a mortgage brokerage and equity refinancing fee of $168,000 based upon the
$16.8 million refinancing.

At September 30, 1996, the Company held a mortgage note receivable secured by a
third lien on a commercial property in South Carolina and personal guaranties
of several individuals.  The borrower had failed to make the required payments
of principal and interest since December 1, 1994.  The Company accelerated the
note and instituted foreclosure proceedings, as well as actions against the
guarantors of the note.  Effective September 1, 1995, the note was extended to
September 1, 1996, requiring a $68,000 principal reduction payment with the
monthly interest, quarterly principal payments and all other terms remaining
the same.  The Company received $43,000 of the required principal reduction
payment in 1995 and received the remaining $25,000 in 1996 as well as the
required first and second quarterly principal reduction payments totaling
$50,000.  The Company and the borrower again agreed to extend the mortgage note
receivable's maturity date to September 1, 1997.  The extension required an
additional $90,000 principal reduction payment payable in three equal monthly
installments beginning November 1, 1996.  The monthly interest, quarterly
principal reduction payments of $25,000 and all other terms remain the same.
The first $25,000 quarterly principal reduction payment is due December 1,
1996.  The principal balance of the note was $179,000 at September 30, 1996 and
the note is performing in accordance with its amended terms.

In May 1996, the Company funded a $100,000 second lien mortgage secured by a
single family residence in Oklahoma City, Oklahoma.  The mortgage





                                       11
<PAGE>   12
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 3.      NOTES AND INTEREST RECEIVABLE (Continued)

note receivable bears interest at 10% per annum with the principal and accrued
but unpaid interest being payable in a single installment on demand.  The
mortgage note receivable matures June 1, 1998.

The borrower on a $1.7 million first lien mortgage note receivable secured by
land in Osceola, Florida, failed to pay the note on its November 1, 1993
maturity.  The Company  instituted foreclosure proceedings and was awarded
summary judgment in January 1994.  During 1994 and 1995, the borrower paid the
Company a total of $270,000 in nonrefundable fees to delay foreclosure of the
property until April 24, 1995. On April 21, 1995, the borrower filed for
bankruptcy protection.  In July 1995, the Company filed a motion with the
bankruptcy court to lift the court's stay and allow the Company to proceed with
foreclosure.  In September 1995, the bankruptcy court denied the Company's
motion to lift stay and the borrower was allowed to file a plan of
reorganization.  The bankruptcy court set a hearing date of May 15, 1996 for
confirmation of the borrower's plan of reorganization.  The borrower failed to
present a confirmable plan of reorganization and the bankruptcy court converted
the bankruptcy proceeding to a Chapter 7 liquidation proceeding.  On August 24,
1996, the bankruptcy court's stay was lifted allowing the Company to proceed
with foreclosure.  The Company expects to receive title to the property in
December 1996.  The note had a principal balance of $1.6 million at September
30, 1996.  The Company does not expect to incur any loss resulting from
foreclosing on the collateral property, as its estimated fair value, less costs
of sale, exceeds the carrying value of the note.

NOTE 4.      REAL ESTATE

In March 1996, the Company sold 2.3 acres of the 74.9 acre Las Colinas land
parcel for $961,000 in cash.  In accordance with the provisions of the term
loan secured by such parcel, the Company applied the net proceeds of the sale,
$891,000, to pay down the term loan, $400,000 being applied to pay off the
remaining balance owing on the $3.0 million principal payment due March 31,
1996, with the remaining $491,000 being applied against the principal payment
of $1.5 million otherwise due in May 1996.  The Company recognized a gain of
$538,000 on the sale.

In May 1996, the Company sold an additional 2.3 acres of the 74.9 acre Las
Colinas land parcel for $941,000 in cash.  The Company applied the net proceeds
of the sale of $864,000 to paydown the term loan secured by such parcel in
accordance with provisions of the loan.  The net proceeds were applied toward
the $3.0 million principal payment otherwise due in November 1996.  The Company
recognized a gain of $538,000 on the sale.  At September 30, 1996, 63.4 acres
remained to be sold.

Also in May 1996, the Company purchased a 2,271 square foot single family
residence in Dallas, Texas for $266,000 in cash.  In August 1996, the Company
financed the residence for $173,000.  The Company received


                                       12
<PAGE>   13
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 4.      REAL ESTATE (Continued)

net financing proceeds of $168,000 after the payment of various closing costs
associated with the financing.  The loan bears interest at the prime rate plus
1%, currently 9.25% per annum, requires monthly principal and interest payments
of $2,000 and matures August 16, 2008.

In June 1996, the Company purchased 442 acres of partially developed land in
Denver, Colorado for $8.5 million.  In connection with the acquisition, the
Company obtained purchase money financing for $7.5 million and issued 15,000
shares of the Company's Series C 10% cumulative preferred stock with an
aggregate liquidation value of $1.5 million.  See NOTE 11. "PREFERRED STOCK."
The excess financing proceeds of $500,000 were applied to the various closing
costs associated with the acquisition in addition to $272,000 of such costs
which the Company paid in cash.  The loan bears interest at 15% per annum,
requires monthly interest only payments at a rate of 12% with the remaining 3%
being deferred and added to the principal balance of the loan.  The principal
balance, accrued and unpaid interest and a $600,000 "maturity fee" is due at
maturity on June 1, 1998.  The Company paid a real estate brokerage commission
of $255,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of BCM, the
Company's advisor, based on the $8.5 million purchase price.

Also in June 1996, the Company sold for $120,000 in cash a tract of land in
Midland, Michigan that was leased under a long-term land lease.  The Company
recognized a gain of $44,000 on the sale.

In October 1995, the Company purchased a 92.6 acre tract of partially developed
land in Las Colinas, Texas.  In February 1996, the Company entered into a
contract to sell 72.5 acres for $12.9 million in cash.  The contract calls for
the sale to close in two phases.  The first phase closed in July 1996, as
discussed below, and the second phase is to close on or before December 31,
1996.

In July 1996, the Company completed the first phase sale of 32.3 acres of the
72.5 acres for $4.9 million in cash.  The Company applied the net proceeds of
the sale, $4.7 million, to paydown the term loan, in accordance with its terms,
in exchange for that lenders' release of its collateral interest in the 32.3
acres sold.  The Company recognized a gain of $2.0 million on such sale.

Also in July 1996, the Company purchased 568 acres of partially developed land
located in Houston, Texas for $6.2 million.  The Company paid $451,000 in cash
and obtained seller mortgage financing for $5.7 million.  The loan bears
interest at 9% per annum, requires a $500,000 principal and interest payment on
November 1, 1996 and quarterly principal and interest payments of $145,000,
thereafter.  The Company made the November 1, 1996 principal and interest
payment.  The loan matures August 1, 1998.  The Company paid a real estate
brokerage commission of $187,000 to Carmel Realty based on the $6.2 million
purchase price.  In September 1996, the Company entered into a contract





                                       13
<PAGE>   14
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 4.      REAL ESTATE (Continued)

to sell the land for a price in excess of the land's purchase price and
carrying and estimated selling costs.  The sale, should it be consummated,
would close on December 1, 1997.

In August 1996, the Company purchased a pool of assets for $3.1 million from
Southmark, consisting of a total of 151 acres of raw land in California,
Indiana and Idaho, various percentage interests, ranging from 15% to 45%, in
five partnerships and trusts that hold an unsecured note receivable with a
principal balance of $3.4 million and Southmark's 19.2% limited partnership
interest in SAMLP.  See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P."  To complete
the acquisition, the Company borrowed an additional $3.0 million from the
lender whose term loan is secured by the Company's 63.4 acres of land in Las
Colinas, Texas.  The term loan was amended to increase the loan amount from
$10.9 million to $13.9 million.  The $3.0 million advance is secured by the 122
acres of raw land purchased in California and the 19.2% limited partnership
interest in SAMLP.

Also in August 1996, the Company purchased 280 acres of partially developed
land in Dallas County, Texas for $13.5 million.  The Company paid $3.8 million
in cash and borrowed the remaining $9.7 million as the third advance under the
term loan from the lender discussed above.  The term loan was again amended
increasing the term loan amount from $13.9 million to $19.5 million with an
additional $4.0 million being loaned on an overline advance note.  The
amendment also changed the principal reduction payments to $2.0 million in
November 1996 and $3.0 million on the last day of December 1996, March 1997,
June 1997, September 1997 and January 1998, and adds 240 acres of the 280 acres
of the land purchased as additional collateral on the term loan.  All other
terms of the term loan remained unchanged.  The Company paid a real estate
brokerage commission of $406,000 to Carmel Realty based on the $13.5 million
purchase price.

In 1991, the Company purchased all of the capital stock of a corporation which
owned 198 developed residential lots in Fort Worth, Texas.  Through December
31, 1995, 176 of the residential lots had been sold.  During 1996, 12
additional lots have been sold for an aggregate gain of $24,000.  At September
30, 1996, 10 lots remained to be sold.

NOTE 5.      INVESTMENT IN REAL ESTATE ENTITIES

The Company's investment in real estate entities at September 30, 1996,
includes (i) equity securities of three publicly traded real estate investment
trusts (collectively the "REITs"), Continental Mortgage and Equity Trust
("CMET"), Income Opportunity Realty Investors, Inc., formerly Income
Opportunity Realty Trust (collectively "IORI") and Transcontinental Realty
Investors, Inc. ("TCI"), (ii) units of limited partner interest of NRLP, (iii)
a general partnership interest in NRLP and NOLP, the operating partnership of
NRLP, through the Company's 96% limited partner interest in SAMLP and (iv)
interests in real estate





                                       14
<PAGE>   15
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 5.      INVESTMENT IN REAL ESTATE ENTITIES (Continued)

joint venture partnerships.  BCM, the Company's advisor, serves as advisor to
the REITs, and performs certain administrative and management functions for
NRLP and NOLP on behalf of SAMLP.

The Company accounts for its investment in the REITs, NRLP and the joint
venture partnerships under the equity method.  The Company continues to account
for its investment in NRLP under the equity method due to the pending
resignation of SAMLP as general partner of NRLP.  See NOTE 2.  "SYNTEK ASSET
MANAGEMENT, L.P."  Substantially all of the Company's equity securities of the
REITs and NRLP are pledged as collateral for borrowings.  See NOTE 9. "MARGIN
BORROWINGS."

The Company's investment in real estate entities, accounted for using the
equity method, at September 30, 1996 was as follows:

<TABLE>
<CAPTION>
                                                                                             
                                                                                             
                                                                                             
                                                                                                                 
                                                      Equivalent                                        
             Percentage             Carrying           Investee                   
           of the Company's         Value of          Book Value                Market Value               
             Ownership at        Investment at            at                  of Investment at
Investee  September 30, 1996   September 30, 1996  September 30, 1996        September 30, 1996
--------  ------------------   ------------------  ------------------        ------------------
<S>            <C>                <C>                 <C>                       <C>
  NRLP         52.9%              $   10,682          $         *               $    41,865
  CMET         39.0                   14,617              31,745                     17,564
  IORI         28.9                    2,765               6,247                      4,503
  TCI          29.6                    6,420              23,762                     11,758
                                  ----------                                    -----------
                                      34,484                                    $    75,690
                                                                                ===========
General partner interest in         
  NRLP and NOLP                        8,847
Other equity investees                11,004
                                  ----------
                                  $   54,335
                                  ==========
</TABLE>


--------------------
*         At September 30, 1996, NRLP reported a deficit partners' capital.
          The Company's share of NRLP's revaluation equity at December 31,
          1995, was $161.5 million.  Revaluation equity is defined as the
          difference between the appraised value of the partnership's real
          estate, adjusted to reflect the partnership's estimate of disposition
          costs, and the amount of the mortgage notes payable and accrued
          interest encumbering such property as reported in NRLP's Annual
          Report on Form 10-K for the year ended December 31, 1995.

The difference between the carrying value of the Company's investment and the
equivalent investee book value is being amortized over the life of the
properties held by each investee.

The Company's management continues to believe that the market value of each of
the REITs and NRLP undervalues their assets and the Company may, therefore,
continue to increase its ownership in these entities in 1996.


                                       15
<PAGE>   16
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 5.   INVESTMENT IN REAL ESTATE ENTITIES (Continued)

Set forth below is summarized results of operations for the Company's equity
investees for the nine months ended September 30, 1996:

Equity investees owned over 50%:

<TABLE>
    <S>                                                    <C>
    Revenues..........................................     $ 93,669
    Property operating expenses.......................      (60,760)
    Depreciation......................................       (8,087)
    Interest expense..................................      (26,019)
                                                           -------- 
    Net (loss)........................................     $ (1,197)
                                                           ======== 
</TABLE>                                              

The Company's share of over 50% owned equity investees' losses was $181,000 for
the nine months ended September 30, 1996.

Equity investees owned less than 50%:

<TABLE>
    <S>                                                                       <C>          
    Revenues.........................................................         $ 75,110     
    Equity in (loss) of partnerships.................................             (246)     
    Property operating expenses......................................          (51,770)    
    Depreciation.....................................................          (10,647)  
    Interest expense.................................................          (22,337)    
    Provision for loss...............................................             (759)     
                                                                              --------     
    (Loss) before gains on sale of real estate and extraordinary
      gains..........................................................          (10,649)
    Gain on sale of real estate......................................           11,410
    Extraordinary gain...............................................            1,068
                                                                              --------
    Net income.......................................................         $  1,829
                                                                              ========
</TABLE>

The Company's share of less than 50% owned equity investees' loss before gain
on sale of real estate and extraordinary gains was $2.9 million for the nine
months ended September 30, 1996.  The Company's share of equity investees gains
on sale of real estate and extraordinary gains was $4.6 million and $381,000,
respectively, for the nine months ended September 30, 1996.

The Company's cash flow from the REITs and NRLP is dependent on the ability of
each of the entities to make distributions.  In the first nine months of 1996,
the Company received aggregate distributions of $8.6 million from the REITs and
NRLP.

In the first nine months of 1996, the Company purchased a total of $944,000 of
equity securities of the REITs and NRLP.

IORI was scheduled to begin liquidation of its assets prior to October 24,
1996.  However, on March 15, 1996, IORI's stockholders approved a proposal to
convert IORI from a finite life business trust to a perpetual life corporation.

In April 1996, the Company purchased a 28% general partner interest in Campbell
Center Associates, Ltd. which in turn has a 56.25% interest in


                                       16
<PAGE>   17
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 5.   INVESTMENT IN REAL ESTATE ENTITIES (Continued)

Campbell Centre I, which owns a 413,175 square foot office building in Dallas,
Texas.  The purchase price of the general partner interest was $550,000 in cash
and a $500,000 note, which bears interest at 8% per annum, requires monthly
interest only payments commencing in April 1997 and matures April 2000.

In July 1996, a newly formed limited partnership, of which the Company is 1%
general partner, purchased 580 acres of land in Collin County, Texas for $5.7
million in cash.  The Company paid $100,000 in cash with  the remaining $5.6
million being contributed by the limited partner.  The partnership agreement
designates the Company as the managing general partner.  The Partnership
agreement also provides that the limited partner receive a 12% preferred
cumulative return on its investment before any sharing of partnership profits.

In January 1992, the Company entered into a partnership agreement with an
entity affiliated with the owner, at the time, of in excess of 14% of the
Company's outstanding shares of Common Stock, to acquire 287 developed
residential lots adjacent to the Company's other residential lots in Fort
Worth, Texas.  The partnership agreement designates the Company as managing
general partner.  The partnership agreement also provides each of the partners
with a guaranteed 10% return on their respective investments.  Through December
31, 1995, 132 residential lots had been sold.  In the first nine months of 1996
an additional 48 lots were sold.  At September 30, 1996, 107 lots remained to
be sold.  For the nine months ended September 30, 1996, each partner had
received $135,000 in return of capital distributions and $161,000 in profit
distributions from the partnership.

NOTE 6.   OTHER EQUITY INVESTMENTS

In April 1996, a newly formed wholly-owned subsidiary of the Company purchased
for $10.7 million in cash 80% of the common stock of an entity which in turn
had acquired 26 operating pizza parlors in various communities in California's
San Joaquin Valley.  Concurrent with the purchase, the Company granted to an
individual an option to purchase 36.25% of the Company's subsidiary at any time
for the Company's net investment in such subsidiary.  Additionally, the Company
is in negotiations with underwriters to take such subsidiary public by the
first quarter of 1997.  Accordingly, the Company believes its control of such
subsidiary is temporary and therefore accounts for such subsidiary under the
equity method.

NOTE 7.   MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO

In the first quarter of 1994, the Company began purchasing equity securities of
entities other than those of the REITs and NRLP to diversify and increase the
liquidity of its margin accounts.  In the first nine months of 1996, the
Company purchased $21.3 million and sold $22.6 million of such securities.
These equity securities are consid-


                                       17
<PAGE>   18
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 7.      MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO

ered a trading portfolio and are carried at market value.  At September 30,
1996, the Company recognized an unrealized increase in the market value of its
trading portfolio securities of $598,000.  Also in the first nine months of
1996, the Company realized a net loss of $5,000 from the sale of trading
portfolio securities and received $200,000 in dividends.  Unrealized and
realized gains and losses on trading portfolio securities are included in other
income in the accompanying Consolidated Statements of Operations.

NOTE 8.      NOTES AND INTEREST PAYABLE

In April 1996, the Company refinanced the $5.1 million first and second lien
debt related to the Denver Merchandise Mart in Denver, Colorado for $15.0
million.  The new loan is secured by a first lien mortgage against the Denver
Merchandise Mart and a pledge of 632,000 newly issued shares of the Company's
common stock.  See NOTE 10. "COMMON STOCK."  The Company received net
refinancing proceeds of $7.8 million after the payoff of the first and second
lien debt, purchasing the ground lease on Denver Merchandise Mart for $678,000
and payment of various closing costs associated with the refinancing.  The new
loan bears interest at the prime rate plus 2.25%, currently 10.5% per annum,
requires monthly principal and interest payments of $142,000 and matures
October 31, 1997.  The Company paid BCM a mortgage brokerage and equity
refinancing fee of $150,000 based upon the $15.0 million refinancing.

In August 1996, the Company refinanced the $2.4 million first lien mortgage
secured by the Rosedale Towers Office Building in Roseville, Minnesota for $2.8
million.  The Company received net refinancing proceeds of $154,000 after the
payoff of the existing mortgage debt and payment of various closing costs
associated with the refinancing.  The Company also received 282,352 shares of
Common Stock of the Company that it had pledged as additional collateral on the
refinanced mortgage debt.  Such shares are held as treasury stock by the
Company.  The new loan bears interest at 9.05% per annum, requires monthly
principal and interest payments of $24,000 and matures August 16, 2006.  The
Company paid BCM a mortgage brokerage and equity refinancing fee of $28,000
based upon the $2.8 million refinancing.

Also in August 1996, the Company financed the Inn at the Mart in Denver,
Colorado for $2.0 million to facilitate renovation of the property.  The
Company received net financing proceeds of $890,000 after the payment of
various closing costs associated with the financing and a $1.1 million
renovation holdback.  The Company expects the lender to advance the $1.1
million renovation holdback by December 1996.  The new loan bears interest at
the prime rate plus 2.25%, currently 10.50% per annum and requires monthly
interest only payments through February 1, 1998.  Commencing March 1, 1998,
monthly payments of interest plus a $3,000 principal paydown are required until
maturity on September 1, 2001.  The Company paid BCM a mortgage brokerage and
equity refinancing fee of $9,500 based upon the $2.0 million financing net of
the $1.1 million renovation holdback.





                                       18
<PAGE>   19
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 8.      NOTES AND INTEREST PAYABLE (Continued)

In October 1996, the Company completed the sale of $1.1 million in 11-1/2%
senior subordinated notes in a private placement.  The notes require interest
to be paid semi-annually on March 31 and September 30 of each year commencing
March 31, 1997 and are due on September 30, 1999, subject to the right of the
Company to call the notes for early redemption at no penalty or premium to the
Company.

NOTE 9.      MARGIN BORROWINGS

The Company has margin arrangements with various brokerage firms which provide
for borrowing of up to 50% of the market value of the Company's marketable
equity securities.  The borrowings under such margin arrangements are secured
by equity securities of the REITs, NRLP and the Company's trading portfolio and
bear interest rates ranging from 6.5% to 9.25%.  Margin borrowings totaled
$36.8 million at September 30, 1996.

In August 1996, the Company consolidated its existing NRLP margin debt held by
various brokerage firms into a single loan of $20.3 million.  The loan is
secured by the Company's NRLP units with a market value of at least 50% of the
principal balance.  The Company received $1.9 million in cash after the payment
of $617,000 in various closing costs associated with the financing and a $17.8
million holdback, pending the lender's receipt of the remaining NRLP units as
collateral.  As of October 31, 1996, the Company had pledged 3,208,119 NRLP
units with a market value of $39.8 million and the lender had released $16.8
million of the holdback directly to the brokerage firms in payment of the
margin debt related to the NRLP units received.  The lender is to receive the
final 200,600 NRLP units with a market value of $2.4 million in November 1996.
These NRLP units are currently being held as additional collateral on the term
loan secured by the Company's 63.4 acres of Las Colinas land and will be
released upon receipt of a $2.0 million term loan paydown in November 1996.
See NOTE 4. "REAL ESTATE."  The $20.3 million margin loan bears interest at the
30 day LIBOR rate plus 4.50%, currently 9.94% per annum, requires monthly
interest only payments and matures the earlier of August 30, 1999 or the
refinancing of NRLP's secured debt.  The Company paid BCM a mortgage brokerage
and equity refinancing fee of $203,300 based upon the $20.3 million financing.

Also in August 1996, the Company obtained a $2.0 million margin loan from a
financial institution secured by a pledge of $4.0 million of previously
unencumbered equity securities of the REITs owned by the Company and Common
Stock of the Company owned by BCM.  The Company received $1,966,000 in net cash
after the payment of closing costs associated with the margin loan.  The loan
bears interest at the prime rate plus 2.25%, currently 10.50% per annum,
requires monthly interest only payments and matures August 2, 1997.

In September 1996, the same lender made a second $2.0 million loan.  The second
margin loan is secured by a pledge of $5.0 million previously unencumbered
equity securities of the REITs owned by the Company and





                                       19
<PAGE>   20
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 9.      MARGIN BORROWINGS (Continued)

Common Stock of the Company owned by BCM.  The Company received $1,970,000 in
net cash after the payment of closing costs associated with the margin loan.
The margin loan bears interest at the prime rate plus 2.25%, currently 10.50%
per annum, requires interest only payments and matures September 27, 1997.

NOTE 10.     COMMON STOCK

At September 30, 1996 and December 31, 1995, there were authorized 16,667,000
shares of Common Stock, par value $.01 per share, of which  6,739,540 and
5,858,328 shares were outstanding at the respective dates.  The increase in
Common shares outstanding is described below.

In April 1996, the Company issued 250,000 shares of Common Stock to ND
Investments, Inc., a wholly-owned subsidiary of the Company, which pledged such
shares as additional collateral for the loan secured by the 92.6 acres of
partially developed land in Las Colinas, Texas.  See NOTE 4. "REAL ESTATE."

Also in April 1996, the Company issued 632,000 shares of Common Stock to Garden
Capital Merchandise Mart, Inc., a wholly-owned subsidiary of the Company, which
pledged such shares as additional collateral for the loan secured by the Denver
Merchandise Mart, in Denver, Colorado.  See NOTE 8. "NOTES AND INTEREST
PAYABLE."

On June 12, 1996, the Company's Board of Directors announced the resumption of
the payment of dividends on the Company's Common Stock with the declaration of
a second quarter dividend of $.10 per share.  The Company had last paid
dividends on May 15, 1990.  The initial distribution totaling $674,000 was paid
on July 8, 1996 to stockholders of record on June 21, 1996.  On September 30,
1996, the Company paid a third quarter dividend of $.10 per share totaling
$674,000 distributed to stockholders of record on September 13, 1996.  Future
distributions to stockholders will be dependent upon the Company's realized
income, financial condition, capital requirements and other factors deemed
relevant by the Company's Board of Directors.

Also on June 12, 1996, the Company announced the redemption of the outstanding
share purchase rights for $.01 per right.  As of the date of redemption, each
share of Common Stock represented 1.5 share rights. The redemption proceeds
totaling $101,000 were also distributed on July 8, 1996 to stockholders of
record on June 21, 1996.  These rights were initially distributed to
stockholders on April 23, 1990.

NOTE 11.    PREFERRED STOCK

In April 1996, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series B 10% cumulative Preferred
Stock, par value $2.00 per share, and a liquidation value of $100 per share out
of the 20,000,000 shares authorized.  The Series B





                                       20
<PAGE>   21
                          AMERICAN REALTY TRUST, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



NOTE 11.    PREFERRED STOCK (Continued)

Preferred Stock consists of a maximum of 4,000 shares, all of which were sold
April 4, 1996 for $400,000 in cash in a private transaction.  Dividends are
payable at a rate of $10.00 per year or $2.50 per quarter to stockholders of
record on the 15th day of each March, June, September and December when and as
declared by the Board of Directors of the Company.  As of September 30, 1996,
the Company has paid dividends totaling $16,000 on the Series B Preferred
Stock.

In June 1996, the Company filed Articles of Amendment to its Articles of
Incorporation creating and designating a Series C 10% cumulative Preferred
Stock, par value $2.00 per share, and a liquidation value of $100 per share out
of the 20,000,000 shares authorized.  The Series C Preferred Stock consists of
a maximum of 16,500 shares, of which 15,000 were issued on June 4, 1996 in
connection with the purchase of 442 acres of partially developed land in
Denver, Colorado.  See NOTE 4. "REAL ESTATE."  Dividends are payable at a rate
of $10.00 per year or $2.50 per quarter to stockholders of record on the 15th
day of each March, June, September and December when and as declared by the
Board of Directors of the Company.  The dividends for the first four quarters
are to be paid with additional shares of Series C Preferred Stock.  On June 30,
1996, the Company issued 111 shares of Series C Preferred Stock to stockholders
of record on June 15, 1996 and on September 30, 1996, the Company issued an
additional 378 shares of Series C Preferred Stock to stockholders of record on
September 15, 1996.


NOTE 12.    INCOME TAXES

Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated
losses.  The Company had no taxable income or provision for income taxes in the
nine months ended September 30, 1996.


NOTE 13.    COMMITMENTS AND CONTINGENCIES

Litigation.  The Company is involved in various lawsuits arising in the
ordinary course of business.  In the opinion of the Company's management, the
outcome of these lawsuits will not have a material impact on the Company's
financial condition, results of operations or liquidity.



                     [THIS SPACE INTENTIONALLY LEFT BLANK.]





                                       21
<PAGE>   22
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS


Introduction

American Realty Trust, Inc. (the "Company") was organized in 1961 to provide
investors with a professionally managed, diversified portfolio of equity real
estate and mortgage loan investments selected to provides opportunities for
capital appreciation as well as current income.

Liquidity and Capital Resources

General.  Cash and cash equivalents at September 30, 1996 and December 31, 1995
aggregated $1.1 million.  Although the Company anticipates that during the
remainder of 1996 it will generate excess cash flow from operations, as
discussed below, such excess cash is not expected to be sufficient to discharge
all of the Company's debt and interest payment obligations as they come due.
The Company will therefore continue to rely on externally generated funds,
including borrowings against its investments in various real estate entities,
mortgage notes receivable, the sale or refinancing of properties and, to the
extent available or necessary, borrowings from its advisor to meet its debt
service obligations, pay taxes, interest and other non-property related
expenses.

At December 31, 1995, notes payable totaling $26.4 million had scheduled
maturities during 1996.  Through September 30, 1996 the Company has paid a
total of $10.9 million of such debt and refinanced an additional $12.1 million.
The Company intends to either pay off, extend the maturity dates or obtain
alternate financing for the remaining $3.4 million of debt obligations that
mature during the remainder of 1996.  There can be no assurance, however, that
these efforts to obtain alternative financing or debt extensions will be
successful.

The Company expects an increase in cash flow from property operations during
the remainder of 1996.  Such increase is expected to be derived from operations
of the Denver Merchandise Mart, the Kansas City Holiday Inn and the Oak Tree
Village Shopping Center.  The Company also expects continued lot sales at its
Texas residential subdivisions and substantial sales of its land holdings to
generate additional cash flow.

In March 1996, the Company sold 2.3 acres of the 74.9 acre parcel in Las
Colinas, Texas for $961,000 in cash.  In accordance with the provisions of the
term loan, the Company applied the $891,000 net proceeds of the sale to pay
down the term loan.

In April 1996, a subsidiary of the Company purchased for $10.7 million in cash
80% of the common stock of an entity that had acquired 26 operating pizza
parlors in various communities in California's San Joaquin Valley.  See NOTE 6.
"OTHER EQUITY INVESTMENTS."

Also in April 1996, the Company purchased a 28% general partner interest in
Campbell Center Associates, Ltd. for $550,000 in cash and a $500,000 four-year
note.





                                       22
<PAGE>   23
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

In May 1996, the Company sold an additional 2.3 acres of the 74.9 acre parcel
in Las Colinas, Texas for $941,000 in cash.  In accordance with the provisions
of the term loan, the Company applied the $864,000 net proceeds of the sale to
paydown the term loan.

Also in May 1996, the Company purchased a 2,271 square foot single family
residence in Dallas, Texas for $266,000 in cash.  In August 1996, the Company
financed the residence for $173,000.  The Company received net financing
proceeds of $168,000 after the payment of various closing costs associated with
the financing.

In June 1996, the Company purchased 442 acres of partially developed land in
Denver, Colorado for $8.5 million.  In connection with the purchase, the
Company obtained purchase money financing of $7.5 million and issued 15,000
shares of the Company's Series C 10% cumulative Preferred Stock with an
aggregate liquidation value of $1.5 million.  The excess financing proceeds of
$500,000 was applied to the various closing costs associated with the
acquisition in addition to $272,000 of such costs paid by the Company.

Also in June 1996, the Company sold a tract of land that was leased under a
long-term ground lease for $120,000 in cash.

In July 1996, a newly formed limited partnership of which the Company is the
general partner acquired 580 acres of land in Collin County, Texas for $5.7
million in cash.  The Company paid $100,000 in cash with the remaining $5.6
million being contributed by the limited partner.

In October 1995, the Company purchased 92.6 acres of partially developed land
in Las Colinas, Texas.  In February 1996, the Company entered into a contract
to sale 72.5 of the 92.6 acres for $12.9 million in cash.  In July 1996, the
Company closed the first phase of the contract selling 32.3 acres for $4.9
million in cash.  In accordance with the provisions of the term loan, the
Company applied the $4.7 million net proceeds to paydown the term loan in
exchange for that lender's release of its collateral interest in such land.

In July 1996, the Company purchased 568 acres of partially developed land in
Houston, Texas for $6.2 million.  The Company paid $451,000 in cash and
obtained seller mortgage financing for the remaining $5.7 million of the
purchase price.

In August 1996, the Company purchased a pool of assets for $3.1 million, from
Southmark Corporation ("Southmark") consisting of raw land totaling 151 acres
in California, Indiana and Idaho, various percentage interests, ranging from
15% to 45%, in five partnerships and trusts that hold an unsecured note
receivable with a principal balance of $3.4 million and Southmark's 19.2%
limited partnership interest in Syntek Asset Management, L.P. ("SAMLP").  In
connection with the acquisition, the Company borrowed $3.0 million.





                                       23
<PAGE>   24
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Also in August 1996, the Company purchased 280 acres of partially developed
land in Dallas County, Texas for $13.5 million.  The Company paid $3.8 million
in cash and borrowed the remaining $9.7 million of the purchase price.

On June 12, 1996, the Company's Board of Directors announced the resumption of
dividend payments at the initial rate of $.10 per share.  Through September 30,
1996, the Company has paid dividends totaling $.20 per share or $1.3 million.

Also on June 12, 1996, the Company announced the redemption of the share
purchase rights for $.01 per right.  The redemption price, totaling $101,000,
was paid on July 8, 1996 to stockholders of record on June 21, 1996.

The Company expects that funds from existing cash resources, collections on
mortgage notes receivable, sales or refinancing of real estate and/or mortgage
notes receivable, and borrowings against its investments in marketable equity
securities, mortgage notes receivable and to the extent available, borrowings
from the Company's advisor, will be sufficient to meet the cash requirements
associated with the Company's current and anticipated level of operations,
maturing debt obligations and existing commitments.  To the extent that the
Company's liquidity permits or financing sources are available, the Company may
make investments in real estate, primarily investments in partially developed
and/or raw land, continue making additional investments in real estate entities
and marketable equity securities and fund or acquire mortgage notes.

The Company expects that it will be necessary for it to sell $10.0 million,
$9.1 million and $23.0 million of such land during the remainder of 1996 and in
each of the next two years, respectively, to satisfy the debt on land holdings
as it matures.  If the Company is unable to sell at least the minimum amount of
land to satisfy the debt obligations on such land as it matures, the Company,
if it was not able to extend such debt, would either sell other of its assets
to pay such debt or return the property to the lender.

Notes Receivable.  The Company has received $640,000 in principal payments on
its notes receivable in the nine months ended September 30, 1996.

At September 30, 1996, the Company held a mortgage note receivable secured by a
third lien on a commercial property in South Carolina and personal guaranties
of several individuals.  The borrower had failed to make the required payments
of principal and interest since December 1, 1994.  The Company accelerated the
note and instituted foreclosure proceedings, as well as actions against the
guarantors of the note.  Effective September 1, 1995, the note was extended to
September 1, 1996, requiring a $68,000 principal reduction payment with the
monthly


                                       24
<PAGE>   25
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS (Continued)


Liquidity and Capital Resources (Continued)

interest, quarterly principal payments and all other terms remaining the same.
The Company received $43,000 of the required principal reduction payment in
1995 and received the remaining $25,000 in 1996 as well as the required first
and second quarterly principal reduction payments totaling $50,000.  The
Company and the borrower have again agreed to extend the mortgage note
receivable's maturity date to September 1, 1997.  The extension required an
additional $90,000 principal reduction payment payable in three equal monthly
installments beginning November 1, 1996.  The monthly interest, quarterly
principal reduction payments of $25,000 and all other terms remain the same.
The first $25,000 quarterly principal reduction payment is due December 1,
1996.  The principal balance of the note was $179,000 at September 30, 1996 and
the note is now performing in accordance with its terms.

Loans Payable.  In February 1996, the Company refinanced $7.8 million of debt
collateralized by a mortgage note receivable with a balance of $18.4 million
which is secured by the Las Vegas Shopping Center in Las Vegas, Nevada, for
$12.0 million.  The Company received net cash of $2.3 million after the payoff
of the existing debt, payment of closing costs associated with the refinancing
and making a $1.5 million paydown on the term loan  secured by land in Las
Colinas, Texas in exchange for that lender's release of its participation
interest in the note receivable.  See NOTE 3.  "NOTES AND INTEREST RECEIVABLE."

In April 1996, the Company refinanced the first and second lien mortgage debt
on its $22.0 million wraparound mortgage note receivable secured by the
Continental Hotel and Casino in Las Vegas, Nevada for $16.8 million.  See NOTE
3.  NOTES AND INTEREST RECEIVABLE.  The Company received net cash of $11.2
million after the payoff of the two underlying liens totaling $2.9 million,
various closing costs associated with the refinancing and making a $1.4 million
paydown on the term loan secured by land in Las Colinas, Texas in exchange for
that lender's release of its participation interest in the note receivable.

Also in April 1996, the Company refinanced $5.1 million of first and second
lien mortgage debt secured by the Denver Merchandise Mart for $15.0 million.
The Company received net refinancing proceeds of $7.8 million after the payoff
of the first and second lien debt, purchasing the ground lease on Denver
Merchandise Mart for $678,000 and payment of various closing costs associated
with the refinancing.

In August 1996, the Company refinanced the $2.4 million first lien mortgage
debt secured by the Rosedale Towers Office Building in Roseville, Minnesota for
$2.8 million.  The Company received net refinancing proceeds of $154,000 after
the payoff of the first lien debt of $2.4 million and payment of various
closing costs associated with the refinancing.  The Company also received
282,352 shares of Common Stock of the Company that it had pledged as additional
collateral on the existing mortgage debt.





                                       25
<PAGE>   26
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

Also in August 1996, the Company financed the previously unencumbered Inn at
the Mart in Denver, Colorado for $2.0 million to facilitate renovating the
property.  The Company received net financing proceeds of $890,000 after the
payment of various closing costs associated with the financing and a $1.1
million renovation holdback.  The Company expects the lender to advance the
$1.1 million renovation holdback by December 1996.

In October 1996, the Company completed the sale of $1.1 million in 11-1/2%
senior subordinated notes in a private placement.

Equity Investments.  During the fourth quarter of 1988, the Company began
purchasing shares of various real estate investment trusts having the same
advisor as the Company, and units of limited partner interest in National
Realty, L.P.  ("NRLP").  It is anticipated that additional equity securities of
NRLP and the REITs, Continental Mortgage and Equity Trust ("CMET"), Income
Opportunity Realty Investors, Inc., formerly Income Opportunity Realty Trust
(collectively "IORI") and Transcontinental Realty Investors, Inc. ("TCI"), will
be acquired in the future through open-market and negotiated transactions to
the extent the Company's liquidity permits.

The Company has margin arrangements with various brokerage firms which provide
for borrowing up to 50% of the market value of the Company's marketable equity
securities.  The borrowing under such margin arrangements are secured by equity
securities of the REITs, and the Company's trading portfolio and bear interest
rates ranging from 6.5% to 9.25%.  Margin borrowing totaled $36.8 million at
September 30, 1996.

In August 1996, the Company consolidated its existing NRLP margin debt held by
the various brokerage firms into a single loan of $20.3 million.  The loan is
secured by the Company's NRLP units with a market value of at least 50% of the
principal balance.  The Company received $1.9 million in cash after the payment
of $617,000 in various closing costs associated with the financing and a $17.8
million holdback, pending the lender's receipt of the remaining NRLP units as
collateral.  As of October 31, 1996, the Company had pledged 3,208,119 NRLP
units with a market value of $39.8 million and the lender had released $16.8
million of the holdback directly to the brokerage firms in payment of the
margin debt related to the NRLP units pledged.  The lender is to receive the
final 200,600 NRLP units with a market value of $2.4 million in November 1996.
These NRLP units are currently being held as additional collateral on the term
loan secured by the Company's 63.4 acres of Las Colinas land and will be
released upon receipt of a $2.0 million term loan paydown in November 1996.
See NOTE 4. "REAL ESTATE."

Also in August 1996, the Company obtained a $2.0 million margin loan from a
financial institution secured by a pledge of $4.0 million of previously
unencumbered equity securities of the REITs owned by the Company and Common
Stock of the Company owned by BCM.  The Company





                                       26
<PAGE>   27
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (Continued)

received $1,966,000 in net cash after the payment of closing costs associated
with the margin loan.  The loan bears interest at the prime rate plus 2.25%,
currently 10.50% per annum, requires monthly interest only payments and matures
August 2, 1997.

In September 1996, the same lender made a second $2.0 million loan.  The second
margin loan is secured by a pledge of $5.0 million previously unencumbered
equity securities of the REITs owned by the Company and Common Stock of the
Company owned by BCM.  The Company received $1,970,000 in net cash after the
payment of closing costs associated with the margin loan.  The margin loan
bears interest at the prime rate plus 2.25%, currently 10.50% per annum,
requires interest only payments and matures September 27, 1997.

Equity securities of the REITs and NRLP held by the Company may be deemed to be
"restricted securities" under Rule 144 of the Securities Act of 1933
("Securities Act").  Accordingly, the Company may be unable  to sell such
equity securities other than in a registered public offering or pursuant to an
exemption under the Securities Act for a period of two years after they are
acquired.  Such  restrictions may reduce the Company's ability to realize the
full fair market value of such investments if the Company attempted to dispose
of such securities in a short period of time.

The Company's cash flow from these investments is dependent on the ability of
each of the entities to make distributions.  The Company received distributions
totaling $8.6 million in the first nine months of 1996 from the REITs and NRLP.

On a quarterly basis, the Company's management reviews the carrying value of
the Company's mortgage notes receivable, properties held for sale and
periodically, but no less than annually, its properties held for investment.
Generally accepted accounting principles require that the carrying value of
such assets cannot exceed the lower of their respective carrying amounts or
estimated net realizable value.  In the initial instance when the estimated net
realizable value of a mortgage note receivable or a property held for sale is
less than the carrying amount at the time of evaluation, a reserve is
established and a corresponding provision for loss is recorded by a charge
against earnings.  A subsequent revision to estimated net realizable value
either increases or decreases such reserve with a corresponding charge against
or credit to earnings. In the case of properties held for investment the
carrying value of the property is written down and a provision for loss is
recorded.  The estimate of net realizable value of  the Company's mortgage note
receivable is based on management's review and evaluation of the collateral
property securing the mortgage note.  The property review generally includes
selective property inspections, a review of the property's current rents
compared to market rents, a review of the property's expenses, a review of
maintenance requirements, discussions with the manager of the property and a
review of the surrounding area.  See "Recent Accounting Pronouncement," below.





                                       27
<PAGE>   28
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS (Continued)

Commitments and Contingencies

In January 1995, NRLP, SAMLP and the NRLP oversight committee executed an
Implementation Agreement which provides for the nomination of a successor
general partner to succeed SAMLP as general partner of NRLP and National
Operating, L.P.  ("NOLP"), the operating partnership of NRLP and for the
resolution of all related matters under the 1990 settlement of a class action
lawsuit.  On February 20, 1996, the parties to the Implementation Agreement
executed an Amended and Restated Implementation Agreement.

Provided that the successor general partner is elected pursuant to the terms of
the Amended and Restated Implementation Agreement, SAMLP shall  receive
$12,471,500 from the Partnership.  This amount represents a compromise
settlement of the net amounts owed by the Partnership to SAMLP upon SAMLP's
withdrawal as general partner and any amounts which SAMLP and its affiliates
may owe to the Partnership.  This amount shall be paid to SAMLP pursuant to a
promissory note in accordance with the terms set forth in the Amended and
Restated Implementation Agreement.

The Amended and Restated Implementation Agreement has been submitted to the
Judge appointed to supervise the class action settlement (the "Supervising
Judge") for tentative approval and approval of the notice to be sent to the
original class members.  On September 23, 1996, the Supervising Judge entered
an order granting tentative approval of the Amended and Restated Implementation
Agreement and the form of notice.  However, the order reserved jurisdiction to
determine other matters which must be resolved prior to final approval.  Upon
final approval by the Supervising Judge, the proposal to elect the successor
general partner will be submitted to the NRLP's unitholders for a vote.  In
addition, the unitholders will vote upon amendments to the NRLP's Partnership
Agreement which relate to the proposed compensation of the successor general
partner and other related matters.

Upon approval by NRLP's unitholders, SAMLP shall withdraw as General Partner
and the successor general partner shall take office.  If the required approvals
are obtained, it is anticipated that the successor general partner will be
elected and take office during the first quarter of 1997.

The Amended and Restated Implementation Agreement provides that SAMLP, and its
affiliates owning units in NRLP shall not vote to remove the successor general
partner, except for removal with cause, for a period of 36 months from the date
the successor general partner takes office.

Upon election and taking office of the successor general partner, the class
action settlement and the NRLP oversight committee shall be terminated.  If the
successor general partner is not elected, the existing class action settlement
shall remain in full force and effect and all of the provisions of the Amended
and Restated Implementation Agreement shall be voided, including the compromise
settlement of amounts owed by SAMLP and NRLP to each other.  See NOTE 2.
"SYNTEK ASSET MANAGEMENT, L.P."





                                       28
<PAGE>   29
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS (Continued)

Commitments and Contingencies (Continued)

On September 3, 1996, Joseph B. Moorman filed a Motion for Orders Compelling
Enforcement of the Moorman Settlement Agreement, Appointment of a Receiver and
Collateral Relief with the Superior Court of California in and for the County
of San Mateo.  The motion alleges that the settling defendants had failed or
refused to perform their obligations under the Moorman Settlement Agreement.
The motion requested that SAMLP be removed as general partner and a receiver be
appointed to manage the Partnership.  The motion also requested that the
Company be ordered to deliver to the court all NRLP units which had been
purchased by the Company since August 7, 1991.  A hearing was held on this
motion on October 4, 1996, and the court took the matter under submission.  No
ruling has been made on this matter.

Results of Operations

For the three months ended September 30, 1996, the Company reported net income
of $770,000, compared to net income of $1.2 million for the three months ended
September 30, 1995.  For the nine months ended September 30, 1996, the Company
had a net loss of $1.6 million compared with a net loss of $3.1 million for the
nine months ended September 30, 1995.  The primary factors effecting the
Company's three and nine month results are discussed in the following
paragraphs.

Rents increased from $5.2 million and $14.2 million for the three and nine
months ended September 30, 1995 to $5.3 million and $14.7 million for the three
and nine months ended September 30, 1996.  The increases are principally due to
the Company obtaining the Oak Tree Village Shopping Center in November 1995
combined with increases in rents from the Denver Merchandise Mart, Kansas City
Holiday Inn and rents from a ground lease on land in Atlanta, Georgia.

Interest income from mortgage notes receivable decreased from $1.2 million and
$3.8 million for the three and nine months ended September 30, 1995 to $1.1
million and $3.4 million for the three and nine months ended September 30,
1996.  The decrease is due to the payoff of a mortgage note receivable in
February 1995 and $640,000 in principal paydowns on other of the Company's
notes receivable in the nine months ended September 30, 1996.  Interest income
for the remainder of 1996 is expected to approximate that of the third quarter.

Other income increased from $739,000 for the three months ended September 30,
1995 to $824,000 for the three months ended September 30, 1996 and increased
from $700,000 for the nine months ended September 30, 1995 to $1.3 million for
the nine months ended September 30, 1996.  The increase in other income for the
three months ended September 30, 1996 is due to a $768,000 increase in gains
from the sale of trading portfolio securities offset by a $128,000 decrease in
dividend income from trading portfolio securities and a $556,000 increase in
unrealized losses.  The nine month improvement is due to recognizing $598,000
of unrealized gains on trading portfolio securities in 1996 compared to a
$408,000 unrealized loss in 1995 and an increase of $181,000 in pre-





                                       29
<PAGE>   30
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

ferred return distributions on a partnership interest.  This is offset by a
$622,000 decrease in dividend income from trading portfolio securities.

Property operating expenses increased from $3.0 million and $10.2 million for
the three and nine months ended September 30, 1995 to $3.6 million and $11.2
million for the three and nine months ended September 30, 1996.  Of this
increase, $267,000 and $857,000 for the three and nine months ended September
30, 1996 is due to obtaining the Oaktree Shopping Center in November 1995 and
the purchase of six parcels of land in 1995 and 1996.

Interest expense increased from $2.4 million and $6.1 million for the three and
nine months ended September 30, 1995 to $4.2 million and $10.7 million for the
three and nine months ended September 30, 1996.  The increases are primarily
attributable to debt refinancings and the debt incurred related to the purchase
of six parcels of land in 1995 and 1996 and the Oaktree Shopping Center
obtained in November 1995.  The increase for the nine months ended September
30, 1996 is offset by a $161,000 decrease in interest expense due to the sale
of the Boulevard Villa Apartments in February 1995.  Interest expense for the
remainder of 1996 is expected to approximate that of the third quarter.

Advisory and mortgage servicing fees increased from $328,000 and $871,000 for
the three and nine months ended September 30, 1995 to $392,000 and $1.1 million
for the three and nine months ended September 30, 1996.  The increases are
primarily attributable to the Company's increase in gross assets, the basis for
such fee.

General and administrative expenses increased from $382,000 and $1.6 million
for the three and nine months ended September 30, 1995 to $618,000 and $1.9
million for the three and nine months ended September 30, 1996.  The increases
are primarily attributable to legal expenses incurred in 1996 relating to
acquisitions and refinancings and an increase in advisor cost reimbursements.

Depreciation and amortization of $429,000 and $1.3 million for the three and
nine months ended September 30, 1996 approximate the $416,000 and $1.3 million
for the three and nine months ended September 30, 1995.  

Equity in losses of investees improved from a loss of $1.4 million and $4.4
million for the three and nine months ended September 30, 1995 to a loss of
$702,000 and $3.1 million for the three and nine months ended September 30,
1996.  The decrease in equity losses is attributable to a decrease in the
combined operating losses of the equity investees from a combined operating loss
of $4.5 million and $14.1 million for the three and nine months ended September
30, 1995 to a combined operating loss of $3.1 million and $11.8 million for the
three and nine months ended September 30, 1996.  Such improvement is generally
attributable to improved occupancy and increased rental rates.


                                       30
<PAGE>   31
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS (Continued)

Results of Operations (Continued)

For the nine months ended September 30, 1995, the Company recognized $671,000
of minority interest expense.  The expense is attributable to the termination
of a joint venture partnership in which the Company held a 60% interest in June
1995.

Gains on sale of real estate were $3.3 million and $7.8 million for the three
and nine months ended September 30, 1996 compared to $1.6 million and $2.5
million for the three and nine months ended September 30, 1995.  For the three
months ended September 30, 1996, the Company recognized a $2.0 million gain on
the sale of 32.3 acres of the 92.6 acres tract of land in Las Colinas, Texas, a
$13,000 gain on the sale of four residential lots and a $1.3 million gain
representing the Company's equity share of the REITs gain on sale of real
estate.  In the three months ended September 30, 1995, the Company recognized a
$1.5 million  gain on the sale of 6.9 acres of partially developed land in Las
Colinas, Texas.  The first nine months of 1996 includes an additional $1.1
million gain on the sale of 4.6 acres of land in Las Colinas, Texas, a $44,000
gain on the sale of a parcel of land in Midland, Michigan, an $11,000 gain on
the sale of eight residential lots and a $3.3 million gain representing the
Company's equity share of the REITs' gain on the sale of real estate.  The
first nine months of 1995 includes an additional $924,000 gain on the sale of
Boulevard Villas in February and a $24,000 gain on the sale of the final four
lots in a joint venture.

The Company reported extraordinary gains of $121,000 and $381,000 for the three
and nine months ended September 30, 1996 compared to $431,000 and $758,000 for
the three and nine months ended September 30, 1995.  The extraordinary gain for
the three months ended September 30, 1996 represents the Company's share of its
equity investees' extraordinary gain from the early payoff of debt.  The first
nine months of 1996 includes an additional extraordinary gain of $13,000 which
represents the Company's share of an equity investee's extraordinary gain from
the early payoff of debt and $247,000 represents the Company's share of an
equity investee's extraordinary gain relating to an insurance settlement from a
fire loss.  For the three and nine months ended September 30, 1995, the
extraordinary gains also represent the Company's share of an equity investee's
extraordinary gain from the early payoff of debt.

Environmental Matters

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





                                       31
<PAGE>   32
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS (Continued)


Environmental Matters (Continued)

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


Inflation

The effects of inflation on the Company's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with inflationary
increases and decreases in housing costs.  Fluctuations in the rate of
inflation also affect the sales values of properties and, correspondingly, the
ultimate gains to be realized by the Company from property sales.


Recent Accounting Pronouncement

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No.  121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of".
The statement requires that long-lived assets be considered impaired "...if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset."  If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"...the amount by which the carrying amount of the asset exceeds the fair value
of the asset."  If impairment of a long-lived asset is recognized, the carrying
amount of the asset shall be reduced by the amount of the impairment, shall be
accounted for as the asset's "new cost" and such new cost shall be depreciated
over the asset's remaining useful life.

SFAS No. 121 further requires that long-lived assets held for sale "...be
reported at the lower of carrying amount or fair value less cost to sell."  If
a reduction in a held for sale asset's carrying amount to fair value less cost
to sell is required, a provision for loss shall be recognized by a charge
against earnings.  Subsequent revisions, either upward or downward, to a held
for sale asset's fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount, but not in excess of the asset's
carrying amount when originally classified or held for sale.  A corresponding
charge or credit to earnings is to be recognized.   Long-lived assets held for
sale are not to be depreciated.  The Company adopted SFAS No. 121 effective
January 1, 1996.

The adoption of SFAS No. 121 had no effect on the Company's net loss for the
nine months ended September 30, 1996, as the Company's one depreciable asset
classified as held for sale is fully depreciated and none of the Company's
other long lived assets are considered to be impaired.





                                       32
<PAGE>   33
                          PART II.  OTHER INFORMATION


ITEM 5.     OTHER INFORMATION


See NOTE 10. "COMMON STOCK" and NOTE 11. "PREFERRED STOCK" of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in PART I for information regarding the
issuance of securities and related transactions thereto.

See NOTE 8. "NOTES AND INTEREST PAYABLE" of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS in PART I for information regarding the sale of 11-1/2% senior
subordinated notes.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


(a) Exhibits: The following exhibits are filed herewith or incorporated by
reference as indicated below.


<TABLE>
<CAPTION>
Exhibit
Number                                    Description                       
-------            ---------------------------------------------------------
<S>     <C>
 27.0              Financial Data Schedule


(b)     Reports on Form 8-K as follows:

        None.
</TABLE>


                                       33
<PAGE>   34

                                 SIGNATURE PAGE


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                         AMERICAN REALTY TRUST, INC.
                                        
                                        
                                        
                                        
                                        
Date:   November 13, 1996            By:   /s/ KARL L. BLAHA                
     ------------------------            -----------------------------------
                                         Karl L. Blaha
                                         President


Date:   November 13, 1996            By:   /s/ THOMAS A. HOLLAND            
     ------------------------            -----------------------------------
                                         Thomas A. Holland
                                         Executive Vice President and
                                         Chief Financial Officer
                                         (Principal Financial and
                                         Accounting Officer)


                                       34
<PAGE>   35
                          AMERICAN REALTY TRUST, INC.

                                  EXHIBITS TO

                         QUARTERLY REPORT ON FORM 10-Q

                    For the Quarter ended September 30, 1996


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

27.0       Financial Data Schedule                                         36


                                       35