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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2011

or



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

For the transition period from              to

Commission File Number 001-15663





AMERICAN REALTY INVESTORS, INC.

(Exact Name of Registrant as Specified in Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                         |  | 75-2847135                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

1800 Valley View Lane, Suite 300, Dallas, Texas 75234

(Address of principal executive offices)

(Zip Code)

(469) 522-4200

(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.    xYes     ̈No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files)*     ̈Yes     ̈No.

* The registrant has not yet been phased into the interactive data requirements

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definition of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act:



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).     ̈Yes    xNo.

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 |  | 11,525,389                     
|(Class)                      |  | (Outstanding at August 5, 2011)









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##### Table of Contents

AMERICAN REALTY INVESTORS, INC.

FORM 10-Q

TABLE OF CONTENTS



|                              |  |                                                                                                                    |    |      |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|                              |  |                                                                                                                    |    | PAGE |   
|PART I. FINANCIAL INFORMATION |  |                                                                                                                    |    |     
|                              |  |                                                                                                                   
|Item 1.                       |  | Financial Statements                                                                                               |    |      |    | 
|                              |  |                                                                                                                   
|                              |  | Consolidated Balance Sheets at June 30, 2011 (unaudited) and December 31, 2010                                     |    |      | 3  | 
|                              |  |                                                                                                                   
|                              |  | Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (unaudited)        |    |      | 4  | 
|                              |  |                                                                                                                   
|                              |  | Consolidated Statement of Shareholders Equity for the six months ended June 30, 2011 (unaudited)                  |    |      | 5  | 
|                              |  |                                                                                                                   
|                              |  | Consolidated Statements of Comprehensive Income (Loss) for the six months ended June 30, 2011 and 2010 (unaudited) |    |      | 6  | 
|                              |  |                                                                                                                   
|                              |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)                  |    |      | 7  | 
|                              |  |                                                                                                                   
|                              |  | Notes to Consolidated Financial Statements                                                                         |    |      | 8  | 
|                              |  |                                                                                                                   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                              |    |      | 23 | 
|                              |  |                                                                                                                   
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                         |    |      | 33 | 
|                              |  |                                                                                                                   
|Item 4.                       |  | Controls and Procedures                                                                                            |    |      | 33 | 
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                    |    |     
|                              |  |                                                                                                                   
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                        |    |      | 34 | 
|                              |  |                                                                                                                   
|Item 6.                       |  | Exhibits                                                                                                           |    |      | 35 | 
|                              | 
|SIGNATURES                    |  |                                                                                                                    | 36 |     



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)



|                                                                                                                                                                                                                                                        |  |                                                           |           |  |                  |   |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------- | --------- |  | ---------------- | - | --------- | 
|                                                                                                                                                                                                                                                        |  | June 30,2011                                              |           |  | December 31,2010 |  
|                                                                                                                                                                                                                                                        |  | (dollars in thousands, except share andpar value amounts) |          
|Assets                                                                                                                                                                                                                                                  |  |                                                           |           |  |                  |   |           | 
|Real estate, at cost                                                                                                                                                                                                                                    |  | $                                                         | 1,081,686 |  |                  | $ | 1,170,214 | 
|Real estate subject to sales contracts at cost, net of depreciation ($93,462 and $75,639 in 2011 and 2010)                                                                                                                                              |  |                                                           | 225,836   |  |                  |   | 295,921   | 
|Less accumulated depreciation                                                                                                                                                                                                                           |  |                                                           | (104,765) |  |                  |   | (133,550) | 
|                                                                                                                                                                                                                                                        |  |                                                           |           |  |                  |   |           | 
|Total real estate                                                                                                                                                                                                                                       |  |                                                           | 1,202,757 |  |                  |   | 1,332,585 | 
|Notes and interest receivable                                                                                                                                                                                                                           |  |                                                           |           |  |                  |   |           | 
|                                                                                                                                                                                                                                                        |  |                                                          
|Performing (including $80,557 and $89,982 in 2011 and 2010 from affiliates and related parties)                                                                                                                                                         |  |                                                           | 87,519    |  |                  |   | 99,839    | 
|Non-performing                                                                                                                                                                                                                                          |  |                                                           | 3,141     |  |                  |   | 3,123     | 
|Less allowance for estimated losses (including $8,962 and $9,926 in 2011 and 2010 from affiliates and related
parties)                                                                                                                                  |  |                                                           | (13,384)  |  |                  |   | (14,348)  | 
|                                                                                                                                                                                                                                                        |  |                                                           |           |  |                  |   |           | 
|Total notes and interest receivable                                                                                                                                                                                                                     |  |                                                           | 77,276    |  |                  |   | 88,614    | 
|Cash and cash equivalents                                                                                                                                                                                                                               |  |                                                           | 10,479    |  |                  |   | 12,649    | 
|Investments in unconsolidated subsidiaries and investees                                                                                                                                                                                                |  |                                                           | 12,138    |  |                  |   | 12,491    | 
|Affiliate receivable                                                                                                                                                                                                                                    |  |                                                           | 4,477     |  |                  |   | -         | 
|Other assets (including $39 in 2011 and $164 in 2010 from affiliates and related parties)                                                                                                                                                               |  |                                                           | 94,224    |  |                  |   | 110,936   | 
|                                                                                                                                                                                                                                                        |  |                                                           |           |  |                  |   |           | 
|Total assets                                                                                                                                                                                                                                            |  | $                                                         | 1,401,351 |  |                  | $ | 1,557,275 | 
|                                                                                                                                                                                                                                                        |  |                                                           |           |  |                  |   |           | 
|                                                                                                                                                                                                                                                        |  |                                                          
|Liabilities and Shareholders Equity                                                                                                                                                                                                                    |  |                                                           |           |  |                  |   |           | 
|Liabilities:                                                                                                                                                                                                                                            |  |                                                           |           |  |                  |   |           | 
|Notes and interest payable                                                                                                                                                                                                                              |  | $                                                         | 819,513   |  |                  | $ | 913,134   | 
|Notes related to subject to sales contracts                                                                                                                                                                                                             |  |                                                           | 281,246   |  |                  |   | 315,547   | 
|Stock-secured notes payable and margin debt                                                                                                                                                                                                             |  |                                                           | 26,120    |  |                  |   | 23,100    | 
|Affiliate payables                                                                                                                                                                                                                                      |  |                                                           | -         |  |                  |   | 12,219    | 
|Deferred gain (including $88,803 and $100,212 in 2011 and 2010 from sales to related parties)                                                                                                                                                           |  |                                                           | 95,589    |  |                  |   | 98,504    | 
|Accounts payable and other liabilities (including $1,779 and $1,539 in 2011 and 2010 to affiliates and related
parties)                                                                                                                                 |  |                                                           | 76,204    |  |                  |   | 88,506    | 
|                                                                                                                                                                                                                                                        |  |                                                           |           |  |                  |   |           | 
|                                                                                                                                                                                                                                                        |  |                                                           | 1,298,672 |  |                  |   | 1,451,010 | 
|Shareholders equity:                                                                                                                                                                                                                                   |  |                                                           |           |  |                  |   |           | 
|Preferred stock, $2.00 par value, authorized 15,000,000 shares, issued and outstanding Series A, 3,353,954 shares in 2011 and
$3,389,546 in 2010 (liquidation preference $10 per share), including 900,000 shares in 2011 and 2010 held by subsidiaries |  |                                                           | 4,908     |  |                  |   | 4,979     | 
|                                                                                                                                                                                                                                                        |  |                                                          
|Common stock, $.01 par value, authorized 100,000,000 shares; issued 11,941,174 and 11,874,138, and outstanding 11,525,389 and
11,466,853 shares in 2011 and in 2010                                                                                     |  |                                                           | 115       |  |                  |   | 114       | 
|                                                                                                                                                                                                                                                        |  |                                                          
|Treasury stock at cost; 415,785 and 407,285 shares in 2011 and 2010 and 241,247 and 276,972 shares held by TCI (consolidated) as
of 2011 and 2010                                                                                                       |  |                                                           | (6,395)   |  |                  |   | (6,333)   | 
|Paid-in capital                                                                                                                                                                                                                                         |  |                                                           | 110,916   |  |                  |   | 110,419   | 
|Retained earnings                                                                                                                                                                                                                                       |  |                                                           | (42,545)  |  |                  |   | (47,776)  | 
|Accumulated other comprehensive income                                                                                                                                                                                                                  |  |                                                           | (786)     |  |                  |   | (786)     | 
|                                                                                                                                                                                                                                                        |  |                                                           |           |  |                  |   |           | 
|Total American Realty Investors, Inc. shareholders equity                                                                                                                                                                                              |  |                                                           | 66,213    |  |                  |   | 60,617    | 
|                                                                                                                                                                                                                                                        |  |                                                           |           |  |                  |   |           | 
|                                                                                                                                                                                                                                                        |  |                                                          
|Non-controlling interest                                                                                                                                                                                                                                |  |                                                           | 36,466    |  |                  |   | 45,648    | 
|                                                                                                                                                                                                                                                        |  |                                                           |           |  |                  |   |           | 
|Total equity                                                                                                                                                                                                                                            |  |                                                           | 102,679   |  |                  |   | 106,265   | 
|                                                                                                                                                                                                                                                        |  |                                                           |           |  |                  |   |           | 
|Total liabilities and equity                                                                                                                                                                                                                            |  | $                                                         | 1,401,351 |  |                  | $ | 1,557,275 | 
|                                                                                                                                                                                                                                                        |  |                                                           |           |  |                  |   |           | 

The accompanying notes are an integral part of these consolidated financial statements.



3



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AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------- | ---------- |  | -------------------------------- | - | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                                                                                                                                                                                              |  | For the Three Months EndedJune 30,                         |            |  | For the Six Months EndedJune 30, |  
|                                                                                                                                                                                              |  | 2011                                                       |            |  | 2010                             |   |            | 2011 |  |   | 2010       | 
|                                                                                                                                                                                              |  | (dollars in thousands, except share and per share amounts) |           
|Revenues:                                                                                                                                                                                     |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Rental and other property revenues (including $358 and $781 for the three months and $730 and $1,495 for the six months ended
2011 and 2010 respectively from affiliates and related parties) |  | $                                                          | 37,528     |  |                                  | $ | 36,548     |      |  | $ | 74,050     |  |  | $ | 74,286     | 
|                                                                                                                                                                                              |  |                                                            |            | 
|Expenses:                                                                                                                                                                                     |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Property operating expenses (including $571 and $562 for the three months and $1,028 and $1,148 for the six months ended 2011 and
2010 respectively from affiliates and related parties)      |  |                                                            | 21,169     |  |                                  |   | 23,306     |      |  |   | 42,627     |  |  |   | 45,934     | 
|Depreciation and amortization                                                                                                                                                                 |  |                                                            | 6,245      |  |                                  |   | 6,780      |      |  |   | 12,759     |  |  |   | 12,996     | 
|General and administrative (including $1,241 and $1,193 for the three months and $2,429 and $2,419 for the six months ended 2011
and 2010 respectively from affiliates and related parties)   |  |                                                            | 4,078      |  |                                  |   | 2,701      |      |  |   | 7,611      |  |  |   | 5,286      | 
|Provision on impairment of notes receivable and real estate assets                                                                                                                            |  |                                                            | 444        |  |                                  |   | -          |      |  |   | 6,503      |  |  |   | -          | 
|Advisory fee to affiliate                                                                                                                                                                     |  |                                                            | 3,462      |  |                                  |   | 3,993      |      |  |   | 6,984      |  |  |   | 8,046      | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Total operating expenses                                                                                                                                                                      |  |                                                            | 35,398     |  |                                  |   | 36,780     |      |  |   | 76,484     |  |  |   | 72,262     | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|                                                                                                                                                                                              |  |                                                            |            | 
|Operating income (loss)                                                                                                                                                                       |  |                                                            | 2,130      |  |                                  |   | (232)      |      |  |   | (2,434)    |  |  |   | 2,024      | 
|                                                                                                                                                                                              |  |                                                            |            | 
|Other income (expense):                                                                                                                                                                       |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Interest income (including $184 and 1,027 for the three months and $1,829 and $2,137 for the six months ended 2011 and 2010
respectively from affiliates and related parties)                 |  |                                                            | 1,203      |  |                                  |   | 1,326      |      |  |   | 1,871      |  |  |   | 2,828      | 
|Other income                                                                                                                                                                                  |  |                                                            | 551        |  |                                  |   | 1,023      |      |  |   | 1,765      |  |  |   | 1,888      | 
|Mortgage and loan interest (including $1,271 and $890 for the three months and $1,580 and $1,735 for the six months ended 2011
and 2010 respectively from affiliates and related parties)     |  |                                                            | (17,731)   |  |                                  |   | (20,276)   |      |  |   | (34,676)   |  |  |   | (38,617)   | 
|Earnings from unconsolidated subsidiaries and investees                                                                                                                                       |  |                                                            | 22         |  |                                  |   | (71)       |      |  |   | (73)       |  |  |   | (93)       | 
|Gain on foreign currency translation                                                                                                                                                          |  |                                                            | -          |  |                                  |   | 906        |      |  |   | -          |  |  |   | 233        | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|                                                                                                                                                                                              |  |                                                            |            | 
|Total other expenses                                                                                                                                                                          |  |                                                            | (15,955)   |  |                                  |   | (17,092)   |      |  |   | (31,113)   |  |  |   | (33,761)   | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Loss before gain on land sales, non-controlling interest, and taxes                                                                                                                           |  |                                                            | (13,825)   |  |                                  |   | (17,324)   |      |  |   | (33,547)   |  |  |   | (31,737)   | 
|Gain (loss) on land sales                                                                                                                                                                     |  |                                                            | 14,029     |  |                                  |   | (4,121)    |      |  |   | 19,373     |  |  |   | (4,115)    | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|                                                                                                                                                                                              |  |                                                            |            | 
|Loss from continuing operations before tax                                                                                                                                                    |  |                                                            | 204        |  |                                  |   | (21,445)   |      |  |   | (14,174)   |  |  |   | (35,852)   | 
|Income tax benefit                                                                                                                                                                            |  |                                                            | 2,469      |  |                                  |   | 1,454      |      |  |   | 3,521      |  |  |   | 2,188      | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Net loss from continuing operations                                                                                                                                                           |  |                                                            | 2,673      |  |                                  |   | (19,991)   |      |  |   | (10,653)   |  |  |   | (33,664)   | 
|                                                                                                                                                                                              |  |                                                            |            | 
|Discontinued operations:                                                                                                                                                                      |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|                                                                                                                                                                                              |  |                                                            |            | 
|Loss from discontinued operations                                                                                                                                                             |  |                                                            | (625)      |  |                                  |   | (1,507)    |      |  |   | (1,756)    |  |  |   | (1,221)    | 
|Gain on sale of real estate from discontinued operations                                                                                                                                      |  |                                                            | 7,679      |  |                                  |   | 5,660      |      |  |   | 11,816     |  |  |   | 5,660      | 
|Income tax expense from discontinued operations                                                                                                                                               |  |                                                            | (2,469)    |  |                                  |   | (1,454)    |      |  |   | (3,521)    |  |  |   | (1,554)    | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Net income from discontinued operations                                                                                                                                                       |  |                                                            | 4,585      |  |                                  |   | 2,699      |      |  |   | 6,539      |  |  |   | 2,885      | 
|Net income (loss)                                                                                                                                                                             |  |                                                            | 7,258      |  |                                  |   | (17,292)   |      |  |   | (4,114)    |  |  |   | (30,779)   | 
|Net gain attributable to non-controlling interests                                                                                                                                            |  |                                                            | 7,175      |  |                                  |   | 3,543      |      |  |   | 9,345      |  |  |   | 5,119      | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Net income (loss) attributable to American Realty Investors, Inc.                                                                                                                             |  |                                                            | 14,433     |  |                                  |   | (13,749)   |      |  |   | 5,231      |  |  |   | (25,660)   | 
|Preferred dividend requirement                                                                                                                                                                |  |                                                            | (613)      |  |                                  |   | (622)      |      |  |   | (1,230)    |  |  |   | (1,244)    | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Net income (loss) applicable to common shares                                                                                                                                                 |  | $                                                          | 13,820     |  |                                  | $ | (14,371)   |      |  | $ | 4,001      |  |  | $ | (26,904)   | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|                                                                                                                                                                                              |  |                                                            |            | 
|Earnings per share - basic                                                                                                                                                                    |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Income (loss) from continuing operations                                                                                                                                                      |  | $                                                          | 0.80       |  |                                  | $ | (1.48)     |      |  | $ | (0.22)     |  |  | $ | (2.59)     | 
|Income from discontinued operations                                                                                                                                                           |  |                                                            | 0.40       |  |                                  |   | 0.23       |      |  |   | 0.57       |  |  |   | 0.25       | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Net income (loss) applicable to common shares                                                                                                                                                 |  | $                                                          | 1.20       |  |                                  | $ | (1.25)     |      |  | $ | 0.35       |  |  | $ | (2.34)     | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|                                                                                                                                                                                              |  |                                                            |            | 
|Earnings per share - diluted                                                                                                                                                                  |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Income (loss) from continuing operations                                                                                                                                                      |  | $                                                          | 0.80       |  |                                  | $ | (1.48)     |      |  | $ | (0.22)     |  |  | $ | (2.59)     | 
|Income from discontinued operations                                                                                                                                                           |  |                                                            | 0.40       |  |                                  |   | 0.23       |      |  |   | 0.57       |  |  |   | 0.25       | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Net income (loss) applicable to common shares                                                                                                                                                 |  | $                                                          | 1.20       |  |                                  | $ | (1.25)     |      |  | $ | 0.35       |  |  | $ | (2.34)     | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|                                                                                                                                                                                              |  |                                                            |            | 
|Weighted average common share used in computing earnings per share                                                                                                                            |  |                                                            | 11,525,389 |  |                                  |   | 11,510,322 |      |  |   | 11,509,341 |  |  |   | 11,512,169 | 
|Weighted average common share used in computing diluted earnings per share                                                                                                                    |  |                                                            | 11,525,389 |  |                                  |   | 11,510,322 |      |  |   | 11,509,341 |  |  |   | 11,512,169 | 
|                                                                                                                                                                                              |  |                                                            |            | 
|Amounts attributable to American Realty Investors, Inc.                                                                                                                                       |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Income (loss) from continuing operations                                                                                                                                                      |  | $                                                          | 9,848      |  |                                  | $ | (16,448)   |      |  | $ | (1,308)    |  |  | $ | (28,545)   | 
|Income from discontinued operations                                                                                                                                                           |  |                                                            | 4,585      |  |                                  |   | 2,699      |      |  |   | 6,539      |  |  |   | 2,885      | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 
|Net income (loss)                                                                                                                                                                             |  | $                                                          | 14,433     |  |                                  | $ | (13,749)   |      |  | $ | 5,231      |  |  | $ | (25,660)   | 
|                                                                                                                                                                                              |  |                                                            |            |  |                                  |   |            |      |  |   |            |  |  |   |            | 

The accompanying notes are an integral part of these consolidated financial statements.



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##### Table of Contents

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

For the Six Months Ended June 30, 2011

(unaudited)

(dollars in thousands)



|                                                         |  |               |         |              |                    |   |           |                          |  |   |       |  |  |  |            |  |                |   |     |                 |  |   |                   |  |  |                                               |         |  |                          |   |          |  |  |   |       |  |  |   |         | 
|-------------------------------------------------------- |  | ------------- | ------- | ------------ | ------------------ | - | --------- | ------------------------ |  | - | ----- |  |  |  | ---------- |  | -------------- | - | --- | --------------- |  | - | ----------------- |  |  | --------------------------------------------- | ------- |  | ------------------------ | - | -------- |  |  | - | ----- |  |  | - | ------- | 
|                                                         |  | Total
Capital |         |              | Comprehensive
Loss |   |           | Series A
Preferred
Stock |  |   |       |  |  |  |            |  | Treasury
Stock |   |     | Paid-in
Capital |  |   | Retained
Earnings |  |  | Accumulated
Other
Comprehensive
Income (Loss) |         |  | Non-controlling
Interest |  
|                                                         |  |               |         |              |                    |   |           |                          | 
|                                                         |  |               |         | Common Stock |                    |   |           |                          |  |  
|                                                         |  |               |         | Shares       |                    |   | Amount    |                          |  |   |       |  | 
|                                                         |  |               |         |             
|Balance, December 31, 2010                               |  | $             | 106,265 |              |                    | $ | (130,713) |                          |  | $ | 4,979 |  |  |  | 11,874,138 |  |                | $ | 114 |                 |  | $ | (6,333)           |  |  | $                                             | 110,419 |  |                          | $ | (47,776) |  |  | $ | (786) |  |  | $ | 45,648  | 
|Net income (loss)                                        |  |               | (4,114) |              |                    |   | (4,114)   |                          |  |   | -     |  |  |  | -          |  |                |   | -   |                 |  |   | -                 |  |  |                                               | -       |  |                          |   | 5,231    |  |  |   | -     |  |  |   | (9,345) | 
|Sale of controlling interest                             |  |               | 2,310   |              |                    |   | -         |                          |  |   | -     |  |  |  | -          |  |                |   | -   |                 |  |   | -                 |  |  |                                               | 1,747   |  |                          |   | -        |  |  |   | -     |  |  |   | 563     | 
|Acquisition of non-controlling interest                  |  |               | (83)    |              |                    |   | -         |                          |  |   | -     |  |  |  | -          |  |                |   | -   |                 |  |   | -                 |  |  |                                               | (80)    |  |                          |   | -        |  |  |   | -     |  |  |   | (3)     | 
|Distribution of non-controlling interest                 |  |               | (438)   |              |                    |   | -         |                          |  |   | -     |  |  |  | -          |  |                |   | -   |                 |  |   | -                 |  |  |                                               | (41)    |  |                          |   | -        |  |  |   | -     |  |  |   | (397)   | 
|Conversion of preferred stock into common stock          |  |               | 31      |              |                    |   | -         |                          |  |   | (71)  |  |  |  | 67,036     |  |                |   | 1   |                 |  |   | -                 |  |  |                                               | 101     |  |                          |   | -        |  |  |   | -     |  |  |   | -       | 
|Series A preferred stock cash dividend ($1.00 per share) |  |               | (1,230) |              |                    |   | -         |                          |  |   | -     |  |  |  | -          |  |                |   | -   |                 |  |   | -                 |  |  |                                               | (1,230) |  |                          |   | -        |  |  |   | -     |  |  |   | -       | 
|Repurchase/sale of treasury shares, net                  |  |               | (62)    |              |                    |   | -         |                          |  |   | -     |  |  |  | -          |  |                |   | -   |                 |  |   | (62)              |  |  |                                               | -       |  |                          |   | -        |  |  |   | -     |  |  |   | -       | 
|                                                         |  |               |         |             
|Balance, June 30, 2011                                   |  | $             | 102,679 |              |                    | $ | (134,827) |                          |  | $ | 4,908 |  |  |  | 11,941,174 |  |                | $ | 115 |                 |  | $ | (6,395)           |  |  | $                                             | 110,916 |  |                          | $ | (42,545) |  |  | $ | (786) |  |  | $ | 36,466  | 
|                                                         |  |               |         |             

The accompanying notes are an integral part of these consolidated financial statements.



5



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##### Table of Contents

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)



|                                                                          |  |                                  |         |  |      |   |          | 
|------------------------------------------------------------------------- |  | -------------------------------- | ------- |  | ---- | - | -------- | 
|                                                                          |  | For the Six Months EndedJune 30, |        
|                                                                          |  | 2011                             |         |  | 2010 |  
|                                                                          |  | (dollars in thousands)           |        
|Net loss                                                                  |  | $                                | (4,114) |  |      | $ | (30,779) | 
|Other comprehensive loss                                                  |  |                                  |         |  |      |   |          | 
|Unrealized loss on foreign currency translation                           |  |                                  | (786)   |  |      |   | (1,960)  | 
|Unrealized gain (loss) on investment securities                           |  |                                  | -       |  |      |   | -        | 
|                                                                          |  |                                  |         |  |      |   |          | 
|Total other comprehensive loss                                            |  |                                  | (786)   |  |      |   | (1,960)  | 
|                                                                          |  |                                  |         |  |      |   |          | 
|Comprehensive loss                                                        |  |                                  | (4,900) |  |      |   | (32,739) | 
|Comprehensive gain attributable to non-controlling interest               |  |                                  | 9,345   |  |      |   | 5,119    | 
|                                                                          |  |                                  |         |  |      |   |          | 
|Comprehensive gain (loss) attributable to American Realty Investors, Inc. |  | $                                | 4,445   |  |      | $ | (27,620) | 
|                                                                          |  |                                  |         |  |      |   |          | 

The accompanying notes are an integral part of these consolidated financial statements.



6



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##### Table of Contents

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                                        |  |                                  |          |   |      |   |         |  
|------------------------------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | ------- | -
|                                                                                                        |  | For the Six Months EndedJune 30, |         
|                                                                                                        |  | 2011                             |          |   | 2010 |  
|                                                                                                        |  | (dollars in thousands)           |         
|Cash Flow From Operating Activities:                                                                    |  |                                  |          |   |      |   |         |  
|Net loss                                                                                                |  | $                                | (4,114   | ) |      | $ | (26,904 | )
|Adjustments to reconcile net loss applicable to common shares to net cash used in operating activities: |  |                                  |          |   |      |   |         |  
|Gain on sale of land                                                                                    |  |                                  | (19,373  | ) |      |   | 4,115   |  
|Gain on sale of income producing properties                                                             |  |                                  | (11,816  | ) |      |   | (5,660  | )
|Depreciation and amortization                                                                           |  |                                  | 13,873   |   |      |   | 15,490  |  
|Provision for impairment of notes receivable and real estate assets                                     |  |                                  | 6,503    |   |      |   | -       |  
|Amortization of deferred borrowing costs                                                                |  |                                  | 2,100    |   |      |   | 2,193   |  
|Earnings from unconsolidated subsidiaries and investees                                                 |  |                                  | 73       |   |      |   | 93      |  
|Change in non-controlling interest                                                                      |  |                                  | -        |   |      |   | (5,119  | )
|Gain on foreign currency translation                                                                    |  |                                  | -        |   |      |   | (233    | )
|Loss on the sale of controlling stock                                                                   |  |                                  | -        |   |      |   | 49      |  
|(Increase) decrease in assets:                                                                          |  |                                  |          |   |      |   |         |  
|Accrued interest receivable                                                                             |  |                                  | (813     | ) |      |   | (330    | )
|Other assets                                                                                            |  |                                  | (148     | ) |      |   | 5,124   |  
|Prepaid expense                                                                                         |  |                                  | 2,143    |   |      |   | 281     |  
|Escrow                                                                                                  |  |                                  | 11,412   |   |      |   | 8,328   |  
|Earnest money                                                                                           |  |                                  | (75      | ) |      |   | 289     |  
|Rent receivables                                                                                        |  |                                  | 776      |   |      |   | (2,411  | )
|Affiliate receivable                                                                                    |  |                                  | (4,477   | ) |      |   | -       |  
|Increase (decrease) in liabilities:                                                                     |  |                                  |          |   |      |   |         |  
|Accrued interest payable                                                                                |  |                                  | 7,091    |   |      |   | 2,453   |  
|Affiliate payables                                                                                      |  |                                  | (12,219  | ) |      |   | 11,823  |  
|Other liabilities                                                                                       |  |                                  | (14,062  | ) |      |   | 516     |  
|                                                                                                        |  |                                  |          |   |      |   |         |  
|Net cash provided by (used in) operating activities                                                     |  |                                  | (23,126  | ) |      |   | 10,097  |  
|                                                                                                        |  |                                 
|Cash Flow From Investing Activities:                                                                    |  |                                  |          |   |      |   |         |  
|Proceeds from notes receivables                                                                         |  |                                  | 13,806   |   |      |   | 1,540   |  
|Origination of notes receivable                                                                         |  |                                  | (693     | ) |      |   | -       |  
|Acquisition of land held for development                                                                |  |                                  | -        |   |      |   | (2,259  | )
|Proceeds from sales of income producing properties                                                      |  |                                  | 64,361   |   |      |   | 32,969  |  
|Proceeds from sale of land                                                                              |  |                                  | 107,877  |   |      |   | 12,325  |  
|Proceeds from sale of investment in unconsolidated real estate entities                                 |  |                                  | (9       | ) |      |   | -       |  
|Investment in unconsolidated real estate entities                                                       |  |                                  | 709      |   |      |   | (607    | )
|Improvement of land held for development                                                                |  |                                  | (2,024   | ) |      |   | (10,569 | )
|Improvement of income producing properties                                                              |  |                                  | (733     | ) |      |   | (1,898  | )
|Acquisition of non-controlling interest                                                                 |  |                                  | (23      | ) |      |   | -       |  
|Sale of non-controlling interest                                                                        |  |                                  | 102      |   |      |   | -       |  
|Sale of controlling interest                                                                            |  |                                  | 2,208    |   |      |   | -       |  
|Construction and development of new properties                                                          |  |                                  | (30,610  | ) |      |   | (10,294 | )
|                                                                                                        |  |                                  |          |   |      |   |         |  
|Net cash provided by investing activities                                                               |  |                                  | 154,971  |   |      |   | 21,207  |  
|                                                                                                        |  |                                 
|Cash Flow From Financing Activities:                                                                    |  |                                  |          |   |      |   |         |  
|Proceeds from notes payable                                                                             |  |                                  | 141,565  |   |      |   | 104,010 |  
|Recurring amortization of principal on notes payable                                                    |  |                                  | (8,933   | ) |      |   | (7,102  | )
|Debt assumption by buyer, part of seller proceeds                                                       |  |                                  | -        |   |      |   | (39,889 | )
|Payments on maturing notes payable                                                                      |  |                                  | (267,788 | ) |      |   | (84,175 | )
|Deferred financing costs                                                                                |  |                                  | (469     | ) |      |   | (4,150  | )
|Stock-secured borrowings and margin debt                                                                |  |                                  | 3,164    |   |      |   | -       |  
|Distributions to non-controlling interests                                                              |  |                                  | (294     | ) |      |   | -       |  
|Preferred stock dividends - Series A                                                                    |  |                                  | (1,230   | ) |      |   | -       |  
|Repurchase of common stock/treasury stock                                                               |  |                                  | (62      | ) |      |   | -       |  
|Issuance of common stock                                                                                |  |                                  | 1        |   |      |   | -       |  
|Conversion of preferred stock into common stock                                                         |  |                                  | 31       |   |      |   | -       |  
|                                                                                                        |  |                                  |          |   |      |   |         |  
|Net cash used in financing activities                                                                   |  |                                  | (134,015 | ) |      |   | (31,306 | )
|                                                                                                        |  |                                  |          |   |      |   |         |  
|                                                                                                        |  |                                 
|Net decrease in cash and cash equivalents                                                               |  |                                  | (2,170   | ) |      |   | (2      | )
|Cash and cash equivalents, beginning of period                                                          |  |                                  | 12,649   |   |      |   | 4,887   |  
|                                                                                                        |  |                                  |          |   |      |   |         |  
|Cash and cash equivalents, end of period                                                                |  | $                                | 10,479   |   |      | $ | 4,885   |  
|                                                                                                        |  |                                  |          |   |      |   |         |  
|                                                                                                        |  |                                 
|Supplemental disclosures of cash flow information:                                                      |  |                                  |          |   |      |   |         |  
|Cash paid for interest                                                                                  |  | $                                | 32,480   |   |      | $ | 39,441  |  
|Cash received for income taxes, net of payments                                                         |  | $                                | -        |   |      | $ | (634    | )
|                                                                                                        |  |                                 
|Schedule of noncash investing and financing activities:                                                 |  |                                  |          |   |      |   |         |  
|Unrealized loss on marketable securities                                                                |  | $                                | -        |   |      | $ | (2,575  | )
|Note receivable received from affiliate                                                                 |  | $                                | 5,380    |   |      | $ | 2,341   |  
|Note receivable from sale of real estate                                                                |  | $                                | -        |   |      | $ | 2,700   |  

The accompanying notes are an integral part of these consolidated financial statements.



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

As used
herein, the terms ARL, the Company, we, our or us refer to American Realty Investors, Inc., a Nevada corporation, which was formed in November 1999. In August 2000, the Company acquired
American Realty Trust, Inc. (ART), a Georgia corporation and National Realty, L.P. (NRLP), a Delaware partnership.

The Company is headquartered in Dallas, Texas and its common stock trades on the New York Stock Exchange under the symbol NYSE: ARL.
Approximately 86.9% of ARLs stock is owned by affiliated entities. ARL owns approximately 82.7% of the outstanding shares of common stock of Transcontinental Realty Investors, Inc. (TCI), a Nevada corporation, which has its common
stock listed and traded on the New York Stock Exchange under the symbol NYSE: TCI. ARL is a C corporation for U.S. federal income tax purposes and has consolidated TCIs accounts and operations since March 2003.

TCI, a subsidiary of ARL, owns approximately 83.3% of the common stock of Income Opportunity Realty Investors, Inc. (IOT).
Effective July 17, 2009, IOTs financial results were consolidated with those of ARL and TCI and their subsidiaries. Shares of IOT are traded on the American Stock Exchange under the symbol AMEX: IOT.

ARL invests in real estate through direct ownership, leases and partnerships and it also invests in mortgage loans on real estate. Prior to
April 30, 2011, Prime Income Asset Management, LLC (Prime) was the Companys external Advisor and Cash Manager. Prime also served as an Advisor and Cash Manager to TCI and IOT. Effective April 30, 2011, Pillar Income Asset
Management, Inc. (Pillar) became the Companys external Advisor and Cash Manager under the same terms as the previous agreement with Prime. Pillar also serves as an Advisor and Cash Manager to TCI and IOT. Prior to December 31,
2010, Triad Realty Services, L.P. (Triad) managed the Companys commercial properties and Regis Realty I, LLC (Regis Realty) provided brokerage services. Triad and Regis Realty are affiliates of Prime. Effective
January 1, 2011, Regis Realty Prime, LLC (Regis), an affiliate of Prime, manages our commercial properties and provides brokerage services under the same terms as the previous agreements with Triad and Regis Realty for a term of
five years. ARL engages third-party companies to lease and manage its apartment properties. We have no employees.

Properties

We own or had interests in a total property portfolio of 79 income producing properties as of June 30, 2011. The properties consisted
of:



| |  |  | 26 commercial properties totaling 4.9 million rentable square feet, consisting of 16 office buildings, five commercial warehouses, four retail
properties, and a 344,975 square foot trade show and exhibit hall;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Four hotels comprising 618 rooms;
| | - |  | ---------------------------------



| |  |  | 49 apartment communities totaling 8,959 units, excluding apartments being developed; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | 9,076 acres of developed and undeveloped land.
| | - |  | ----------------------------------------------

We are involved in the construction of three apartment complexes and the development of a 420-acre holiday resort community in Germany. In addition, we invest in several tracts of land and are at various
stages of predevelopment on many of these properties. We partner with several third-party developers to construct residential projects. The third-party developer typically takes a general partner and majority limited partner interest in the
development partnership while we take a minority limited partner interest. We are required to fund the equity contributions. The third-party developer is responsible for obtaining financing, for hiring a general contractor and for the overall
management and delivery of the project, and is compensated with a fee equal to a certain percentage of the construction costs. We are also partnered in a joint venture to develop a 420-acre former naval base, located in the northeastern section of
Schleswig-Holstein, Germany, into a multi-family resort area.

Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, have been condensed or omitted in
accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being misleading. In the opinion of management, all adjustments (consisting of normal recurring matters)
considered necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for other interim periods or for the
full fiscal year.

The year-end consolidated balance sheet at December 31, 2010 was derived from the audited financial statements at that
date, but does not include all of the information and disclosures required by GAAP for complete financial statements. For further information, refer to the financial statements and notes thereto included in the Companys Annual Report on Form
10-K for the year ended



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##### Table of Contents

December 31, 2010. Certain 2010 financial statement amounts have been reclassified to conform to the 2011
presentation, including adjustments for discontinued operations.

Principles of consolidation

The accompanying financial statements include the accounts of the Company, its subsidiaries, generally all of which are wholly-owned, and all entities in
which we have a controlling interest. Arrangements that are not controlled through voting or similar rights are accounted for as a Variable Interest Entity (VIE), in accordance with the provisions and guidance of ASC Topic 810
Consolidation, whereby we have determined that we are a primary beneficiary of the VIE and meet certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (EITF)
Issue 04-5, Investors Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (EITF 04-5). VIEs are generally entities that lack
sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the
entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital
transactions, or makes operating decisions that materially affect the entitys financial results. All significant intercompany balances and transactions have been eliminated in consolidation.

In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: the
amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; our and the other investors ability to control or significantly influence key decisions for the VIE; and the
similarity with and significance to the business activities of us and the other investors. Significant judgments related to these determinations include estimates about the current future fair values and performance of real estate held by these
VIEs and general market conditions.

For entities in which we have less than a controlling financial interest or entities where we are
not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities is included in consolidated net income. Our investments in Gruppa
Florentina, LLC, LK-Four Hickory, LLC, and Garden Centura, L.P. are accounted for under the equity method.

During the second quarter of 2011,
we evaluated the non-controlling equity interests and made certain reclassifications among equity accounts to correctly reflect non-controlling interest. In connection with that evaluation, we reclassified approximately $6.3 million of deferred gain
to non-controlling interest related to the 2009 acquisition of the controlling interest in IOT, a consolidated entity. These amounts have been reclassified for all periods presented in the consolidated financial statements.

Real estate, depreciation, and impairment

Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and
depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements  10-40 years; furniture, fixtures and equipment  5-10 years). The
Company continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in ASC Topic 360, Property, Plant and Equipment. Factors considered by management in evaluating impairment
of its existing real estate assets held for investment include significant declines in property operating profits, annually recurring property operating losses and other significant adverse changes in general market conditions that are considered
permanent in nature. Under ASC Topic 360, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated cash flow from future operations and the estimated
cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the assets net book value at the balance sheet date. If any real estate asset held for investment is considered impaired, a loss is provided
to reduce the carrying value of the asset to its estimated fair value.

Real estate held for sale

We periodically classify real estate assets as held for sale. An asset is classified as held for sale after the approval of our board of
directors and after an active program to sell the asset has commenced. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its estimated fair value, less
costs to sell the asset. Subsequent to the classification of assets as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately on the accompanying Consolidated Balance Sheets. Upon a
decision to no longer market as an asset for sale, the asset is classified as an operating asset and depreciation expense is reinstated. The operating results of real estate assets held for sale and sold are reported as discontinued operations in
the accompanying statements of operations. Income from discontinued operations includes the revenues and expenses, including depreciation and interest expense, associated with the assets. This classification of operating results as discontinued
operations applies retroactively for all periods presented. Additionally, gains and losses on assets designated as held for sale are classified as part of discontinued operations.



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Cost capitalization

Costs related to planning, developing, leasing and constructing a property are capitalized and classified as Real Estate in the Consolidated Balance Sheets. We capitalize interest to qualifying assets
under development based on average accumulated expenditures outstanding during the period. In capitalizing interest to qualifying assets, we first use the interest incurred on specific project debt, if any, and next use the weighted average interest
rate of non-project specific debt. We capitalize interest, real estate taxes and certain operating expenses until building construction is substantially complete and the building is ready for its intended use, but no later than one year from the
cessation of major construction activity.

We capitalize leasing costs which include commissions paid to outside brokers, legal costs incurred
to negotiate and document a lease agreement and any internal costs that may be applicable. We allocate these costs to individual tenant leases and amortize them over the related lease term.

Fair value measurement

We apply the guidance in ASC Topic 820, Fair Value
Measurements and Disclosures, to the valuation of real estate assets. These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the
measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to
quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entitys own data.

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:



|          |  |                                                                                                                                                                                                                           
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1  |  | Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.                                                                                                                          
|Level 2  |  | Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the financial instrument.
|Level 3  |  | Unobservable inputs that are significant to the fair value measurement.                                                                                                                                                   

A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that
is significant to the fair value measurement.

Newly issued accounting standards

We have considered all other newly issued accounting guidance that is applicable to our operations and the preparation of our consolidated statements,
including that which we have not yet adopted. We do not believe that any such guidance will have a material effect on our financial position or results of operations.

NOTE 2. REAL ESTATE ACTIVITY

The highlights of our significant real estate transactions for the six months ended June 30, 2011 are listed below:

On January 4, 2011, we recognized the 2010 sale of 18.84 acres of land known as Archon land located in Las Colinas, Texas to FRE Real Estate, Inc.,
a related party under common control, for a sales price of $5.5 million. The buyer assumed the existing mortgage of $4.0 million secured by the property. We recorded a gain of $0.1 million when ownership of the property transferred to the existing
lender.

The Company had a 75.0% limited partner interest in Woodmont TCI Group X, LP, a partnership that owned 7.19 acres of land known as
Galleria West Lofts land located in Dallas, Texas. The partnership was consolidated in accordance with ASC 810. On January 4, 2011 the partnership transferred ownership of the property to the existing lender and there was no gain or loss
recorded on the transfer.

The Company had a 75.0% limited partner interest in Woodmont TCI Group XI, LP, a partnership that owned 1.97 acres
of land known as Galleria West Hotel land located in Dallas, Texas. The partnership was consolidated in accordance with ASC 810. On January 4, 2011 the partnership transferred ownership of the property to the existing lender and there was no
gain or loss recorded on the transfer.

On January 4, 2011, we recognized the 2010 sale of 9.96 acres of land known as Limestone Canyon
II land located in Austin, Texas to FRE Real Estate, Inc., a related party under common control, for a sales price of $0.6 million. We recorded a gain on sale of $0.2 million when ownership of the property transferred to the existing lender.



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##### Table of Contents

On January 4, 2011, we recognized the sale of 72.14 acres of land known as Manhattan land located in
Farmers Branch, Texas to ABCLD Income, LLC, a related party under common control, for a sales price of $4.1 million. The buyer assumed the existing mortgage of $2.4 million secured by the property. We recorded the sale when ownership of the property
transferred to the existing lender.

On January 4, 2011, we recognized the 2010 sale of Teleport Blvd., a 6,833 square foot building and
3.70 acres of land, located in Irving, Texas to FRE Real Estate, Inc., a related party under common control, for a sales price of $0.7 million. We recorded a gain on sale of $0.4 million when ownership of the property transferred to the existing
lender.

On January 4, 2011, we recognized the 2010 sale of Westgrove Air Plaza, a 79,652 square foot building, located in Addison, Texas
to FRE Real Estate, Inc., a related party under common control, for a sales price of $4.5 million. The buyer assumed the existing mortgage of $2.3 million secured by the property. We recorded a gain of $3.3 million due to recognition of prior period
deferred gain when ownership of the property transferred to the existing lender.

On January 26, 2011, we sold 100% of our common stock
in TCI Willowbrook Village, Inc. to TX LTS Investments, Inc., a related party under common control, for a sales price of $7.8 million. This entity owns a 179,741 square foot retail shopping center located in Coldwater, Michigan known as Willowbrook
Village. We provided $2.2 million in seller financing with a five-year note receivable. The note accrues interest at 6% and is payable at maturity on January 26, 2016. The buyer assumed the existing mortgage of $5.6 million, secured by the
property. We have deferred the recognition of the sale in accordance with ASC 360-20 due to our continuing involvement, inadequate initial investment and questionable recovery of investment cost.

On February 1, 2011, we recognized the 2009 sale of five land parcels totaling 21.99 acres located in Dallas County, Texas to One Realco Land
Holdings, Inc., a related party under common control, for a sales price of $5.9 million. These land parcels were known as Bonneau land, Dalho land, HSM Cummings land, JHL Connell land and Walnut Hill land. The buyer assumed the existing mortgage of
$5.9 million secured by the property. We recorded a gain on sale of $3.0 million when the buyer subsequently sold the land to a third party.

The Company had a 75.0% limited partner interest in Woodmont TCI Group XIII, LP, a partnership that owned 8.91 acres of land known as Las Colinas Station
land located in Irving, Texas. The partnership was consolidated in accordance with ASC 810. On February 4, 2011 the partnership transferred ownership of the property to the existing lender and there was no gain or loss recorded on the transfer.

The Company had a 75.0% limited partner interest in Woodmont TCI Group IX, LP, a partnership that owned 15.0 acres of land known as Galleria
East Center Retail land located in Dallas, Texas. The partnership was consolidated in accordance with ASC 810. On February 4, 2011 the partnership transferred ownership of the property to the existing lender and there was no gain or loss
recorded on the transfer.

On March 1, 2011, we recognized the 2009 sale of 6.54 acres of land known as Chase Oaks land located in Plano,
Texas to One Realco Land Holdings, Inc., a related party under common control, for a sales price of $1.5 million. The buyer assumed the existing mortgage of $1.8 million secured by the property. We recorded a gain on sale of $0.8 million when the
buyer subsequently sold the land to a third party.

On March 22, 2011, we sold our investment in Cross County National Associates, LP to
ABC Land Real Estate, LLC and ABC Land

& Development, Inc., both related parties under common control, for a sales price of $9.5 million.
This entity owns a 307,266 square foot retail center known as Cross County Mall located in Mattoon, Illinois. We provided $0.3 million in seller-financing with a five-year note receivable. The note accrues interest at 6% and is payable at maturity
on March 22, 2016. The buyer assumed the existing mortgage of $9.2 million, secured by the property. We have deferred the recognition of the sale in accordance with ASC 360-20 due to our continuing involvement, inadequate initial investment and
questionable recovery of investment cost.

On March 23, 2011, we sold 82.20 acres of land known as Denton Coonrod land located in Denton,
Texas and 23.24 acres of land known as Cooks Lane land located in Tarrant County, Texas to Cross County National Associates, LP, a related party under common control, for a sales price of $2.9 million. We provided $1.6 million in seller-financing
with a five-year note receivable. The note accrues interest at 6% and is payable at maturity on March 23, 2016. The buyer assumed the existing mortgage of $1.3 million, secured by the property. We have deferred the recognition of the sale in
accordance with ASC 360-20 due to our continuing involvement, inadequate initial investment and questionable recovery of investment cost.

On
March 23, 2011, we sold our investment in Palmer Lane Golf, Inc. to One Realco Corporation, a related party under common control, for $13.8 million. This entity owns 376.25 acres of land known as Pioneer Crossing land located in Austin, Texas.
The buyer assumed the existing mortgage, secured by the property, of $13.8 million. We have deferred the recognition of the sale in accordance with ASC 360-20 due to our continuing involvement, inadequate initial investment and questionable recovery
of investment cost.



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On March 23, 2011, we sold our investment in TCI Courtyard, Inc. to One Realco Corporation, a related
party under common control, for a sales price of $11.2 million. This entity owns Quail Hollow at the Lakes apartments, a 200-unit complex located in Holland, Ohio. The buyer assumed the existing mortgage of $11.2 million, secured by the property. We
have deferred the recognition of the sale in accordance with ASC 360-20 due to our continuing involvement, inadequate initial investment and questionable recovery of investment cost.

On March 23, 2011, we sold our membership interest in 1340 Poydras Corp. to ABCLD Real Estate, LLC, a related party under common control, for a sales price of $23.5 million. This entity owns a
378,895 square foot building located in New Orleans, Louisiana known as Amoco. The buyer assumed the existing mortgage of $19.5 million, secured by the property. This transaction was rescinded as of the original transaction date and ownership
transferred back to TCI.

On March 28, 2011, we sold our investment in ART One Hickory Corporation and ART Two Hickory Corporation to
ABCLD Real Estate, LLC, a related party under common control, for a sales price of $19.5 million. These entities own a 97,361 square foot office building known as One Hickory Center and a 96,539 square foot office building known as Two Hickory
Center, both located in Dallas, Texas. We provided $0.7 million in seller-financing with a five-year note receivable. The note accrues interest at 6% and is payable at maturity on March 28, 2016. The buyer assumed the existing mortgage of $18.8
million, secured by the property. We have deferred the recognition of the sale in accordance with ASC 360-20 due to our continuing involvement, inadequate initial investment and questionable recovery of investment cost.

On April 5, 2011, we recognized the 2009 sale of five land parcels, comprising approximately 30.18 acres of land known as Keenan Bridge land,
Thompson land, Thompson II land, Tomlin land and Pac Trust land located in Dallas County, Texas, to One Realco Land Holdings, Inc., a related party under common control, for a sales price of $6.0 million. The buyer assumed the existing mortgage of
$6.0 million secured by the property. We recorded a gain on sale of $2.1 million when ownership of the property transferred to the existing lender.

On April 5, 2011, we recognized the sale of 13.22 acres of land known as Hackberry land located in Irving, Texas to One Realco Land Holdings, Inc., a related party under common control, for a sales
price of $3.9 million. The buyer assumed the existing mortgage of $3.9 million secured by the property. We recorded a gain on sale of $2.4 million when ownership of the property transferred to the existing lender.

On April 5, 2011, we recognized the sale of 14.43 acres of land known as Fortune Drive land located in Irving, Texas to One Realco Land Holdings,
Inc., a related party under common control, for a sales price of $1.7 million. The buyer assumed the existing mortgage of $1.1 million secured by the property. We recorded a loss on sale of $0.4 million when ownership of the property transferred to
the existing lender.

On April 5, 2011, we recognized the 2010 sale of 10.69 acres of land known as Temple land, located in Irving, Texas
to FRE Real Estate, Inc., a related party under common control, for a sales price of $0.4 million. We recorded a loss on sale of $0.1 million when ownership of the property transferred to the existing lender.

On April 5, 2011, we recognized the sale of 7.11 acres of land known as Pac Trust land located in Irving, Texas to One Realco Land Holdings, Inc., a
related party under common control, for a sales price of $1.4 million. The buyer assumed the existing mortgage of $1.4 million secured by the property. We recorded a loss on sale of $0.2 million when ownership of the property transferred to the
existing lender.

On April 5, 2011, we recognized the sale of our investment in Palmer Lane Golf, Inc. to One Realco Corporation, a
related party under common control, for $13.8 million. This entity owns 376.25 acres of land known as Pioneer Crossing land located in Austin, Texas. The buyer assumed the existing mortgage, secured by the property, of $13.8 million. We recorded a
loss on sale of $0.1 million when ownership of the property transferred to the existing lender.

The Company had a 75.0% limited partner
interest in Woodmont TCI Group III, LP, a partnership that owned 5.87 acres of land known as Polo Estates at Bent Tree land located in Dallas, Texas. The partnership was consolidated in accordance with ASC 810. On April 5, 2011 the partnership
transferred ownership of the property to the existing lender and we recorded a gain of $3.0 million due to recognition of a prior period deferred gain.

On April 5, 2011, we recognized the sale of 87.62 acres of land known as Wilmer 88 land located in Dallas, Texas, 24.91acres of land known as Crowley land located in Dallas, Texas and 30.07 acres of
land known as Creekside land located in Fort Worth, Texas to T Sorrento, Inc., a related party under common control, for a sales price of $4.4 million. The buyer assumed the existing mortgage of $2.4 million secured by the property. We recorded a
loss on sale of $2.0 million when ownership of the property transferred to the existing lender.

On June 7, 2011, we recognized the sale
of our investment in Pacific Center, LLC to ABC Land and Development, Inc., a related party under common control, for a sales price of $2.5 million. This entity owns the Piccadilly University Hotel, a 190-room hotel,



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located in Fresno, California. The buyer assumed the existing mortgage of $2.5 million secured by the property. We recorded a gain on sale of $3.6 million when ownership of the property
transferred to the existing lender.

On June 7, 2011, we recognized the sale of Alpenloan, a 28,594 square foot building and 8.16 acres
of land, located in Dallas, Texas to One Realco Retail, Inc., a related party under common control, for a sales price of $0.4 million. We recorded a loss on sale of $0.9 million when ownership of the property transferred to the existing lender.

On June 7, 2011, we recognized the sale of 5.34 acres of land known as Archon land located in Irving, Texas and 1.31 acres of land known
as Ackerley land located in Dallas, Texas to One Realco Retail, Inc., a related party under common control, for a sales price of $0.7 million. The buyer assumed the existing mortgage of $0.7 million secured by the property. We recorded a loss on
sale of $0.7 million when ownership of the property transferred to the existing lender.

On June 7, 2011, we recognized the sale of
Fenton Centre, a 707,559 square foot building and 4.70 acres of land, located in Dallas, Texas to ABCLD Properties, LLC, a related party under common control, for a sales price of $67.0 million. We recorded a loss on sale of $7.0 million when
ownership of the property transferred to the existing lender.

On June 7, 2011, we recognized the sale of 27.11 acres of land known as
Kinwest land located in Irving, Texas to Fenton Real Estate, Inc., a related party under common control, for a sales price of $4.1 million. The buyer assumed the existing mortgage of $4.0 million secured by the property. We recorded a gain on sale
of $1.1 million when ownership of the property transferred to the existing lender.

On June 7, 2011, we recognized the sale of 20.85
acres of land known as McKinney Ranch land located in McKinney, Texas to Fenton Real Estate, Inc., a related party under common control, for a sales price of $5.4 million. The buyer assumed the existing mortgage of $5.4 million secured by the
property. We recorded a gain on sale of $0.8 million when ownership of the property transferred to the existing lender.

On June 7, 2011,
we recognized the sale of 109.85 acres of land known as Payne North land located in Irving, Texas to FRE Real Estate, Inc., a related party under common control, for a sales price of $14.1 million. The buyer assumed the existing mortgage of $12.0
million secured by the property. We recorded a loss on sale of $1.9 million when ownership of the property transferred to the existing lender.

On June 7, 2011, we recognized the 2010 sale of 97.28 acres of land known as Pioneer Crossing land located in Austin, Texas to FRE Real Estate,
Inc., a related party under common control, for a sales price of $1.4 million. The buyer assumed the existing mortgage of $1.4 million secured by the property. We recorded a loss on sale of $1.8 million when ownership of the property transferred to
the existing lender.

In December 2010, ARL sold 34 properties, which consisted of six commercial buildings comprising an aggregate of
1.4 million square feet, approximately 3,683 acres of undeveloped land, and one ground lease to FRE Real Estate, Inc. a related party under common control, for an aggregate sales price of $229.2 million. During the first three months of 2011,
many of these transactions were rescinded as of the original transaction date and were subsequently sold to related parties under the same ownership as FRE Real Estate, Inc. The sales of the ground lease and 210.70 acres of the undeveloped land were
rescinded and ownership transferred back to TCI. For the properties that were sold to a third party or ownership was transferred back to the lender for credit against the loan balance, the sales was recognized during the first six months of 2011 and
have been disclosed in Note 2. Real Estate Activity. We have deferred the recognition of the sales in accordance with ASC 360-20 due to our continuing involvement, inadequate initial investment and questionable recovery of investment
cost.

We continue to invest in the development of apartments and various projects. During the six months ended June 30, 2011, we have
expended $30.6 million on construction and development and capitalized $2.8 million of interest costs.

The properties that we have sold to a
related party under common control and have deferred the recognition of the sale are treated as subject to sales contract on the Consolidated Balance Sheets. These properties were sold to a related party in order to help facilitate an
appropriate debt or organizational restructure and may or may not be transferred back to the seller upon resolution. These properties have mortgages that are secured by the property and many have corporate guarantees. According to the loan
documents, we are currently in default on these mortgages primarily due to lack of payment although we are actively involved in discussions with every lender in order to settle or cure the default situation. We have reviewed each asset and taken
impairment to the extent we feel the value of the property was less than our current basis.

In reviewing the impairment reserves for our real
estate holdings, there were reserves taken on properties that were no longer necessary due to a current valuation analysis and therefore we released $11.0 million of real estate reserves in the second quarter of 2011.



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NOTE 3. NOTES AND INTEREST RECEIVABLE

A portion of our assets are invested in mortgage notes receivable, principally secured by real estate. We may originate mortgage loans
in conjunction with providing purchase money financing of property sales. Notes receivable are generally collateralized by real estate or interests in real estate and personal guarantees of the borrower and, unless noted otherwise, are so secured.
Management intends to service and hold for investment the mortgage notes in our portfolio. A majority of the notes receivable provide for principal to be paid at maturity. Our mortgage notes receivable consist of first, wraparound and junior
mortgage loans (dollars in thousands):



|                                                                     |  |                |  |                |         |   |        |   |          |          |  |                                                           
|-------------------------------------------------------------------- |  | -------------- |  | -------------- | ------- | - | ------ | - | -------- | -------- |  | ----------------------------------------------------------
|Borrower                                                             |  | Maturity  Date |  | Interest  Rate |         |   | Amount |   |          | Security
|Performing loans:                                                    |  |                |  |                |         |   |        |   |          |          |  |                                                           
|Dallas Fund XVII L.P.(2)                                             |  | 10/09          |  |                | 9.00    | % |        | $ | 1,432    |          |  | Assignment of partnership interests                       
|Garden Centura, L.P. (1)                                             |  | N/A            |  |                | 7.00    | % |        |   | 3,767    |          |  | Excess cash flow from partnership                         
|Miscellaneous non-related party notes                                |  | Various        |  |                | Various |   |        |   | 4,826    |          |  | Various security interests                                
|Miscellaneous related party notes (1)                                |  | Various        |  |                | Various |   |        |   | 3,663    |          |  | Various security interests                                
|Unified Housing Foundation, Inc. (Cliffs of El Dorado)
(1)           |  | 12/27          |  |                | 5.25    | % |        |   | 5,459    |          |  | 100% Interest in UH of McKinney, LLC                      
|Unified Housing Foundation, Inc. (Echo Station)
(1)                  |  | 12/27          |  |                | 5.25    | % |        |   | 1,481    |          |  | 100% Interest in UH of Temple, LLC                        
|Unified Housing Foundation, Inc. (Inwood on the Park)
(1)            |  | 12/27          |  |                | 5.25    | % |        |   | 5,059    |          |  | 100% Interest in Unified Housing Inwood, LLC              
|Unified Housing Foundation, Inc. (Kensington Park)
(1)               |  | 12/27          |  |                | 5.25    | % |        |   | 3,936    |          |  | 100% Interest in Unified Housing Kensington, LLC          
|Unified Housing Foundation, Inc. (Lakeshore Villas)
(1)              |  | 12/27          |  |                | 5.25    | % |        |   | 2,000    |          |  | Unsecured                                                 
|Unified Housing Foundation, Inc. (Lakeshore Villas)
(1)              |  | 12/27          |  |                | 5.25    | % |        |   | 9,096    |          |  | Membership interest in Housing for Seniors of Humble, LLC 
|Unified Housing Foundation, Inc. (Limestone Canyon)
(1)              |  | 07/15          |  |                | 5.25    | % |        |   | 3,057    |          |  | 100% Interest in Unified Housing of Austin, LLC           
|Unified Housing Foundation, Inc. (Limestone Canyon)
(1)              |  | 12/27          |  |                | 5.25    | % |        |   | 4,663    |          |  | 100% Interest in Unified Housing of Austin, LLC           
|Unified Housing Foundation, Inc. (Limestone Ranch)
(1)               |  | 07/15          |  |                | 5.25    | % |        |   | 2,250    |          |  | 100% Interest in Unified Housing of Vista Ridge,LLC       
|Unified Housing Foundation, Inc. (Limestone Ranch)
(1)               |  | 12/27          |  |                | 5.25    | % |        |   | 6,000    |          |  | 100% Interest in Unified Housing of Vista Ridge,LLC       
|Unified Housing Foundation, Inc. (Parkside Crossing)
(1)             |  | 12/27          |  |                | 5.25    | % |        |   | 1,936    |          |  | 100% Interest in Unified Housing of Parkside Crossing, LLC
|Unified Housing Foundation, Inc. (Sendero Ridge)
(1)                 |  | 12/27          |  |                | 5.25    | % |        |   | 5,174    |          |  | 100% Interest in Unified Housing of Sendero Ridge, LLC    
|Unified Housing Foundation, Inc. (Sendero Ridge)
(1)                 |  | 07/15          |  |                | 5.25    | % |        |   | 4,812    |          |  | 100% Interest in Unified Housing of Sendero Ridge, LLC    
|Unified Housing Foundation, Inc. (Timbers of Terrell)
(1)            |  | 12/27          |  |                | 5.25    | % |        |   | 1,323    |          |  | 100% Interest in Unified Housing of Terrell, LLC          
|Unified Housing Foundation, Inc.(Tivoli)
(1)                         |  | 12/27          |  |                | 5.25    | % |        |   | 7,966    |          |  | 100% Interest in Unified Housing of Tivoli, LLC           
|Unified Housing Foundation, Inc. (Reserve at White Rock Phase I)(1)  |  | 12/27          |  |                | 5.25    | % |        |   | 2,524    |          |  | 100% Interest in Unified Housing of Harvest Hill I, LLC   
|Unified Housing Foundation, Inc. (Reserve at White Rock Phase II)(1) |  | 12/27          |  |                | 5.25    | % |        |   | 2,555    |          |  | 100% Interest in Unified Housing of Harvest Hill, LLC     
|Unified Housing Foundation, Inc. (Trails at White
Rock)(1)           |  | 12/27          |  |                | 5.25    | % |        |   | 3,815    |          |  | 100% Interest in Unified Housing of Harvest Hill III, LLC 
|Accrued interest                                                     |  |                |  |                |         |   |        |   | 725      |          |  |                                                           
|                                                                     |  |                |  |                |         |   |        |   |          |          |  |                                                           
|Total Performing                                                     |  |                |  |                |         |   |        | $ | 87,519   |          |  |                                                           
|                                                                     |  |                |  |               
|Non-Performing loans:                                                |  |                |  |                |         |   |        |   |          |          |  |                                                           
|130 Windmill Farms, L.P.                                             |  | 07/11          |  |                | 7.00    | % |        |   | 507      |          |  | Unsecured                                                 
|Leman Development, Ltd.                                              |  | 07/11          |  |                | 7.00    | % |        |   | 1,500    |          |  | Unsecured                                                 
|Tracy Suttles                                                        |  | 12/11          |  |                | 0.00    | % |        |   | 1,077    |          |  | Unsecured                                                 
|Accrued interest                                                     |  |                |  |                |         |   |        |   | 57       |          |  |                                                           
|                                                                     |  |                |  |                |         |   |        |   |          |          |  |                                                           
|Total Non-Performing                                                 |  |                |  |                |         |   |        | $ | 3,141    |          |  |                                                           
|Allowance for estimated losses                                       |  |                |  |                |         |   |        |   | (13,384) |          |  |                                                           
|                                                                     |  |                |  |                |         |   |        |   |          |          |  |                                                           
|Total                                                                |  |                |  |                |         |   |        | $ | 77,276   |          |  |                                                           



|(1) | Related party notes
|--- | -------------------

|(2) | Note matured and an allowance was taken for estimated losses at full value
of note
|--- | ----------------------------------------------------------------------------------

NOTE 4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND INVESTEES

Investments in unconsolidated joint ventures and other investees in which we have a 20% to 50% interest or otherwise exercise
significant influence are carried at cost, adjusted for the Companys proportionate share of their undistributed earnings or losses, via the equity method of accounting.

Investments in unconsolidated joint ventures and other investees consist of the following:





|                       |  |     |  |                      |  |                 
|---------------------- |  | --- |  | -------------------- |  | ----------------
|                       |  |     |  | Percentage Ownership
|                       |  |     |  | at June 30, 2011     |  | at June 30, 2010
|Garden Centura, L.P.   |  | (1) |  | 5.00%                |  | 5.00%           
|                       |  |     | 
|Gruppa Florentina, LLC |  | (1) |  | 20.00%               |  | 20.00%          
|                       |  |     | 
|LK-Four Hickory, LLC   |  | (1) |  | 28.57%               |  | 28.57%          



(1) Other investees



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Our partnership interest in Garden Centura, L.P. in the amount of 5% is accounted for under the equity
method because we exercise significant influence over the operations and financial activities. We have guaranteed the notes payable and control the day to day activities. Accordingly, the investment is carried at cost, adjusted for the
companies proportionate share of earnings or losses. The following is a summary of the financial position and results of operations from our investees (dollars in thousands):



|                                             |  |                    |          | 
|-------------------------------------------- |  | ------------------ | -------- | 
|For the Six Months Ended June 30, 2011       |  | Other    Investees |         
|Real estate, net of accumulated depreciation |  | $                  | 118,000  | 
|Notes receivable                             |  |                    | 5,435    | 
|Other assets                                 |  |                    | 43,060   | 
|Notes payable                                |  |                    | (88,968) | 
|Other liabilities                            |  |                    | (14,294) | 
|Shareholders equity/partners capital        |  |                    | (63,233) | 
|                                             |  |                    |          | 
|Revenue                                      |  | $                  | 28,133   | 
|Depreciation                                 |  |                    | (3,258)  | 
|Operating expenses                           |  |                    | (23,174) | 
|Interest expense                             |  |                    | (2,485)  | 
|                                             |  |                    |          | 
|Loss from continuing operations              |  | $                  | (784)    | 
|Loss from discontinued operations            |  |                    | -        | 
|                                             |  |                    |          | 
|Net loss                                     |  | $                  | (784)    | 
|                                             |  |                    |          | 
|Companys proportionate share of earnings    |  | $                  | 3        | 
|                                             |  |                    |          | 
|                                             | 
|For the Six Months Ended June 30, 2010       |  | Other    Investees |         
|Real estate, net of accumulated depreciation |  | $                  | 122,822  | 
|Notes receivable                             |  |                    | 4,667    | 
|Other assets                                 |  |                    | 44,282   | 
|Notes payable                                |  |                    | (91,762) | 
|Other liabilities                            |  |                    | (12,510) | 
|Shareholders equity/partners capital        |  |                    | (67,499) | 
|                                             |  |                    |          | 
|Revenue                                      |  | $                  | 27,901   | 
|Depreciation                                 |  |                    | (3,203)  | 
|Operating expenses                           |  |                    | (22,249) | 
|Interest expense                             |  |                    | (3,247)  | 
|                                             |  |                    |          | 
|Loss from continuing operations              |  | $                  | (798)    | 
|Loss from discontinued operations            |  |                    | -        | 
|                                             |  |                    |          | 
|Net loss                                     |  | $                  | (798)    | 
|                                             |  |                    |          | 
|Companys proportionate share of earnings    |  | $                  | 1        | 
|                                             |  |                    |          | 



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NOTE 5. NOTES PAYABLE

On February 28, 2011, we refinanced the existing mortgage on Vistas of Vance Jackson apartments, a 240-unit complex located in San
Antonio, Texas, for a new mortgage of $16.1 million. We received $0.1 million in cash after paying off the existing mortgage of $15.4 million and $0.6 million in closing costs. The note accrues interest at 4.80% and payments of interest and
principal are due monthly based upon a 40-year amortization schedule, maturing on March 1, 2051.

On February 28, 2011, a
loan with a commercial lender in the amount of $1.7 million was taken out to fund real estate property taxes. The loan accrues interest at 12.5%, payable monthly as interest only, until August 1, 2013. Thereafter, payments of interest and
principal are due monthly based upon an 8-year amortization schedule, maturing on July 1, 2021.

On April 28, 2011, we
refinanced the existing mortgage on Mariposa Villas apartments, a 216-unit complex located in Dallas, Texas, for a new mortgage of $12.4 million. We paid off the existing mortgage of $11.8 million and $0.6 million in closing costs. The note accrues
interest at 3.90% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on May 1, 2051.

On April 28, 2011, we refinanced the existing mortgage on Verandas at City View apartments, a 314-unit complex located in Fort Worth, Texas, for a new mortgage of $18.5 million. We paid off the
existing mortgage of $17.3 million and $1.2 million in closing costs. The note accrues interest at 4.20% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on May 1, 2051.

On May 31, 2011, we refinanced the existing mortgage on Stonebridge at City Park apartments, a 240-unit complex located in Houston, Texas, for a new
mortgage of $14.6 million. We paid off the existing mortgage of $13.9 million and $0.7 million in closing costs. The note accrues interest at 3.90% and payments of interest and principal are due monthly based upon a 40-year amortization schedule,
maturing on June 1, 2051.

In conjunction with the development of various apartment projects and other developments, we drew down $29.1
million in construction loans during the six months ended June 30, 2011.

The properties that we have sold to a related party under
common control and have deferred the recognition of the sale are treated as subject to sales contract on the Consolidated Balance Sheets. These properties were sold to a related party in order to help facilitate an appropriate debt or
organizational restructure and may or may not be transferred back to the seller upon resolution. These properties have mortgages that are secured by the property and many have corporate guarantees. According to the loan documents, we are currently
in default on these mortgages primarily due to lack of payment although we are actively involved in discussions with every lender in order to settle or cure the default situation. We have reviewed each asset and taken impairment to the extent we
feel the value of the property was less than our current basis

NOTE 6. STOCK-SECURED NOTES PAYABLE

The Company has margin arrangements with various financial institutions and brokerage firms, which provide for borrowings of up to
50.0% of the market value of marketable equity securities. We also have other notes payable secured by stock. The borrowings under such margin arrangements and notes are secured by the equity securities of IOT and TCI, and ARLs trading
portfolio securities, and bear interest rates ranging from 4.00% to 10.00% per annum. Stock-secured notes payable and margin borrowings were $26.1 million at June 30, 2011.



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NOTE 7. RELATED PARTY TRANSACTIONS

The following table reconciles the beginning and ending balances of accounts receivable from and (accounts payable) to affiliates as of
June 30, 2011 (dollars in thousands):



|                                |  |        |         |  |       |   |          |       |  |   |          | 
|------------------------------- |  | ------ | ------- |  | ----- | - | -------- | ----- |  | - | -------- | 
|                                |  | Pillar |         |  | Prime |   |          | Total | 
|Balance, December 31, 2010      |  | $      | -       |  |       | $ | (12,219) |       |  | $ | (12,219) | 
|Cash transfers                  |  |        | 313     |  |       |   | 2,265    |       |  |   | 2,578    | 
|Advisory fees                   |  |        | (2,288) |  |       |   | (4,825)  |       |  |   | (7,113)  | 
|Cost reimbursements             |  |        | -       |  |       |   | (2,277)  |       |  |   | (2,277)  | 
|Interest from advisor           |  |        | (2)     |  |       |   | (292)    |       |  |   | (294)    | 
|POA fees                        |  |        | -       |  |       |   | 7        |       |  |   | 7        | 
|Expenses paid by advisor        |  |        | 331     |  |       |   | (1,575)  |       |  |   | (1,244)  | 
|Financing (mortgage payments)   |  |        | 746     |  |       |   | 159      |       |  |   | 905      | 
|Note receivable with affiliate  |  |        | 2,726   |  |       |   | 7,516    |       |  |   | 10,242   | 
|Sales/Purchases transactions    |  |        | (929)   |  |       |   | 3,983    |       |  |   | 3,054    | 
|Intercompany property transfers |  |        | 1,914   |  |       |   | 8,924    |       |  |   | 10,838   | 
|                                |  |        |         |  |       |   |          |       |  |   |          | 
|Balance, June 30, 2011          |  | $      | 2,811   |  |       | $ | 1,666    |       |  | $ | 4,477    | 
|                                |  |        |         |  |       |   |          |       |  |   |          | 

During the ordinary course of business, we have related party transactions that include, but are not limited to rent
income, interest income, interest expense, general and administrative costs, commissions, management fees, and property expenses. In addition, we have assets and liabilities that include related party amounts. The affiliated amounts included in
assets and liabilities, and the affiliated revenues and expenses received/paid are shown on the face of the financial statements.

NOTE 8. OPERATING SEGMENTS

Our segments are based on our method of internal reporting which classifies our operations by property type. Our property types are
grouped into commercial, apartments, hotels, land and other operating segments. Significant differences among the accounting policies of the operating segments as compared to the consolidated financial statements principally involve the calculation
and allocation of administrative and other expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their net operating income and cash flow.

Items of income that are not reflected in the segments are interest, other income, gain on debt extinguishment, gain on condemnation award, equity in
partnerships, and gains on sale of real estate. Expenses that are not reflected in the segments are provision for losses, advisory, net income and incentive fees, general and administrative, non-controlling interests and net loss from discontinued
operations before gains on sale of real estate.



17



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Presented below is our reportable segments operating income for the three and six months ended
June 30, 2011 and 2010, including segment assets and expenditures (dollars in thousands):



|                                         |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |         |  |       |   |          |  |  |   |           | 
|---------------------------------------- |  | -------------------- | ------- |  | ---------- | - | ------- | ------ |  | - | ------- |  |  | ----- | ------- |  | ----- | - | -------- |  |  | - | --------- | 
|For the Three Months Ended June 30, 2011 |  | CommercialProperties |         |  | Apartments |   |         | Hotels |  |   | Land    |  |  | Other |         |  | Total |  
|Operating revenue                        |  | $                    | 14,982  |  |            | $ | 20,109  |        |  | $ | 2,259   |  |  | $     | 200     |  |       | $ | (22)     |  |  | $ | 37,528    | 
|Operating expenses                       |  |                      | 8,122   |  |            |   | 10,353  |        |  |   | 1,907   |  |  |       | 551     |  |       |   | 236      |  |  |   | 21,169    | 
|Depreciation and amortization            |  |                      | 2,463   |  |            |   | 3,691   |        |  |   | 177     |  |  |       | -       |  |       |   | (86)     |  |  |   | 6,245     | 
|Mortgage and loan interest               |  |                      | 3,233   |  |            |   | 8,649   |        |  |   | 649     |  |  |       | 2,786   |  |       |   | 2,414    |  |  |   | 17,731    | 
|Interest income                          |  |                      | -       |  |            |   | -       |        |  |   | -       |  |  |       | -       |  |       |   | 1,203    |  |  |   | 1,203     | 
|Gain on land sales                       |  |                      | -       |  |            |   | -       |        |  |   | -       |  |  |       | 14,029  |  |       |   | -        |  |  |   | 14,029    | 
|                                         |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |         |  |       |   |          |  |  |   |           | 
|Segment operating gain (loss)            |  | $                    | 1,164   |  |            | $ | (2,584) |        |  | $ | (474)   |  |  | $     | 10,892  |  |       | $ | (1,383)  |  |  | $ | 7,615     | 
|                                         |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |         |  |       |   |          |  |  |   |           | 
|Capital expenditures                     |  |                      | 255     |  |            |   | 82      |        |  |   | -       |  |  |       | -       |  |       |   | -        |  |  |   | 337       | 
|Assets                                   |  |                      | 242,503 |  |            |   | 608,790 |        |  |   | 14,823  |  |  |       | 336,641 |  |       |   | -        |  |  |   | 1,202,757 | 
|                                         |  |                      |         |  |            |  
|Property Sales                           |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |         |  |       |   |          |  |  |   |           | 
|Sales price                              |  | $                    | 67,397  |  |            | $ | -       |        |  | $ | 2,525   |  |  | $     | 60,377  |  |       | $ | -        |  |  | $ | 130,299   | 
|Cost of sale                             |  |                      | 75,274  |  |            |   | -       |        |  |   | (1,114) |  |  |       | 49,338  |  |       |   | -        |  |  |   | 123,498   | 
|Deferred current gain                    |  |                      | -       |  |            |   | -       |        |  |   | -       |  |  |       | -       |  |       |   | -        |  |  |   | -         | 
|Recognized prior deferred gain           |  |                      | -       |  |            |   | 963     |        |  |   | -       |  |  |       | 2,990   |  |       |   | 10,954   |  |  |   | 14,907    | 
|                                         |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |         |  |       |   |          |  |  |   |           | 
|Gain (loss) on sale                      |  | $                    | (7,877) |  |            | $ | 963     |        |  | $ | 3,639   |  |  | $     | 14,029  |  |       | $ | 10,954   |  |  | $ | 21,708    | 
|                                         |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |         |  |       |   |          |  |  |   |           | 
|                                         |  |                      |         |  |            |  
|For the Three Months Ended June 30, 2010 |  | CommercialProperties |         |  | Apartments |   |         | Hotels |  |   | Land    |  |  | Other |         |  | Total |  
|Operating revenue                        |  | $                    | 14,392  |  |            | $ | 19,404  |        |  | $ | 2,569   |  |  | $     | 166     |  |       | $ | 17       |  |  | $ | 36,548    | 
|Operating expenses                       |  |                      | 8,670   |  |            |   | 10,976  |        |  |   | 1,976   |  |  |       | 1,649   |  |       |   | 35       |  |  |   | 23,306    | 
|Depreciation and amortization            |  |                      | 2,653   |  |            |   | 4,020   |        |  |   | 181     |  |  |       | -       |  |       |   | (74)     |  |  |   | 6,780     | 
|Mortgage and loan interest               |  |                      | 4,264   |  |            |   | 8,986   |        |  |   | 646     |  |  |       | 3,633   |  |       |   | 2,747    |  |  |   | 20,276    | 
|Interest income                          |  |                      | -       |  |            |   | -       |        |  |   | -       |  |  |       | -       |  |       |   | 1,326    |  |  |   | 1,326     | 
|Loss on land sales                       |  |                      | -       |  |            |   | -       |        |  |   | -       |  |  |       | (4,121) |  |       |   | -        |  |  |   | (4,121)   | 
|                                         |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |         |  |       |   |          |  |  |   |           | 
|Segment operating loss                   |  | $                    | (1,195) |  |            | $ | (4,578) |        |  | $ | (234)   |  |  | $     | (9,237) |  |       | $ | (1,365)  |  |  | $ | (16,609)  | 
|                                         |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |         |  |       |   |          |  |  |   |           | 
|Capital expenditures                     |  |                      | 333     |  |            |   | -       |        |  |   | -       |  |  |       | -       |  |       |   | -        |  |  |   | 333       | 
|Assets                                   |  |                      | 251,279 |  |            |   | 565,691 |        |  |   | 17,433  |  |  |       | 528,271 |  |       |   | (23,080) |  |  |   | 1,339,594 | 
|                                         |  |                      |         |  |            |  
|Property Sales                           |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |         |  |       |   |          |  |  |   |           | 
|Sales price                              |  | $                    | 5,970   |  |            | $ | 29,459  |        |  | $ | -       |  |  | $     | 17,660  |  |       | $ | -        |  |  | $ | 53,089    | 
|Cost of sale                             |  |                      | 6,184   |  |            |   | 22,897  |        |  |   | -       |  |  |       | 23,300  |  |       |   | -        |  |  |   | 52,381    | 
|Deferred current gain                    |  |                      | -       |  |            |   | 6,487   |        |  |   | -       |  |  |       | -       |  |       |   | -        |  |  |   | 6,487     | 
|Recognized prior deferred gain           |  |                      | -       |  |            |   | 5,799   |        |  |   | -       |  |  |       | 1,519   |  |       |   | -        |  |  |   | 7,318     | 
|                                         |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |         |  |       |   |          |  |  |   |           | 
|Gain (loss) on sale                      |  | $                    | (214)   |  |            | $ | 5,874   |        |  | $ | -       |  |  | $     | (4,121) |  |       | $ | -        |  |  | $ | 1,539     | 
|                                         |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |         |  |       |   |          |  |  |   |           | 

The table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of
Operations:



|                                                                   |  |                                |         |  |      |   |          | 
|------------------------------------------------------------------ |  | ------------------------------ | ------- |  | ---- | - | -------- | 
|                                                                   |  | For Three Months EndedJune 30, |        
|                                                                   |  | 2011                           |         |  | 2010 |  
|Segment operating gain (loss)                                      |  | $                              | 7,615   |  |      | $ | (16,609) | 
|Other non-segment items of income (expense)                        |  |                                |         |  |      |   |          | 
|General and administrative                                         |  |                                | (4,078) |  |      |   | (2,701)  | 
|Advisory fees                                                      |  |                                | (3,462) |  |      |   | (3,993)  | 
|Provision on impairment of notes receivable and real estate assets |  |                                | (444)   |  |      |   | -        | 
|Other income                                                       |  |                                | 551     |  |      |   | 1,023    | 
|Gain on Foreign Currency Transactions                              |  |                                | -       |  |      |   | 906      | 
|Equity in earnings of investees                                    |  |                                | 22      |  |      |   | (71)     | 
|Deferred tax benefit                                               |  |                                | 2,469   |  |      |   | 1,454    | 
|                                                                   |  |                                |         |  |      |   |          | 
|Loss from continuing operations                                    |  | $                              | 2,673   |  |      | $ | (19,991) | 
|                                                                   |  |                                |         |  |      |   |          | 

The table below reconciles the segment information to the corresponding amounts in the Consolidated Balance Sheets:



|                                        |  |                                 |           |  |      |   |           | 
|--------------------------------------- |  | ------------------------------- | --------- |  | ---- | - | --------- | 
|                                        |  | For Three Months Ended
June 30, |          
|                                        |  | 2011                            |           |  | 2010 |  
|Segment assets                          |  | $                               | 1,202,757 |  |      | $ | 1,339,594 | 
|Investments in real estate partnerships |  |                                 | 12,138    |  |      |   | 12,748    | 
|Other assets and receivables            |  |                                 | 186,456   |  |      |   | 201,095   | 
|Assets held for sale                    |  |                                 | -         |  |      |   | 211,920   | 
|                                        |  |                                 |           |  |      |   |           | 
|Total assets                            |  | $                               | 1,401,351 |  |      | $ | 1,765,357 | 
|                                        |  |                                 |           |  |      |   |           | 



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##### Table of Contents

|                                       |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |          |  |       |   |          |  |  |   |           | 
|-------------------------------------- |  | -------------------- | ------- |  | ---------- | - | ------- | ------ |  | - | ------- |  |  | ----- | -------- |  | ----- | - | -------- |  |  | - | --------- | 
|For the Six Months Ended June 30, 2011 |  | CommercialProperties |         |  | Apartments |   |         | Hotels |  |   | Land    |  |  | Other |          |  | Total |  
|Operating revenue                      |  | $                    | 29,352  |  |            | $ | 40,125  |        |  | $ | 4,162   |  |  | $     | 469      |  |       | $ | (58)     |  |  | $ | 74,050    | 
|Operating expenses                     |  |                      | 17,086  |  |            |   | 20,334  |        |  |   | 3,793   |  |  |       | 1,128    |  |       |   | 286      |  |  |   | 42,627    | 
|Depreciation and amortization          |  |                      | 5,150   |  |            |   | 7,428   |        |  |   | 355     |  |  |       | -        |  |       |   | (174)    |  |  |   | 12,759    | 
|Mortgage and loan interest             |  |                      | 6,762   |  |            |   | 16,052  |        |  |   | 1,298   |  |  |       | 6,586    |  |       |   | 3,978    |  |  |   | 34,676    | 
|Interest income                        |  |                      | -       |  |            |   | -       |        |  |   | -       |  |  |       | -        |  |       |   | 1,871    |  |  |   | 1,871     | 
|Gain on land sales                     |  |                      | -       |  |            |   | -       |        |  |   | -       |  |  |       | 19,373   |  |       |   | -        |  |  |   | 19,373    | 
|                                       |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |          |  |       |   |          |  |  |   |           | 
|Segment operating gain (loss)          |  | $                    | 354     |  |            | $ | (3,689) |        |  | $ | (1,284) |  |  | $     | 12,128   |  |       | $ | (2,277)  |  |  | $ | 5,232     | 
|                                       |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |          |  |       |   |          |  |  |   |           | 
|Capital expenditures                   |  |                      | 255     |  |            |   | 82      |        |  |   | -       |  |  |       | -        |  |       |   | -        |  |  |   | 337       | 
|Assets                                 |  |                      | 242,503 |  |            |   | 608,790 |        |  |   | 14,823  |  |  |       | 336,641  |  |       |   | -        |  |  |   | 1,202,757 | 
|                                       |  |                      |         |  |            |  
|Property Sales                         |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |          |  |       |   |          |  |  |   |           | 
|Sales price                            |  | $                    | 109,411 |  |            | $ | -       |        |  | $ | 2,525   |  |  | $     | 127,547  |  |       | $ | -        |  |  | $ | 239,483   | 
|Cost of sale                           |  |                      | 117,002 |  |            |   | -       |        |  |   | (1,114) |  |  |       | 112,415  |  |       |   | -        |  |  |   | 228,303   | 
|Deferred current gain                  |  |                      | -       |  |            |   | -       |        |  |   | -       |  |  |       | -        |  |       |   | -        |  |  |   | -         | 
|Recognized prior deferred gain         |  |                      | 3,851   |  |            |   | 963     |        |  |   | -       |  |  |       | 4,241    |  |       |   | 10,954   |  |  |   | 20,009    | 
|                                       |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |          |  |       |   |          |  |  |   |           | 
|Gain on sale                           |  | $                    | (3,740) |  |            | $ | 963     |        |  | $ | 3,639   |  |  | $     | 19,373   |  |       | $ | 10,954   |  |  | $ | 31,189    | 
|                                       |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |          |  |       |   |          |  |  |   |           | 
|                                       |  |                      |         |  |            |  
|For the Six Months Ended June 30, 2010 |  | CommercialProperties |         |  | Apartments |   |         | Hotels |  |   | Land    |  |  | Other |          |  | Total |  
|Operating revenue                      |  | $                    | 30,927  |  |            | $ | 38,352  |        |  | $ | 4,721   |  |  | $     | 281      |  |       | $ | 5        |  |  | $ | 74,286    | 
|Operating expenses                     |  |                      | 17,896  |  |            |   | 21,522  |        |  |   | 3,942   |  |  |       | 2,466    |  |       |   | 108      |  |  |   | 45,934    | 
|Depreciation and amortization          |  |                      | 5,307   |  |            |   | 7,534   |        |  |   | 366     |  |  |       | -        |  |       |   | (211)    |  |  |   | 12,996    | 
|Mortgage and loan interest             |  |                      | 8,398   |  |            |   | 16,794  |        |  |   | 1,327   |  |  |       | 7,205    |  |       |   | 4,893    |  |  |   | 38,617    | 
|Interest income                        |  |                      | -       |  |            |   | -       |        |  |   | -       |  |  |       | -        |  |       |   | 2,828    |  |  |   | 2,828     | 
|Loss on land sales                     |  |                      | -       |  |            |   | -       |        |  |   | -       |  |  |       | (4,115)  |  |       |   | -        |  |  |   | (4,115)   | 
|                                       |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |          |  |       |   |          |  |  |   |           | 
|Segment operating loss                 |  | $                    | (674)   |  |            | $ | (7,498) |        |  | $ | (914)   |  |  | $     | (13,505) |  |       | $ | (1,957)  |  |  | $ | (24,548)  | 
|                                       |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |          |  |       |   |          |  |  |   |           | 
|Capital expenditures                   |  |                      | 333     |  |            |   | -       |        |  |   | -       |  |  |       | -        |  |       |   | -        |  |  |   | 333       | 
|Assets                                 |  |                      | 251,279 |  |            |   | 565,691 |        |  |   | 17,433  |  |  |       | 527,871  |  |       |   | (22,680) |  |  |   | 1,339,594 | 
|                                       |  |                      |         |  |            |  
|Property Sales                         |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |          |  |       |   |          |  |  |   |           | 
|Sales price                            |  | $                    | 5,970   |  |            | $ | 29,459  |        |  | $ | -       |  |  | $     | 17,669   |  |       | $ | -        |  |  | $ | 53,098    | 
|Cost of sale                           |  |                      | 6,184   |  |            |   | 22,897  |        |  |   | -       |  |  |       | 23,303   |  |       |   | -        |  |  |   | 52,384    | 
|Deferred current gain                  |  |                      | -       |  |            |   | 6,487   |        |  |   | -       |  |  |       | -        |  |       |   | -        |  |  |   | 6,487     | 
|Recognized prior deferred gain         |  |                      | -       |  |            |   | 5,799   |        |  |   | -       |  |  |       | 1,519    |  |       |   | -        |  |  |   | 7,318     | 
|                                       |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |          |  |       |   |          |  |  |   |           | 
|Gain (loss) on sale                    |  | $                    | (214)   |  |            | $ | 5,874   |        |  | $ | -       |  |  | $     | (4,115)  |  |       | $ | -        |  |  | $ | 1,545     | 
|                                       |  |                      |         |  |            |   |         |        |  |   |         |  |  |       |          |  |       |   |          |  |  |   |           | 

The table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of
Operations:



|                                                                   |  |                              |          |  |      |   |          | 
|------------------------------------------------------------------ |  | ---------------------------- | -------- |  | ---- | - | -------- | 
|                                                                   |  | For Six Months EndedJune 30, |         
|                                                                   |  | 2011                         |          |  | 2010 |  
|Segment operating gain (loss)                                      |  | $                            | 5,232    |  |      | $ | (24,548) | 
|Other non-segment items of income (expense)                        |  |                              |          |  |      |   |          | 
|General and administrative                                         |  |                              | (7,611)  |  |      |   | (5,286)  | 
|Advisory fees                                                      |  |                              | (6,984)  |  |      |   | (8,046)  | 
|Provision on impairment of notes receivable and real estate assets |  |                              | (6,503)  |  |      |   | -        | 
|Other income                                                       |  |                              | 1,765    |  |      |   | 1,888    | 
|Gain on Foreign Currency Transactions                              |  |                              | -        |  |      |   | 233      | 
|Equity in earnings of investees                                    |  |                              | (73)     |  |      |   | (93)     | 
|Deferred tax benefit                                               |  |                              | 3,521    |  |      |   | 2,188    | 
|                                                                   |  |                              |          |  |      |   |          | 
|Loss from continuing operations                                    |  | $                            | (10,653) |  |      | $ | (33,664) | 
|                                                                   |  |                              |          |  |      |   |          | 

The table below reconciles the segment information to the corresponding amounts in the Consolidated Balance Sheets:



|                                        |  |                               |           |  |      |   |           | 
|--------------------------------------- |  | ----------------------------- | --------- |  | ---- | - | --------- | 
|                                        |  | For Six Months Ended
June 30, |          
|                                        |  | 2011                          |           |  | 2010 |  
|Segment assets                          |  | $                             | 1,202,757 |  |      | $ | 1,339,594 | 
|Investments in real estate partnerships |  |                               | 12,138    |  |      |   | 12,748    | 
|Other assets and receivables            |  |                               | 186,456   |  |      |   | 201,095   | 
|Assets held for sale                    |  |                               | -         |  |      |   | 211,920   | 
|                                        |  |                               |           |  |      |   |           | 
|Total assets                            |  | $                             | 1,401,351 |  |      | $ | 1,765,357 | 
|                                        |  |                               |           |  |      |   |           | 



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NOTE 9. DISCONTINUED OPERATIONS

We apply the provisions of ASC Topic 360, Property, Plant and Equipment. ASC Topic 360 requires that long-lived assets that
are to be disposed of by sale be measured at the lesser of (1) book value or (2) fair value less cost to sell. In addition, it requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal transactions.

Discontinued operations relates to properties that were either
sold or held for sale as of the period ended June 30, 2011. Included in discontinued operations are a total of five and 20 properties as of 2011 and 2010, respectively. Properties sold in 2011 have been reclassified to discontinued operations
for current and prior year reporting periods. In 2011, we sold four commercial properties (Alpenloan, Fenton Centre, Teleport Blvd and Westgrove Air Plaza) and one hotel (University). In 2010, we sold 13 apartment complexes (Baywalk, Chateau,
Foxwood, Island Bay, Kingsland Ranch, Limestone Canyon, Limestone Ranch, Longfellow Arms, Marina Landing, Mason Park, Sendero Ridge, Tivoli and Villager), one commercial building (217 Rampart) and transferred our limited partnership interest in a
consolidated entity that owned an apartment complex (Quail Oaks). The gain on sale of the properties is also included in discontinued operations for those years. The following table summarizes revenue and expense information for the properties sold
and held for sale (dollars in thousands):



|                                                                                           |  |                            |         |  |                          |   |         |      |  |   |         |  |  |   |         | 
|------------------------------------------------------------------------------------------ |  | -------------------------- | ------- |  | ------------------------ | - | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                                                           |  | For the Three Months Ended |         |  | For the Six Months Ended |  
|                                                                                           |  | June 30,                   |         |  | June 30,                 |  
|                                                                                           |  | 2011                       |         |  | 2010                     |   |         | 2011 |  |   | 2010    | 
|Revenue                                                                                    |  |                            |         |  |                          |   |         |      |  |   |         |  |  |   |         | 
|Rental                                                                                     |  | $                          | 2,390   |  |                          | $ | 5,860   |      |  | $ | 4,963   |  |  | $ | 14,303  | 
|Property operations                                                                        |  |                            | 1,793   |  |                          |   | 3,888   |      |  |   | 3,796   |  |  |   | 8,123   | 
|                                                                                           |  |                            |         |  |                          |   |         |      |  |   |         |  |  |   |         | 
|                                                                                           |  | $                          | 597     |  |                          | $ | 1,972   |      |  | $ | 1,167   |  |  | $ | 6,180   | 
|                                                                                           |  |                            |         | 
|Expenses                                                                                   |  |                            |         |  |                          |   |         |      |  |   |         |  |  |   |         | 
|Interest                                                                                   |  |                            | (637)   |  |                          |   | (2,255) |      |  |   | (1,594) |  |  |   | (4,852) | 
|General and administration                                                                 |  |                            | (146)   |  |                          |   | (26)    |      |  |   | (216)   |  |  |   | (41)    | 
|Litigation settlement expense                                                              |  |                            | -       |  |                          |   | (1)     |      |  |   | -       |  |  |   | (1)     | 
|Depreciation                                                                               |  |                            | (439)   |  |                          |   | (1,197) |      |  |   | (1,113) |  |  |   | (2,507) | 
|                                                                                           |  |                            |         |  |                          |   |         |      |  |   |         |  |  |   |         | 
|                                                                                           |  | $                          | (1,222) |  |                          | $ | (3,479) |      |  | $ | (2,923) |  |  | $ | (7,401) | 
|                                                                                           |  |                            |         |  |                          |   |         |      |  |   |         |  |  |   |         | 
|                                                                                           |  |                            |         | 
|Net loss from discontinued operations before gains on sale of real estate, taxes, and fees |  |                            | (625)   |  |                          |   | (1,507) |      |  |   | (1,756) |  |  |   | (1,221) | 
|Gain on sale of discontinued operations                                                    |  |                            | 7,679   |  |                          |   | 5,660   |      |  |   | 11,816  |  |  |   | 5,660   | 
|                                                                                           |  |                            |         |  |                          |   |         |      |  |   |         |  |  |   |         | 
|                                                                                           |  |                            |         | 
|Income from discontinued operations before tax                                             |  | $                          | 7,054   |  |                          | $ | 4,153   |      |  | $ | 10,060  |  |  | $ | 4,439   | 
|                                                                                           |  |                            |         | 
|Tax expense                                                                                |  |                            | (2,469) |  |                          |   | (1,454) |      |  |   | (3,521) |  |  |   | (1,554) | 
|                                                                                           |  |                            |         |  |                          |   |         |      |  |   |         |  |  |   |         | 
|                                                                                           |  |                            |         | 
|Income from discontinued operations                                                        |  | $                          | 4,585   |  |                          | $ | 2,699   |      |  | $ | 6,539   |  |  | $ | 2,885   | 
|                                                                                           |  |                            |         |  |                          |   |         |      |  |   |         |  |  |   |         | 

Our application of ASC Topic 360 results in the presentation of the net operating results of these qualifying properties
sold or held for sale during 2010 as income from discontinued operations. This does not have an impact on net income available to common shareholders and only impacts the presentation of these properties within the Consolidated Statements of
Operations.

NOTE 10. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

In conjunction with its sale of Four Hickory in November 2007, the Company agreed to fund approximately $1.0 million to satisfy its
commitment to compensate LK-Four Hickory, LLC for move-in discounts and other concessions to existing tenants at the time of sale. The Company also has certain agreements with LK-Four Hickory, LLC to fund projection shortfalls, which, to date, we
have not had to provide any additional funding. In addition, related parties of the Company have active lease agreements with LK-Four Hickory, LLC.

On December 17, 2007, both Limkwang Nevada, Inc., the majority owner of LK-Four Hickory, LLC, and ARL unconditionally guaranteed the punctual payment when due, whether at stated maturity, by
acceleration or hereafter, including all fees and expense incurred by the bank on collection of a $28.0 million note payable for LK-Four Hickory, LLC.

Liquidity. Management believes that ARL will generate excess cash flow from property operations in 2011, such excess however, will not be sufficient to discharge all of ARLs obligations as
they became due. Management intends to sell land and income producing real estate, refinance real estate and obtain additional borrowings primarily secured by real estate to meet its liquidity requirements.



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Partnership Buyouts. ARL is the limited partner in three partnerships currently constructing
residential properties and two partnerships in which the residential property is substantially complete. As permitted in the respective partnership agreements, ARL intends to purchase the interests of the general and any other limited partners in
these partnerships subsequent to the completion of these projects. The amounts paid to buy out the non-affiliated partners are limited to development fees earned by the non-affiliated partners, and are set forth in the respective partnership
agreements.

Litigation. A lawsuit has been filed against the Company with regard to certain guaranties pertaining to a $12 million
real estate note made by a consolidated subsidiary of the Company. The note is secured by certain real estate owned by the subsidiary. The lender has not taken any action to foreclose on the property and the Company is vigorously defending the
lawsuit. The book value for the property is equal to the debt and should the lender ultimately prevail there will be no loss or additional liability recorded by the Company.

The ownership of property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its subsidiaries are involved in various items of litigation
incidental to and in the ordinary course of its business, in the opinion of Management, the outcome of such litigation will not have a material adverse impact upon the Companys financial condition, results of operation or liquidity

NOTE 11. EARNINGS PER SHARE

Earnings per share, EPS, have been computed pursuant to the provisions of ASC Topic 260 Earnings Per Share. The
computation of basic EPS is calculated by dividing net income available to common shareholders from continuing operations, adjusted for preferred dividends, by the weighted-average number of common shares outstanding during the period. Shares issued
during the period shall be weighted for the portion of the period that they were outstanding. As of June 30, 2011, we have 3,353,954 shares of Series A 10.0% Cumulative Convertible Preferred Stock, which are outstanding. These shares may be
converted into common stock at 90.0% of the average daily closing price of the common stock for the prior 20 trading days. These are considered in the computation of diluted earnings per share if the effect of applying the if-converted method is
dilutive. We have 2,000 shares of stock options outstanding, 1,000 of which will expire on January 12, 2012 and 1,000 of which will expire January 1, 2015 if not exercised. The outstanding options are considered in the computation of
diluted earnings per share if the effect of applying the treasury stock method is dilutive. As of June 30, 2011, the preferred stock and the stock options were anti-dilutive and thus not included in the EPS calculation.

NOTE 12. SUBSEQUENT EVENTS

Subsequent to the period ending June 30, 2011, several properties that were sold to a related party and treated on the books as
subject to sales contract have been transferred back to the lender for credit against the loan balance. Any impairment necessary related to the inability to recover our original investment has been recorded in 2010 and 2011 and the sales
that were deferred will be recognized in the third quarter 2011 when ownership transferred to a third party.

On July 1, 2011, we sold
12.74 acres of land known as Centurion 12 land located in Fort Worth, Texas for a sales price of $1.1 million.

On July 5, 2011, a
warehouse and 13.0 acres of land known as Eagle Crest located in Farmers Branch, Texas, which was sold to a related party and treated on the books as subject to sales contract, was transferred to the lender for credit against the loan
balance. Any impairment necessary related to the inability to recover our original investment has been realized in 2011 and the sale that was deferred will be recognized in the third quarter, when ownership transferred to a third party.

On July 5, 2011, Three Hickory land located in Farmers Branch, Texas, which was sold to a related party and treated on the books as subject to
sales contract, was transferred to the lender for credit against the loan balance. Any impairment necessary related to the inability to recover our original investment has been realized in 2011 and the sale that was deferred will be recognized
in the third quarter, when ownership transferred to a third party.

On July 5, 2011, One Hickory Center and Two Hickory Center, office
buildings located in Dallas, Texas, both of which were sold to a related party and treated on the books as subject to sales contract, were transferred to the lender for credit against the loan balances. Any impairment necessary related
to the inability to recover our original investment has been realized in 2011 and the sale that was deferred will be recognized in the third quarter, when ownership transferred to a third party.

On July 5, 2011, Windmill Farms-Harlan land located in Kaufman County, Texas, which was sold to a related party and treated on the books as
subject to sales contract, was transferred to the lender for credit against the loan balance. The sale that was deferred in 2010 will be recognized in the third quarter, when ownership transferred to a third party.



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On August 2, 2011, Centura land located in Dallas, Texas, which was sold to a related party and treated
on the books as subject to sales contract, was transferred to the lender for credit against the loan balance. Any impairment necessary related to the inability to recover our original investment has been realized in 2011 and the sale
that was deferred will be recognized in the third quarter, when ownership transferred to a third party.

On August 2, 2011, seven
properties comprising approximately 2,713.68 acres of undeveloped land located in Irving, Farmers Branch and Forney, Texas, all of which were sold to a related party and treated on the books as subject to sales contract, were transferred
to the lender for credit against the loan balance. Any impairment necessary related to the inability to recover our original investment has been realized in 2011 and we do not anticipate any additional gain or loss. The sale that was deferred will
be recognized in the third quarter, when ownership transferred to a third party.

On August 2, 2011, Signature Athletic Club, an office
building located in Dallas, Texas, which was sold to a related party and treated on the books as subject to sales contract, was transferred to the lender for credit against the loan balance. Any impairment necessary related to the
inability to recover our original investment has been realized in 2011 and the sale that was deferred will be recognized in the third quarter, when ownership transferred to a third party.

On August 2, 2011, Parkway North, an office building located in Dallas, Texas, which was sold to a related party and treated on the books as subject to sales contract, was transferred to
the lender for credit against the loan balance. Any impairment necessary related to the inability to recover our original investment has been realized in 2011 and the sale that was deferred will be recognized in the third quarter, when ownership
transferred to a third party.

On August 2, 2011, Las Colinas Station land, a land parcel owned by TCI Woodmont Group XIII, LP, which the
Company has a 75% limited partner interest in, was transferred to the lender for credit against the loan balance. This property was impaired in 2008 and 2009 and we do not anticipate any additional losses.

On August 5, 2011, we sold our 30% limited partner interest in a partnership that owned a 120-unit apartment complex known as Westwood apartments,
located in Mary Ester, Florida for a sales price of $7.1 million.



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

The following discussion should be read in conjunction with the financial statements and
notes thereto appearing elsewhere in this report.

This Report on Form 10-Q contains forward-looking statements within the meaning of the
federal securities laws, principally, but not only, under the captions Business, Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations. We caution investors
that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on managements beliefs and on assumptions made by, and information currently available to, management. When
used, the words anticipate, believe, expect, intend, may, might, plan, estimate, project, should, will,
result and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future
performance, which may be affected by known and unknown risks, trends, uncertainties, and factors, that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual
results may vary materially from those anticipated, estimated, or projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by
actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use
caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others,
the following:



| |  |  | general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on
tenants financial condition, and competition from other developers, owners and operators of real estate);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | risks associated with the availability and terms of construction and mortgage financing and the use of debt to fund acquisitions and developments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | demand for apartments and commercial properties in the Companys markets and the effect on occupancy and rental rates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | the Companys ability to obtain financing, enter into joint venture arrangements in relation to or self-fund the development or acquisition of
properties;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | risks associated with the timing and amount of property sales and the resulting gains/losses associated with such sales;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability
to obtain necessary permits and public opposition to such activities);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs of compliance with the Americans with Disabilities Act and other similar laws and regulations;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | potential liability for uninsured losses and environmental contamination;
| | - |  | -------------------------------------------------------------------------



| |  |  | risks associated with our dependence on key personnel whose continued service is not guaranteed; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the other risk factors identified in this Form 10-Q, including those described under the caption Risk Factors.
| | - |  | ----------------------------------------------------------------------------------------------------------------

The risks included here are not exhaustive. Some of the risks and uncertainties that may cause our actual results,
performance, or achievements to differ materially from those expressed or implied by forward-looking statements, include among others, the factors listed and described at Part I, Item 1A. Risk Factors in the Companys Annual
Report on Form 10-K, which investors should review. There have been no changes from the risk factors previously described in the Companys Form 10-K for the fiscal year ended December 31, 2010.

Other sections of this report may also include suggested factors that could adversely affect our business and financial performance. Moreover, we operate
in a very competitive and rapidly changing environment. New risks emerge from time-to-time and it is not possible for management to predict all such matters: nor can we assess the impact of all such matter on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as
prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise as we file them with the SEC.



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Overview

We are an externally advised and managed real estate investment company that owns a diverse portfolio of income-producing properties, and land held for development. Our portfolio of income-producing
properties includes residential apartment communities, office buildings, hotels, a trade mart located in Denver, Colorado, and other commercial properties. Our investment strategy includes acquiring existing income-producing properties as well as
developing new properties on land already owned or acquired for a specific development project. We acquire land primarily in urban in-fill locations or high-growth suburban markets. We are an active buyer and seller of real estate and during the
first six months of 2011 we sold $172.2 million of land and income-producing properties. As of June 30, 2011, we owned 8,959 units in 49 residential apartment communities, 26 commercial properties comprising almost 4.9 million rentable
square feet and four hotels containing a total of 618 rooms. In addition, we owned 9,076 acres of land held for development with three apartment complexes and a 420-acre holiday resort project in Germany currently in development.

We finance our acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties, and debt financing
primarily in the form of property-specific first-lien mortgage loans from commercial banks and institutional lenders. We finance our development projects principally with short-term, variable interest rate construction loans that are converted to
long-term, fixed rate amortizing mortgages when the development project is completed and occupancy has been stabilized. We will, from time to time, also enter into partnerships with various investors to acquire income-producing properties or land
and to sell interests in certain of our wholly owned properties. When we sell assets, we may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable. We generate operating revenues
primarily by leasing apartment units to residents; leasing office, retail and industrial space to commercial tenants; and renting hotel rooms to guests.

We have historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving
related parties cannot be presumed to be carried out on an arms length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always
be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest.

Prior to April 30, 2011, Prime Income Asset Management, LLC (Prime) was the Companys external Advisor and Cash Manager. Prime also
served as an Advisor and Cash Manager to TCI and IOT. Effective April 30, 2011, Pillar Income Asset Management, Inc. (Pillar) became the Companys external Advisor and Cash Manager under the same terms as the previous agreement
with Prime. Pillar also serves as an Advisor and Cash Manager to TCI and IOT. Prior to December 31, 2010, Triad Realty Services, L.P. (Triad) managed the Companys commercial properties and Regis Realty I, LLC (Regis
Realty) provided brokerage services. Triad and Regis Realty are affiliates of Prime. Effective January 1, 2011, Regis Realty Prime, LLC (Regis), an affiliate of Prime, manages our commercial properties and provides brokerage
services under the same terms as the previous agreements with Triad and Regis Realty, for a term of five years. We engage third-party companies to lease and manage our apartment properties.

Critical Accounting Policies

We present our financial statements in accordance with
generally accepted accounting principles in the United States (GAAP). In June 2009, the Financial Accounting Standards Board (FASB) completed its accounting guidance codification project. The FASB Accounting Standards
Codification (ASC) became effective for our financial statements issued subsequent to June 30, 2009 and is the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with GAAP. As of the effective date, we no longer refer to the authoritative guidance dictating our accounting methodologies under the previous accounting standards hierarchy. Instead, we refer
to the ASC guidance as the sole source of authoritative literature.

The accompanying Consolidated Financial Statements include our accounts,
our subsidiaries, generally all of which are wholly-owned, and all entities in which we have a controlling interest. Arrangements that are not controlled through voting or similar rights are accounted for as a Variable Interest Entity (VIE), in
accordance with the provisions and guidance of ASC Topic 810 Consolidation, whereby we have determined that we are a primary beneficiary of the VIE and meet certain criteria of a sole general partner or managing member as identified in
accordance with Emerging Issues Task Force (EITF) Issue 04-5, Investors Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (EITF
04-5). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to
absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the
financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entitys financial results. All significant intercompany balances and transactions have been eliminated in consolidation.

In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited
to: the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; our and the other investors ability to control or significantly influence key decisions for the VIE; and
the similarity with and



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significance to the business activities of us and the other investors. Significant judgments related to these determinations include estimates about the current future fair values and performance
of real estate held by these VIEs and general market conditions.

For entities in which we have less than a controlling financial interest or
entities where we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities are included in consolidated net income. Our
investments in Gruppa Florentina, LLC, LK-Four Hickory, LLC, and Garden Centura, L.P. are accounted for under the equity method.

Real
Estate

Upon acquisitions of real estate, we assess the fair value of acquired tangible and intangible assets, including land, buildings,
tenant improvements, above-market and below-market leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with ASC Topic 805 Business
Combinations, and allocate the purchase price to the acquired assets and assumed liabilities, including land at appraised value and buildings at replacement cost.

We assess and consider fair value based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates, as well as available market information. Estimates of future cash
flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions. The fair value of the tangible assets of an acquired property considers the value of the property as
if it were vacant. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the
existing relationship with the tenants, the tenants credit quality and expectations of lease renewals. Based on our acquisitions to date, our allocation to customer relationship intangible assets has been immaterial.

We record acquired above-market and below-market leases at their fair values (using a discount rate which reflects the risks
associated with the leases acquired) equal to the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) managements estimate of fair market lease rates for each corresponding in-place
lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases.

Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each
tenants lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real
estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider leasing
commissions, legal and other related expenses.

Depreciation and Impairment

Real estate is stated at depreciated cost. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Costs directly related to the development
of properties are capitalized. Capitalized development costs include interest, property taxes, insurance, and other project costs incurred during the period of development.

Management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates impairment in value. An impairment loss is recognized if the
carrying amount of its assets is not recoverable and exceeds its fair value. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated
cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods.

ASC Topic 360 Property, Plant and Equipment requires that qualifying assets and liabilities and the results of operations that have been
sold, or otherwise qualify as held for sale, be presented as discontinued operations in all periods presented if the property operations are expected to be eliminated and we will not have significant continuing involvement following the sale. The
components of the propertys net income that is reflected as discontinued operations include the net gain (or loss) upon the disposition of the property held for sale, operating results, depreciation and interest expense (if the property is
subject to a secured loan). We generally consider assets to be held for sale when the transaction has been approved by our Board of Directors, or a committee thereof, and there are no known significant contingencies relating to the sale, such that
the property sale within one year is considered probable. Following the classification of a property as held for sale, no further depreciation is recorded on the assets.

A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is
benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by ASC Topic 835-20 Interest 
Capitalization of Interest and ASC Topic 970 Real Estate - General. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the
development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and



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related costs and other costs incurred during the period of development. We cease capitalization when a building is considered substantially complete and ready for its intended use, but no later
than one year from the cessation of major construction activity.

Investments in Unconsolidated Real Estate Ventures

Except for ownership interests in variable interest entities, we account for our investments in unconsolidated real estate ventures under the equity
method of accounting because we exercise significant influence over, but do not control, these entities. These investments are recorded initially at cost, as investments in unconsolidated real estate ventures, and subsequently adjusted for equity in
earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated
real estate ventures over the life of the related asset. Under the equity method of accounting, our net equity is reflected within the Consolidated Balance Sheets, and our share of net income or loss from the joint ventures is included within the
Consolidated Statements of Operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses; however, our recognition of joint venture income or loss generally follows the joint
ventures distribution priorities, which may change upon the achievement of certain investment return thresholds. For ownership interests in variable interest entities, we consolidate those in which we are the primary beneficiary.

Recognition of Rental Income

Rental
income for commercial property leases is recognized on a straight-line basis over the respective lease terms. In accordance with ASC Topic 805 Business Combinations, we recognize rental revenue of acquired in-place
above-market and below-market leases at their fair values over the terms of the respective leases. On our Consolidated Balance Sheets, we include as a receivable the excess of rental income recognized over rental payments
actually received pursuant to the terms of the individual commercial lease agreements.

Reimbursements of operating costs, as allowed under
most of our commercial tenant leases, consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, and are recognized as revenue in the period in which the recoverable expenses are incurred. We
record these reimbursements on a gross basis, since we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and have the credit risk with
respect to paying the supplier.

Rental income for residential property leases is recorded when due from residents and is recognized monthly
as earned, which is not materially different than on a straight-line basis as lease terms are generally for periods of one year or less. For hotel properties, revenues for room sales and guest services are recognized as rooms are occupied and
services are rendered. An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible.

Revenue Recognition on the Sale of Real Estate

Sales and the associated gains or losses of
real estate are recognized in accordance with the provisions of ASC Topic 360-20, Property, Plant and Equipment  Real Estate Sale. The specific timing of a sale is measured against various criteria in ASC 360-20 related to the
terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria for the full accrual method are not met, we defer some or all of the gain recognition and
account for the continued operations of the property by applying the finance, leasing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.

Non-performing Notes Receivable

We consider a note receivable to be non-performing when
the maturity date has passed without principal repayment and the borrower is not making interest payments in accordance with the terms of the agreement.

Interest Recognition on Notes Receivable

For notes other than surplus cash notes, we
record interest income as earned in accordance with the terms of the related loan agreements. On cash flow notes where payments are based upon surplus cash from operations, accrued but unpaid interest income is only recognized to the extent that
cash is received.

Allowance for Estimated Losses

We assess the collectability of notes receivable on a periodic basis, of which the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated
cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the
contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnerships real estate that represents the primary source of loan repayment. See Note 3 Notes and Interest
Receivable for details on our notes receivable.



26



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##### Table of Contents

Fair Value of Financial Instruments

We apply the guidance in ASC Topic 820, Fair Value Measurements and Disclosures, to the valuation of real estate assets. These provisions define fair value as the price that would be received
to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair
value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the
reporting entitys own data.

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability
as of the measurement date and includes three levels defined as follows:



|          |  |                                                                                                                                                                                                                           
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1  |  | Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.                                                                                                                          
|Level 2  |  | Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the financial instrument.
|Level 3  |  | Unobservable inputs that are significant to the fair value measurement.                                                                                                                                                   

A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that
is significant to the fair value measurement.

Results of Operations

The discussion of our results of operations is based on managements review of operations, which is based on our segments. Our segments consist of apartments, commercial buildings, hotels, land and
other. For discussion purposes, we break these segments down into the following sub-categories; same property portfolio, acquired properties, and developed properties in the lease-up phase. The same property portfolio consists of properties that
were held by us for the entire period for both years being compared. The acquired property portfolio consists of properties that we acquired but have not been held for the entire period for both periods being compared. Developed properties in the
lease-up phase consist of completed projects that are being leased up. As we complete each phase of the project, we lease-up that phase and include those revenues in our continued operations. Once a developed property becomes leased up and is held
the entire period for both periods under comparison, it is considered to be included in the same property portfolio. Income producing properties that we have sold during the year are reclassified to discontinuing operations for all periods
presented.

The following discussion is based on our Consolidated Statements of Operations for the six months ended June 30, 2011 and
2010 as included in Part I, Item 1. Financial Statements of this report. The prior years property portfolios have been adjusted for subsequent sales. Continued operations relates to income producing properties that were held
during those years as adjusted for sales in the subsequent years.

At June 30, 2011 and 2010, we owned or had interests in a portfolio of
79 and 93 income producing properties, respectively. For discussion purposes, we broke this out between continuing operations and discontinued operations. The total property portfolio represents all income producing properties held as of
June 30 for the period presented. Sales subsequent to quarter end represent properties that were held as of period end for the periods presented, but sold in the next quarter. Continuing operations represents all properties that have not been
reclassed to discontinued operations as of June 30, 2011 for the periods presented. The table below shows the number of income producing properties held at the quarter ended:



|                               |  |          |    |  |      |  |    |  |  | 
|------------------------------ |  | -------- | -- |  | ---- |  | -- |  |  | 
|                               |  | June 30, |    |  |     
|                               |  | 2011     |    |  | 2010 |  |    | 
|Continuing operations          |  |          | 73 |  |      |  | 77 |  | 
|Sales subsequent to period end |  |          | 6  |  |      |  | 0  |  | 
|Discontinued operations        |  |          | 0  |  |      |  | 16 |  | 
|                               |  |          |    |  |      |  |    |  | 
|Total property portfolio       |  |          | 79 |  |      |  | 93 |  | 
|                               |  |          |    |  |      |  |    |  |  | 

Comparison of the three months ended June 30, 2011 to the same period ended 2010

For the three months ended June 30, 2011, we reported a net income applicable to common shares of $13.8 million or $1.20 per diluted earnings per
share, as compared to a net loss applicable to common shares of ($14.4) million or ($1.25) per diluted earnings per share for the same period ended 2010.



27



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##### Table of Contents

Revenues

Rental and other property revenues were $37.5 million for the three months ended June 30, 2011. This represents an increase of $1.0 million, as compared to the prior period revenues of $36.5 million.
This change, by segment, is an increase in the commercial portfolio of $0.6 million, an increase in the apartment portfolio of $0.7 million, offset by a decrease in the hotel portfolio of $0.3 million. Within the apartment portfolio, there was an
increase of $0.3 million due to the developed properties in the lease-up phase and an increase of $0.4 million in the same property portfolio. Within the commercial portfolio, the same property portfolio increased by $0.5 million primarily due to a
$2.6 million tenant lease buy-out. Overall, the commercial portfolio decreased due to an increase in vacancy, which we attribute to the current state of the economy. Revenues from our same hotel portfolio are also suffering due to the economy with
decreased stays from travelers. We have directed our efforts to apartment development and put some additional land projects on hold until the economic conditions turn around. We are also continuing to market our properties aggressively to attract
new tenants and strive for continuous improvement of our properties in order to maintain our existing tenants.

Expenses

Property operating expenses were $21.2 million for the three months ended June 30, 2011. This represents a decrease of $2.1 million, as compared to
the prior period operating expenses of $23.3 million. This change, by segment, is a decrease in our commercial properties of $0.6 million, a decrease in our apartment portfolio of $0.6 million, and a decrease in our in our land and other segments of
$0.9 million. Within the apartment portfolio, the same apartment properties decreased $0.9 million due to a decrease in overall costs and additional repairs and maintenance, offset by an increase of $0.3 million from developed properties in the
lease-up phase. The decrease in the land and other portfolios was due to a prior year real estate tax accrual adjustment.

General and
administrative expenses were $4.1 million for the three months ended June 30, 2011. This represents an increase of $1.4 million, as compared to the prior period general and administrative expenses of $2.7 million. This change is primarily due
to an increase in professional services.

Mortgage and loan interest expense was $17.7 million for the three months ended June 30, 2011.
This represents a decrease of $2.6 million, as compared to the prior period interest expense of $20.3 million. This change, by segment, is a decrease in our commercial properties of $1.1 million, a decrease in our apartment portfolio of $0.3
million, and a decrease in our land portfolio of $0.9 million and a decrease in our other portfolio of $0.3 million. The decrease in the apartment portfolio is primarily due to loans that were refinanced in 2010 at a lower interest rate. The
majority of the decrease in the commercial portfolio is due to a matured loan that is being negotiated. The decrease in the other portfolio was due to a decrease in interest expense on loan amounts due to our advisor.

Other income (expense)

Gain on land
sales was $14.0 million for the three months ended June 30, 2011. This represents an increase of $18.1 million as compared to the prior period loss of $4.1 million. In the current period, we sold 1,067 acres of land in 19 separate transactions
for an aggregate sales price of $60.4 million and recorded a gain of $14.0 million. In the prior period, we sold 23.56 acres of land in two transactions for an aggregate sales price of $17.6 million and recorded a loss $4.1 million.



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##### Table of Contents

Included in discontinued operations are a total of five and 20 properties as of 2011 and 2010, respectively.
Properties sold in 2011 have been reclassified to discontinued operations for the current and prior reporting periods. In 2011, we sold four commercial properties (Alpenloan, Fenton Centre, Teleport Blvd and Westgrove Air Plaza) and one hotel
(University). In 2010, we sold 13 apartment complexes (Baywalk, Chateau, Foxwood, Island Bay, Kingsland Ranch, Limestone Canyon, Limestone Ranch, Longfellow Arms, Marina Landing, Mason Park, Sendero Ridge, Tivoli and Villager), one commercial
building (217 Rampart) and transferred our limited partnership interest in a consolidated entity that owned an apartment complex (Quail Oaks). The gain on sale of the properties is also included in discontinued operations for those years. There was
an additional gain of $11.0 million due to release of reserves on sold properties, see Note 2. Real Estate Activity for additional details. The following table summarizes revenue and expense information for these properties sold and held
for sale (dollars in thousands):



|                                                                                           |  |                                    |        |   |      |   |        |  
|------------------------------------------------------------------------------------------ |  | ---------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                           |  | For the Three Months EndedJune 30, |       
|                                                                                           |  | 2011                               |        |   | 2010 |  
|Revenue                                                                                    |  |                                    |        |   |      |   |        |  
|Rental                                                                                     |  | $                                  | 2,390  |   |      | $ | 5,860  |  
|Property operations                                                                        |  |                                    | 1,793  |   |      |   | 3,888  |  
|                                                                                           |  |                                    |        |   |      |   |        |  
|                                                                                           |  | $                                  | 597    |   |      | $ | 1,972  |  
|Expenses                                                                                   |  |                                    |        |   |      |   |        |  
|Interest                                                                                   |  |                                    | (637   | ) |      |   | (2,255 | )
|General and administration                                                                 |  |                                    | (146   | ) |      |   | (26    | )
|Litigation settlement expense                                                              |  |                                    |       |   |      |   | (1     | )
|Depreciation                                                                               |  |                                    | (439   | ) |      |   | (1,197 | )
|                                                                                           |  |                                    |        |   |      |   |        |  
|                                                                                           |  | $                                  | (1,222 | ) |      | $ | (3,479 | )
|                                                                                           |  |                                    |        |   |      |   |        |  
|Net loss from discontinued operations before gains on sale of real estate, taxes, and fees |  |                                    | (625   | ) |      |   | (1,507 | )
|Gain on sale of discontinued operations                                                    |  |                                    | 7,679  |   |      |   | 5,660  |  
|                                                                                           |  |                                    |        |   |      |   |        |  
|                                                                                           |  |                                   
|Income from discontinued operations before tax                                             |  | $                                  | 7,054  |   |      | $ | 4,153  |  
|                                                                                           |  |                                   
|Tax expense                                                                                |  |                                    | (2,469 | ) |      |   | (1,454 | )
|                                                                                           |  |                                    |        |   |      |   |        |  
|                                                                                           |  |                                   
|Income from discontinued operations                                                        |  | $                                  | 4,585  |   |      | $ | 2,699  |  
|                                                                                           |  |                                    |        |   |      |   |        |  

Comparison of the six months ended June 30, 2011 to the same period ended 2010

For the six months ended June 30, 2011, we reported a net gain applicable to common shares of $4.0 million or $0.35 per diluted earnings per share,
as compared to a net loss applicable to common shares of ($26.9) million or ($2.34) per diluted earnings per share for the same period ended 2010.

Revenues

Rental and other property revenues were $74.1 million for the six months ended
June 30, 2011. This represents a decrease of $0.2 million, as compared to the prior period revenues of $74.3 million. This change, by segment, is a decrease in the commercial portfolio of $1.6 million, a decrease in the hotel portfolio of $0.5
million, an increase in the land and other portfolios of $0.1 million, and an increase in the apartment portfolio of $1.8 million. Within the apartment portfolio, there was an increase of $0.5 million due to the developed properties in the lease-up
phase and an increase of $1.3 million in the same property portfolio. Within the commercial portfolio the decrease was attributable to the same properties due to an increase in vacancy, which we attribute to the current state of the economy.
Revenues from our same hotel portfolio are also suffering due to the economy with decreased stays from travelers. We have directed our efforts to apartment development and put some additional land projects on hold until the economic conditions turn
around. We are continuing to market our properties aggressively to attract new tenants and strive for continuous improvement of our properties in order to maintain our existing tenants.

Expenses

Property operating expenses were $42.6 million for the six months ended
June 30, 2011. This represents a decrease of $3.3 million, as compared to the prior period operating expenses of $45.9 million. This change, by segment, is a decrease in our commercial properties of $0.8 million, a decrease in our apartment
portfolio of $1.2 million, a decrease in our hotels of $0.1 million and a decrease in our in our land and other segments of $1.2 million. Within the apartment portfolio, the same apartment properties decreased $1.7 million due to a decrease in
overall costs and additional repairs and maintenance, offset by a $0.5 million increase in developed properties in the lease-up phase. Within the commercial portfolio, the same properties decreased by $0.8 million. The decrease in our hotel
portfolio is due to the decrease in variable costs that are directly associated with stays within the hotel. The decrease in the land and other portfolios was due to a prior year real estate tax accrual adjustment.



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##### Table of Contents

General and administrative expenses were $7.6 million for the six months ended June 30, 2011. This
represents an increase of $2.3 million, as compared to the prior period general and administrative expenses of $5.3 million. This change is primarily due to an increase in professional services.

Mortgage and loan interest expense was $34.7 million for the six months ended June 30, 2011. This represents a decrease of $3.9 million, as compared
to the prior period interest expense of $38.6 million. This change, by segment, is a decrease in our commercial properties of $1.6 million, a decrease in our apartment portfolio of $0.8 million, a decrease in our land portfolio of $0.6 million and a
decrease in our other portfolios of $0.9 million. The decrease in the apartment portfolio is primarily due to loans that were refinanced in 2010 at a lower interest rate. The majority of the decrease in the commercial portfolio is due to a matured
loan that is being negotiated.

Provision for impairment was $6.5 million for the six months ended June 30, 2011. Impairment was recorded
as an additional loss of $5.6 million in the apartment properties we currently hold and $0.9 million in the commercial properties we currently hold. The majority of the impairment losses were taken on the properties that are treated as subject
to sales contract where, subsequent to the sale to a related party under common control, negotiations have occurred for the property ownership to transfer to the lender and estimated current property values are lower than our current basis.

Other income (expense)

Interest income was $1.9 million for the six months ended June 30, 2011. This represents a decrease of $0.9 million, as compared to the prior period
interest income of $2.8 million. The majority of this decrease is due to the accrued interest recognition on the cash flow notes from Unified Housing Foundation, Inc. On cash flow notes where payments are based upon surplus cash from operations,
accrued but unpaid interest income is only recognized to the extent that cash is received. Less cash was received in the current period as compared to the prior period.

Gain on land sales was $19.4 million for the six months ended June 30, 2011. This represents an increase of $23.5 million as compared to the prior period loss of $4.1 million. In the current period,
we sold 1,297.84 acres of land in 31 separate transactions for an aggregate sales price of $110.5 million and recorded a gain of $19.4 million. In the prior period, we sold 23.56 acres of land in two transactions for an aggregate sales price of
$17.6 million and recorded a loss of $4.1 million.



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##### Table of Contents

Included in discontinued operations are a total of five and 20 properties as of 2011 and 2010, respectively.
Properties sold in 2011 have been reclassified to discontinued operations for the current and prior reporting periods. In 2011, we sold four commercial properties (Alpenloan, Fenton Centre, Teleport Blvd and Westgrove Air Plaza) and one hotel
(University). In 2010, we sold 13 apartment complexes (Baywalk, Chateau, Foxwood, Island Bay, Kingsland Ranch, Limestone Canyon, Limestone Ranch, Longfellow Arms, Marina Landing, Mason Park, Sendero Ridge, Tivoli and Villager), one commercial
building (217 Rampart) and transferred our limited partnership interest in a consolidated entity that owned an apartment complex (Quail Oaks). The gain on sale of the properties is also included in discontinued operations for those years. There was
an additional gain of $11.0 million due to release of reserves on sold properties, see Note 2. Real Estate Activity for additional details. The following table summarizes revenue and expense information for these properties sold and held
for sale (dollars in thousands):



|                                                                                           |  |                                  |        |   |      |   |        |  
|------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                           |  | For the Six Months EndedJune 30, |       
|                                                                                           |  | 2011                             |        |   | 2010 |  
|Revenue                                                                                    |  |                                  |        |   |      |   |        |  
|Rental                                                                                     |  | $                                | 4,963  |   |      | $ | 14,303 |  
|Property operations                                                                        |  |                                  | 3,796  |   |      |   | 8,123  |  
|                                                                                           |  |                                  |        |   |      |   |        |  
|                                                                                           |  | $                                | 1,167  |   |      | $ | 6,180  |  
|Expenses                                                                                   |  |                                  |        |   |      |   |        |  
|Interest                                                                                   |  |                                  | (1,594 | ) |      |   | (4,852 | )
|General and administration                                                                 |  |                                  | (216   | ) |      |   | (41    | )
|Litigation settlement expense                                                              |  |                                  |       |   |      |   | (1     | )
|Depreciation                                                                               |  |                                  | (1,113 | ) |      |   | (2,507 | )
|                                                                                           |  |                                  |        |   |      |   |        |  
|                                                                                           |  | $                                | (2,923 | ) |      | $ | (7,401 | )
|                                                                                           |  |                                  |        |   |      |   |        |  
|Net loss from discontinued operations before gains on sale of real estate, taxes, and fees |  |                                  | (1,756 | ) |      |   | (1,221 | )
|Gain on sale of discontinued operations                                                    |  |                                  | 11,816 |   |      |   | 5,660  |  
|                                                                                           |  |                                  |        |   |      |   |        |  
|                                                                                           |  |                                 
|Income from discontinued operations before tax                                             |  | $                                | 10,060 |   |      | $ | 4,439  |  
|                                                                                           |  |                                 
|Tax expense                                                                                |  |                                  | (3,521 | ) |      |   | (1,554 | )
|                                                                                           |  |                                  |        |   |      |   |        |  
|                                                                                           |  |                                 
|Income from discontinued operations                                                        |  | $                                | 6,539  |   |      | $ | 2,885  |  
|                                                                                           |  |                                  |        |   |      |   |        |  

Liquidity and Capital Resources

Our principal liquidity needs are:



| |  |  | fund normal recurring expenses;
| | - |  | -------------------------------



| |  |  | meet debt service and principal repayment obligations including balloon payments on maturing debt;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | fund capital expenditures, including tenant improvements and leasing costs;
| | - |  | ---------------------------------------------------------------------------



| |  |  | fund development costs not covered under construction loans; and
| | - |  | ----------------------------------------------------------------



| |  |  | fund possible property acquisitions.
| | - |  | ------------------------------------

Our principal sources of cash have been and will continue to be:



| |  |  | property operations;
| | - |  | --------------------



| |  |  | proceeds from land and income-producing property sales;
| | - |  | -------------------------------------------------------



| |  |  | collection of mortgage notes receivable;
| | - |  | ----------------------------------------



| |  |  | collection of receivables from affiliated companies;
| | - |  | ----------------------------------------------------



| |  |  | refinancing of existing debt; and
| | - |  | ---------------------------------



| |  |  | additional borrowing, including mortgage notes payable and lines of credit.
| | - |  | ---------------------------------------------------------------------------

We draw on multiple financing sources to fund our long-term capital needs. We generally fund our development projects with construction loans. Management anticipates that our available cash from property
operations may not be sufficient to meet all of our cash requirements. Management intends to selectively sell land and income producing assets, refinance or extend real estate debt and seek additional borrowing secured by real estate to meet its
liquidity requirements. Although the past cannot predict the future, historically, management has been successful at extending a portion of our current maturity obligations and selling assets as necessary to meet current obligations.



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Cash flow summary

The following summary discussion of our cash flows is based on the statements of cash flows as presented in Part I Item 1. Financial Statements and is not meant to be an all inclusive
discussion of the changes in our cash flow (dollars in thousands):



|                                                    |  |          |          |   |      |   |         |          |  |   |          |  
|--------------------------------------------------- |  | -------- | -------- | - | ---- | - | ------- | -------- |  | - | -------- | -
|                                                    |  | June 30, |          |   |      |  
|                                                    |  | 2011     |          |   | 2010 |   |         | Variance | 
|Net cash provided by (used in) operating activities |  | $        | (23,126  | ) |      | $ | 10,097  |          |  | $ | (33,223  | )
|Net cash provided by investing activities           |  | $        | 154,971  |   |      | $ | 21,207  |          |  | $ | 133,764  |  
|Net cash used in financing activities               |  | $        | (134,015 | ) |      | $ | (31,306 | )        |  | $ | (102,709 | )

Our primary use of cash for operations is daily operating costs, general and administrative, advisory fees and land
holding costs. Our primary source of cash from operating activities is rental income on properties. In addition, we have an affiliated account in which excess cash is transferred to or from. We had a decrease in cash provided by operating activities
is due to the repayment of affiliate payables in the current period.

Our cash from investing activities increased $133.7 million, as compared
to the prior period. The increase is primarily attributable to the sale of income producing properties and land in the current period. The majority of the proceeds from sales were used for payment on loans associated with those projects.

Our cash used in financing activities consists of payments on recurring debt obligations and maturing notes payable, offset by proceeds from refinancing
current mortgages. There was an increase in cash used in financing activities due to payoff or assumption of debt related to the sales of income producing properties and land in the current period.

Environmental Matters

Under various
federal, state and local environmental laws, ordinances and regulations, we 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 for personal injury associated with such materials.

Management is not aware of
any environmental liability relating to the above matters that would have a material adverse effect on our business, assets or results of operations.

Inflation

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

Tax Matters

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. ARL had a loss for federal income tax purposes after the use of net operating loss carryforwards in the first six months of 2011 and a loss in 2010 and 2009, therefore, it recorded no provision for income taxes.

At June 30, 2011, ARL had a net deferred tax asset of $119.9 million due to tax deductions available to it in future years. However, as
management cannot determine that it is more likely than not that ARI will realize the benefit of the deferred tax assets, a 100% valuation allowance has been established.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|------- | -----------------------------------------------------------

At June 30, 2011, our exposure to a change in interest rates on our debt is as follows (dollars in thousands, except per share):



|                                          |  |         |         |  |                              |  |      |                                   |  |   |       | 
|----------------------------------------- |  | ------- | ------- |  | ---------------------------- |  | ---- | --------------------------------- |  | - | ----- | 
|                                          |  | Balance |         |  | WeightedAverageInterest Rate |  |      | Effect of 1%Increase In BaseRates | 
|Notes payable:                            |  |         |         |  |                              |  |      |                                   |  |   |       | 
|Variable rate                             |  | $       | 263,103 |  |                              |  | 5.72 | %                                 |  | $ | 2,631 | 
|                                          |  |         |         |  |                              |  |      |                                   |  |   |       | 
|Total decrease in ARLs annual net income |  |         |         |  |                              |  |      |                                   |  |   | 2,631 | 
|                                          |  |         |         |  |                              |  |      |                                   |  |   |       | 
|Per share                                 |  |         |         |  |                              |  |      |                                   |  | $ | 0.23  | 
|                                          |  |         |         |  |                              |  |      |                                   |  |   |       | 



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Based on an evaluation by our management (with the participation of our Principal Executive Officer and Principal Financial Officer), as of the end of the period covered by this report, our Principal
Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), were effective
to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and
that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures.

There has been no change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART II. OTHER INFORMATION

ITEM 2.         UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On September 1, 2000, the Board of Directors approved a share repurchase program authorizing the repurchase of up to a total of
1,000,000 shares of ARL Common Stock. This repurchase program has no termination date. In August 2010, the Board of Directors approved an increase in the share repurchase program for up to an additional 250,000 shares of Common Stock which results
in a total authorization under the repurchase program for up to 1,250,000 shares. The following table represents shares repurchased on a monthly basis during the second quarter of 2011:



|                          |  |                                 |   |  |                             |  |   |                                                                      |  |  |                                                                   |  |  |  |         | 
|------------------------- |  | ------------------------------- | - |  | --------------------------- |  | - | -------------------------------------------------------------------- |  |  | ----------------------------------------------------------------- |  |  |  | ------- | 
|Period                    |  | Total Number ofShares Purchased |   |  | Average PricePaid per share |  |   | Total Number ofShares Purchasedas Part of PubliclyAnnounced 
Program |  |  | Maximum Number ofShares that MayYet be PurchasedUnder the Program | 
|Balance at March 31, 2011 |  |                                 |   |  |                             |  |   |                                                                      |  |  | 986,750                                                           |  |  |  | 263,250 | 
|April 30, 2011            |  |                                 | - |  |                             |  | - |                                                                      |  |  | 986,750                                                           |  |  |  | 263,250 | 
|May 31, 2011              |  |                                 | - |  |                             |  | - |                                                                      |  |  | 986,750                                                           |  |  |  | 263,250 | 
|June 30, 2011             |  |                                 | - |  |                             |  | - |                                                                      |  |  | 986,750                                                           |  |  |  | 263,250 | 
|                          |  |                                 |   |  |                             |  |   |                                                                      |  |  |                                                                   |  |  |  |         | 
|Total                     |  |                                 | - |  |                             |  |   |                                                                      |  |  |                                                                   |  |  |  |         | 
|                          |  |                                 |   |  |                             |  |   |                                                                      |  |  |                                                                   |  |  |  |         | 



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##### Table of Contents

ITEM 6.         EXHIBITS

The following exhibits are filed herewith or incorporated by reference as indicated below:



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                         
|3.0           |  | Certificate of Restatement of Articles of Incorporation of American Realty Investors, Inc. dated August 3, 2000 (incorporated by reference to Exhibit 3.0 to the
Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).                                                                                                                                         
|              | 
|3.1           |  | Certificate of Correction of Restated Articles of Incorporation of American Realty Investors, Inc. dated August 29, 2000 (incorporated by reference to Exhibit 3.1 to
Registrants Quarterly Report on Form 10-Q dated September 30, 2000).                                                                                                                                                    
|              | 
|3.2           |  | Articles of Amendment to the Restated Articles of Incorporation of American Realty Investors, Inc. decreasing the number of authorized shares of and eliminating Series B
Cumulative Convertible Preferred Stock dated August 23, 2003 (incorporated by reference to Exhibit 3.3 to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).                      
|              | 
|3.3           |  | Articles of Amendment to the Restated Articles of Incorporation of American Realty Investors, Inc., decreasing the number of authorized shares of and eliminating Series I
Cumulative Preferred Stock dated October 1, 2003 (incorporated by reference to Exhibit 3.4 to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).                                 
|              | 
|3.4           |  | Bylaws of American Realty Investors, Inc. (incorporated by reference to Exhibit 3.2 to Registrants Registration Statement on Form S-4 filed December 30,
1999).                                                                                                                                                                                                                               
|              | 
|4.1           |  | Certificate of Designations, Preferences and Relative Participating or Optional or Other Special Rights, and Qualifications, Limitations or Restrictions Thereof of Series F
Redeemable Preferred Stock of American Realty Investors, Inc., dated June 11, 2001 (incorporated by reference to Exhibit 4.1 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2001).
|              | 
|4.2           |  | Certificate of Withdrawal of Preferred Stock, Decreasing the Number of Authorized Shares of and Eliminating Series F Redeemable Preferred Stock, dated June 18, 2002 (incorporated
by reference to Exhibit 3.0 to the Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).                                                                                         
|              | 
|4.3           |  | Certificate of Designation, Preferences and Rights of the Series I Cumulative Preferred Stock of American Realty Investors, Inc., dated February 3, 2003 (incorporated by
reference to Exhibit 4.3 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2002).                                                                                                       
|              | 
|4.4           |  | Certificate of Designation for Nevada Profit Corporations designating the Series J 8% Cumulative Convertible Preferred Stock as filed with the Secretary of State of Nevada on
March 16, 2006 (incorporated by reference to Registrant current report on Form 8-K for event of March 16, 2006).                                                                                                
|              | 
|10.1          |  | Advisory Agreement between American Realty Investors, Inc. and Pillar Income Asset Management, Inc., dated April 30, 2011 (incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, dated May 2, 2011).                                                                                                                                                       
|              | 
|10.2          |  | Second Amendment to Modification of Stipulation of Settlement dated October 17, 2001 (incorporated by reference to Exhibit 10.1 to the Registrants Registration Statement on
Form S-4, dated February 24, 2002).                                                                                                                                                                              
|              | 
|31.1*         |  | Certification by the Principal Executive Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                     
|              | 
|31.2*         |  | Certification by the Principal Financial Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                     
|              | 
|32.1*         |  | Certification pursuant to 18 U.S.C. 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                 



|* | Filed herewith
|- | --------------



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##### Table of Contents

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 INVESTORS, INC.
|                      |  |                                
|Date: August 15, 2011 |  | By:                             |  | /s/ Daniel J. Moos                                                                
|                      |  |                                 |  |                                                                                   
|                      |  |                                 |  | Daniel J. Moos                                                                    
|                      |  |                                 |  | President and Chief Executive Officer (Principal Executive Officer)               
|                      |  |                                
|Date: August 15, 2011 |  | By:                             |  | /s/ Gene S. Bertcher                                                              
|                      |  |                                 |  |                                                                                   
|                      |  |                                 |  | Gene S. Bertcher                                                                  
|                      |  |                                 |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer)



36



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##### Table of Contents

AMERICAN REALTY INVESTORS, INC.

EXHIBITS TO

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2011



|               |  |                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                                                   
|               | 
|31.1*          |  | Certification by the Principal Executive Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.
|               | 
|31.2*          |  | Certification by the Principal Financial Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.
|               | 
|32.1*          |  | Certification pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                            



|* | Filed herewith
|- | --------------



37