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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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



FOR THE QUARTER ENDED JUNE 30, 2004



Commission File Number 1-15663



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AMERICAN REALTY INVESTORS, INC.

(Exact Name of Registrant as Specified in Its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



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Indicate by
check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes ̈.    No  x.



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



APPLICABLE ONLY TO CORPORATE ISSUERS:



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



|                             |  |                                  
|---------------------------- |  | ---------------------------------
|Common Stock, $.01 par value |  | 10,484,900                       
|(Class)                      |  | (Outstanding at August 13, 2004)*



|* | Does not include 746,972 shares issued to and owned by Transcontinental Realty Investors, Inc.
|- | ----------------------------------------------------------------------------------------------



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AMERICAN REALTY INVESTORS, INC.



PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants, but, in the opinion of the management of American
Realty Investors, Inc. (ARI), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of consolidated results of operations, consolidated balance sheets and consolidated cash flows at the dates and for
the periods indicated, have been included.



AMERICAN REALTY
INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                   |  |                                          |           |   |                  |   |           |  
|---------------------------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                   |  | June 30,2004                             |           |   | December 31,2003 |  
|                                                                                   |  |                                          |           |   | As Restated      |  
|                                                                                   |  | (dollars in thousands, except per share) |          
|Assets                                                                             |  |                                          |           |   |                  |   |           |  
|Real estate held for investment                                                    |  | $                                        | 1,086,948 |   |                  | $ | 1,015,385 |  
|Lessaccumulated depreciation                                                      |  |                                          | (180,959  | ) |                  |   | (171,659  | )
|                                                                                   |  |                                          |           |   |                  |   |           |  
|                                                                                   |  |                                          | 905,989   |   |                  |   | 843,726   |  
|                                                                                   |  |                                         
|Real estate held for sale                                                          |  |                                          | 149,014   |   |                  |   | 212,104   |  
|                                                                                   |  |                                         
|Notes and interest receivable:                                                     |  |                                          |           |   |                  |   |           |  
|Performing ($37,293 in 2004 and $37,697 in 2003 from affiliates)                   |  |                                          | 69,875    |   |                  |   | 64,296    |  
|Nonperforming                                                                      |  |                                          | 10,932    |   |                  |   | 10,932    |  
|                                                                                   |  |                                          |           |   |                  |   |           |  
|                                                                                   |  |                                          | 80,807    |   |                  |   | 75,228    |  
|Lessallowance for estimated losses                                                |  |                                          | (4,633    | ) |                  |   | (4,633    | )
|                                                                                   |  |                                          |           |   |                  |   |           |  
|                                                                                   |  |                                          | 76,174    |   |                  |   | 70,595    |  
|                                                                                   |  |                                         
|Pizza parlor equipment                                                             |  |                                          | 12,929    |   |                  |   | 12,237    |  
|Lessaccumulated depreciation                                                      |  |                                          | (5,992    | ) |                  |   | (5,385    | )
|                                                                                   |  |                                          |           |   |                  |   |           |  
|                                                                                   |  |                                          | 6,937     |   |                  |   | 6,852     |  
|                                                                                   |  |                                         
|Marketable equity securities, at market value                                      |  |                                          | 5,439     |   |                  |   | 5,020     |  
|Cash and cash equivalents                                                          |  |                                          | 7,003     |   |                  |   | 9,543     |  
|Investments in equity investees                                                    |  |                                          | 4,981     |   |                  |   | 4,987     |  
|Goodwill, net of accumulated amortization ($1,763 in 2004 and 2003)                |  |                                          | 11,858    |   |                  |   | 11,858    |  
|Other intangibles, net of accumulated amortization ($847 in 2004 and $822 in 2003) |  |                                          | 1,504     |   |                  |   | 1,529     |  
|Other assets ($12,625 in 2004 and $8,098 in 2003 from affiliate)                   |  |                                          | 61,714    |   |                  |   | 75,761    |  
|                                                                                   |  |                                          |           |   |                  |   |           |  
|                                                                                   |  | $                                        | 1,230,613 |   |                  | $ | 1,241,975 |  
|                                                                                   |  |                                          |           |   |                  |   |           |  



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



2



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AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETSContinued



|                                                                                                                                                                 |  |                                          |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                 |  | June 30,2004                             |           |   | December 31,2003 |  
|                                                                                                                                                                 |  |                                          |           |   | As Restated      |  
|                                                                                                                                                                 |  | (dollars in thousands, except per share) |          
|Liabilities and Stockholders Equity                                                                                                                             |  |                                          |           |   |                  |   |           |  
|Liabilities:                                                                                                                                                     |  |                                          |           |   |                  |   |           |  
|Notes and interest payable ($36,735 in 2004 and $34,775 in 2003 to affiliates)                                                                                   |  | $                                        | 889,146   |   |                  | $ | 886,615   |  
|Liabilities related to assets held for sale                                                                                                                      |  |                                          | 108,197   |   |                  |   | 100,154   |  
|Margin borrowings                                                                                                                                                |  |                                          | 21,509    |   |                  |   | 21,194    |  
|Accounts payable and other liabilities ($2,052 in 2004 and $2,934 in 2003 to affiliates)                                                                         |  |                                          | 85,294    |   |                  |   | 96,360    |  
|                                                                                                                                                                 |  |                                          |           |   |                  |   |           |  
|                                                                                                                                                                 |  |                                          | 1,104,146 |   |                  |   | 1,104,323 |  
|                                                                                                                                                                 |  |                                         
|Minority interest                                                                                                                                                |  |                                          | 57,310    |   |                  |   | 60,537    |  
|                                                                                                                                                                 |  |                                         
|Commitments and contingencies                                                                                                                                    |  |                                          |           |   |                  |   |           |  
|                                                                                                                                                                 |  |                                         
|Stockholders equity:                                                                                                                                            |  |                                          |           |   |                  |   |           |  
|Preferred Stock, $2.00 par value, authorized 50,000,000 shares, issued and outstanding:                                                                          |  |                                          |           |   |                  |   |           |  
|Series A, 3,475,370 shares in 2004 and 3,225,370 shares in 2003 (liquidation preference $34,754), including 900,000 shares in 2004 and 2003
held by subsidiaries |  |                                          | 5,151     |   |                  |   | 4,651     |  
|Series E, 50,000 shares in 2004 and 2003 (liquidation preference $500)                                                                                           |  |                                          | 100       |   |                  |   | 100       |  
|Common Stock, $.01 par value, authorized 100,000,000 shares; issued 11,392,272 shares in 2004 and 2003                                                           |  |                                          | 114       |   |                  |   | 114       |  
|Paid-in capital                                                                                                                                                  |  |                                          | 93,164    |   |                  |   | 92,464    |  
|Treasury stock, at cost, 784,972 shares in 2004 and 746,972 shares in 2003                                                                                       |  |                                          | (10,259   | ) |                  |   | (9,924    | )
|Accumulated deficit                                                                                                                                              |  |                                          | (18,458   | ) |                  |   | (10,391   | )
|Accumulated other comprehensive income (loss)                                                                                                                    |  |                                          | (655      | ) |                  |   | 101       |  
|                                                                                                                                                                 |  |                                          |           |   |                  |   |           |  
|                                                                                                                                                                 |  |                                          | 69,157    |   |                  |   | 77,115    |  
|                                                                                                                                                                 |  |                                          |           |   |                  |   |           |  
|                                                                                                                                                                 |  | $                                        | 1,230,613 |   |                  | $ | 1,241,975 |  
|                                                                                                                                                                 |  |                                          |           |   |                  |   |           |  



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



|                                                                                                           |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | -------------------------------- | - | ------- | ---- |  | - | ----------- | - |  | - | ------- | -
|                                                                                                           |  | For the Three MonthsEnded June 30,       |         |   | For the Six MonthsEnded June 30, |  
|                                                                                                           |  | 2004                                     |         |   | 2003                             |   |         | 2004 |  |   | 2003        |  
|                                                                                                           |  |                                          |         |   | As Restated                      |   |         |      |  |   | As Restated |  
|                                                                                                           |  | (dollars in thousands, except per share) |        
|Property revenue:                                                                                          |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|Rents ($627 in six months of 2004 and $753 in six months of 2003 from affiliates)                          |  | $                                        | 47,514  |   |                                  | $ | 44,522  |      |  | $ | 96,729      |   |  | $ | 63,207  |  
|Property operations expenses ($2,514 in six months of 2004 and $2,501 in six months of 2003 to affiliates) |  |                                          | 35,903  |   |                                  |   | 30,338  |      |  |   | 68,835      |   |  |   | 44,074  |  
|                                                                                                           |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|Operating income                                                                                           |  |                                          | 11,611  |   |                                  |   | 14,184  |      |  |   | 27,894      |   |  |   | 19,133  |  
|                                                                                                           |  |                                          |         |  
|Land operations:                                                                                           |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|Sales                                                                                                      |  |                                          |        |   |                                  |   | 3,318   |      |  |   | 30,194      |   |  |   | 12,103  |  
|Cost of sales                                                                                              |  |                                          |        |   |                                  |   | 2,359   |      |  |   | 21,283      |   |  |   | 11,070  |  
|Deferral of gains on current period sales                                                                  |  |                                          |        |   |                                  |   |        |      |  |   | 5,159       |   |  |   |        |  
|Recognition of previously deferred gains                                                                   |  |                                          |        |   |                                  |   |        |      |  |   |            |   |  |   | 19,897  |  
|                                                                                                           |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|Gain on land sales                                                                                         |  |                                          |        |   |                                  |   | 959     |      |  |   | 3,752       |   |  |   | 20,930  |  
|                                                                                                           |  |                                          |         |  
|Pizza parlor operations:                                                                                   |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|Sales                                                                                                      |  |                                          | 8,823   |   |                                  |   | 8,070   |      |  |   | 16,992      |   |  |   | 15,937  |  
|Cost of sales                                                                                              |  |                                          | 6,924   |   |                                  |   | 6,358   |      |  |   | 13,137      |   |  |   | 12,765  |  
|                                                                                                           |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|Gross margin                                                                                               |  |                                          | 1,899   |   |                                  |   | 1,712   |      |  |   | 3,855       |   |  |   | 3,172   |  
|                                                                                                           |  |                                          |         |  
|Income from operations                                                                                     |  |                                          | 13,510  |   |                                  |   | 16,855  |      |  |   | 35,501      |   |  |   | 43,235  |  
|                                                                                                           |  |                                          |         |  
|Other income:                                                                                              |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|Interest income ($1,047 in six months of 2004 and $1,972 in six months of 2003 from affiliates)            |  |                                          | 1,597   |   |                                  |   | 3,406   |      |  |   | 2,658       |   |  |   | 5,636   |  
|Equity in income (loss) of investees                                                                       |  |                                          | (55     | ) |                                  |   | 264     |      |  |   | (201        | ) |  |   | (4,075  | )
|Gain on foreign currency transaction                                                                       |  |                                          | 1,249   |   |                                  |   |        |      |  |   | 1,249       |   |  |   |        |  
|Other                                                                                                      |  |                                          | (835    | ) |                                  |   | 244     |      |  |   | (208        | ) |  |   | 252     |  
|                                                                                                           |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|                                                                                                           |  |                                          | 1,956   |   |                                  |   | 3,914   |      |  |   | 3,498       |   |  |   | 1,813   |  
|                                                                                                           |  |                                          |         |  
|Other expenses:                                                                                            |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|Interest ($1,335 in six months of 2004 and $519 in six months of 2003 to affiliates)                       |  |                                          | 17,622  |   |                                  |   | 18,799  |      |  |   | 37,228      |   |  |   | 28,098  |  
|Depreciation and amortization                                                                              |  |                                          | 7,254   |   |                                  |   | 6,262   |      |  |   | 14,585      |   |  |   | 8,223   |  
|Discount on sale of notes receivable                                                                       |  |                                          |        |   |                                  |   |        |      |  |   | 398         |   |  |   | 1,558   |  
|General and administrative ($2,386 in six months of 2004 and $2,268 in six months of 2003 to affiliates)   |  |                                          | 4,258   |   |                                  |   | 7,386   |      |  |   | 8,892       |   |  |   | 10,694  |  
|Advisory fee to affiliate                                                                                  |  |                                          | 2,377   |   |                                  |   | 2,700   |      |  |   | 5,228       |   |  |   | 4,728   |  
|Net income fee to affiliate                                                                                |  |                                          | (79     | ) |                                  |   | (452    | )    |  |   |            |   |  |   |        |  
|Incentive fee to affiliate                                                                                 |  |                                          |        |   |                                  |   | (261    | )    |  |   |            |   |  |   |        |  
|Writedown of assets held for sale                                                                          |  |                                          |        |   |                                  |   | 2,352   |      |  |   |            |   |  |   | 2,352   |  
|Minority interest                                                                                          |  |                                          | 445     |   |                                  |   | 720     |      |  |   | 1,629       |   |  |   | 1,270   |  
|                                                                                                           |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|                                                                                                           |  |                                          | 31,877  |   |                                  |   | 37,506  |      |  |   | 67,960      |   |  |   | 56,923  |  
|                                                                                                           |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|Net loss from continuing operations                                                                        |  |                                          | (16,411 | ) |                                  |   | (16,737 | )    |  |   | (28,961     | ) |  |   | (11,875 | )
|                                                                                                           |  |                                          |         |  
|Discontinued operations:                                                                                   |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|Income (loss) from operations                                                                              |  |                                          | 191     |   |                                  |   | (1,843  | )    |  |   | (591        | ) |  |   | (2,527  | )
|Gain on sale of real estate                                                                                |  |                                          | 6,655   |   |                                  |   | 12,806  |      |  |   | 20,589      |   |  |   | 15,819  |  
|Equity in gain on sale of real estate by equity investees                                                  |  |                                          | 113     |   |                                  |   |        |      |  |   | 896         |   |  |   |        |  
|                                                                                                           |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|Net income from discontinued operations                                                                    |  |                                          | 6,959   |   |                                  |   | 10,963  |      |  |   | 20,894      |   |  |   | 13,292  |  
|                                                                                                           |  |                                          |         |  
|Net income (loss)                                                                                          |  |                                          | (9,452  | ) |                                  |   | (5,774  | )    |  |   | (8,067      | ) |  |   | 1,417   |  
|Preferred dividend requirement                                                                             |  |                                          | (650    | ) |                                  |   | (633    | )    |  |   | (1,300      | ) |  |   | (1,221  | )
|                                                                                                           |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  
|Net income (loss) applicable to Common shares                                                              |  | $                                        | (10,102 | ) |                                  | $ | (6,407  | )    |  | $ | (9,367      | ) |  | $ | 196     |  
|                                                                                                           |  |                                          |         |   |                                  |   |         |      |  |   |             |   |  |   |         |  



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



4



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AMERICAN REALTY INVESTORS, INC.



CONSOLIDATED STATEMENTS OF OPERATIONSContinued



|                                                                          |  |                                          |            |   |                                   |   |            |      |  |   |             |   |  |   |            |  
|------------------------------------------------------------------------- |  | ---------------------------------------- | ---------- | - | --------------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ---------- | -
|                                                                          |  | For the Three Months Ended June 30,      |            |   | For the Six Months Ended June 30, |  
|                                                                          |  | 2004                                     |            |   | 2003                              |   |            | 2004 |  |   | 2003        |  
|                                                                          |  |                                          |            |   | As Restated                       |   |            |      |  |   | As Restated |  
|                                                                          |  | (dollars in thousands, except per share) |           
|Basic and diluted income (loss) per share:                                |  |                                          |            |   |                                   |   |            |      |  |   |             |   |  |   |            |  
|Net loss from continuing operations                                       |  | $                                        | (1.61      | ) |                                   | $ | (1.63      | )    |  | $ | (2.85       | ) |  | $ | (1.19      | )
|Discontinued operations                                                   |  |                                          | .66        |   |                                   |   | 1.03       |      |  |   | 1.97        |   |  |   | 1.21       |  
|                                                                          |  |                                          |            |   |                                   |   |            |      |  |   |             |   |  |   |            |  
|Net income (loss) applicable to Common shares                             |  | $                                        | (.95       | ) |                                   | $ | (.60       | )    |  | $ | (.88        | ) |  | $ | .02        |  
|                                                                          |  |                                          |            |   |                                   |   |            |      |  |   |             |   |  |   |            |  
|Weighted average Common shares used in computing income (loss) per share: |  |                                          |            |   |                                   |   |            |      |  |   |             |   |  |   |            |  
|Basic and diluted                                                         |  |                                          | 10,608,932 |   |                                   |   | 10,628,155 |      |  |   | 10,626,799  |   |  |   | 10,945,928 |  



Convertible Preferred Stock (2,575,370
shares) and options to purchase 101,250 shares of ARIs Common Stock were excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2004, because the effect of their inclusion would be antidilutive.



Convertible Preferred Stock (2,326,858 shares) and options to purchase 108,750
shares of ARIs Common Stock were excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2003, because the effect of their inclusion would be antidilutive.



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



5



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AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



For the Six Months Ended June 30, 2004



|                                                              |  |                                          |       |                        |   |             |  |                |     |  |               |        |   |                    |   |         |                                     |  |   |                           |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------- |  | ---------------------------------------- | ----- | ---------------------- | - | ----------- |  | -------------- | --- |  | ------------- | ------ | - | ------------------ | - | ------- | ----------------------------------- |  | - | ------------------------- | - |  | - | ------ | - |  | - | ------ | -
|                                                              |  | Series APreferredStock                   |       | Series EPreferredStock |   | CommonStock |  | Paid-inCapital |     |  | TreasuryStock |        |   | AccumulatedDeficit |   |         | AccumulatedOtherComprehensiveIncome |  |   | Total StockholdersEquity |  
|                                                              |  | (dollars in thousands, except per share) |      
|Balance, January 1, 2004, as previously reported              |  | $                                        | 4,651 |                        | $ | 100         |  | $              | 114 |  | $             | 92,464 |   |                    | $ | (9,924  | )                                   |  | $ | (11,826                   | ) |  | $ | 101    |   |  | $ | 75,680 |  
|Correction of accounting error in prior period (see Note. 11) |  |                                          |      |                        |   |            |  |                |    |  |               |       |   |                    |   |        |                                     |  |   | 1,435                     |   |  |   |       |   |  |   | 1,435  |  
|                                                              |  |                                          |       |                        |   |             |  |                |     |  |               |        |   |                    |   |         |                                     |  |   |                           |   |  |   |        |   |  |   |        |  
|Adjusted balance, January 1, 2004                             |  |                                          | 4,651 |                        |   | 100         |  |                | 114 |  |               | 92,464 |   |                    |   | (9,924  | )                                   |  |   | (10,391                   | ) |  |   | 101    |   |  |   | 77,115 |  
|Comprehensive income:                                         |  |                                          |       |                        |   |             |  |                |     |  |               |        |   |                    |   |         |                                     |  |   |                           |   |  |   |        |   |  |   |        |  
|Unrealized loss on foreign currency translation               |  |                                          |      |                        |   |            |  |                |    |  |               |       |   |                    |   |        |                                     |  |   |                          |   |  |   | (1,153 | ) |  |   | (1,153 | )
|Unrealized gain on marketable securities                      |  |                                          |      |                        |   |            |  |                |    |  |               |       |   |                    |   |        |                                     |  |   |                          |   |  |   | 397    |   |  |   | 397    |  
|Net loss                                                      |  |                                          |      |                        |   |            |  |                |    |  |               |       |   |                    |   |        |                                     |  |   | (8,067                    | ) |  |   |       |   |  |   | (8,067 | )
|                                                              |  |                                          |       |                        |   |             |  |                |     |  |               |        |   |                    |   |         |                                     |  |   |                           |   |  |   |        |   |  |   |        |  
|                                                              |  |                                          |       |                        |   |             |  |                |     |  |               |        |   |                    |   |         |                                     |  |   |                           |   |  |   |        |   |  |   | (8,823 | )
|Repurchase of Common Stock                                    |  |                                          |      |                        |   |            |  |                |    |  |               |       |   |                    |   | (335    | )                                   |  |   |                          |   |  |   |       |   |  |   | (335   | )
|Issuance of Preferred Stock                                   |  |                                          | 500   |                        |   |            |  |                |    |  |               | 2,000  |   |                    |   |        |                                     |  |   |                          |   |  |   |       |   |  |   | 2,500  |  
|Preferred dividends                                           |  |                                          |       |                        |   |             |  |                |     |  |               |        |   |                    |   |         |                                     |  |   |                           |   |  |   |        |   |  |   |        |  
|Series A Preferred Stock ($.50 per share)                     |  |                                          |      |                        |   |            |  |                |    |  |               | (1,285 | ) |                    |   |        |                                     |  |   |                          |   |  |   |       |   |  |   | (1,285 | )
|Series E Preferred Stock ($.30 per share)                     |  |                                          |      |                        |   |            |  |                |    |  |               | (15    | ) |                    |   |        |                                     |  |   |                          |   |  |   |       |   |  |   | (15    | )
|                                                              |  |                                          |       |                        |   |             |  |                |     |  |               |        |   |                    |   |         |                                     |  |   |                           |   |  |   |        |   |  |   |        |  
|Balance, June 30, 2004                                        |  | $                                        | 5,151 |                        | $ | 100         |  | $              | 114 |  | $             | 93,164 |   |                    | $ | (10,259 | )                                   |  | $ | (18,458                   | ) |  | $ | (655   | ) |  | $ | 69,157 |  
|                                                              |  |                                          |       |                        |   |             |  |                |     |  |               |        |   |                    |   |         |                                     |  |   |                           |   |  |   |        |   |  |   |        |  



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



6



---

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                        |  |                                   |          |   |             |   |         |  
|--------------------------------------------------------------------------------------- |  | --------------------------------- | -------- | - | ----------- | - | ------- | -
|                                                                                        |  | For the Six Months Ended June 30, |         
|                                                                                        |  | 2004                              |          |   | 2003        |  
|                                                                                        |  |                                   |          |   | As Restated |  
|                                                                                        |  | (dollars in thousands)            |         
|Cash Flows From Operating Activities:                                                   |  |                                   |          |   |             |   |         |  
|Net income (loss)                                                                       |  | $                                 | (8,067   | ) |             | $ | 1,417   |  
|Adjustments to reconcile net income (loss) to net cash used in operating activities     |  |                                   |          |   |             |   |         |  
|Gain on sale of land and real estate                                                    |  |                                   | (25,237  | ) |             |   | (36,749 | )
|Depreciation and amortization                                                           |  |                                   | 15,209   |   |             |   | 10,186  |  
|Amortization of deferred borrowing costs                                                |  |                                   | 3,683    |   |             |   | 4,954   |  
|Discount on sale of notes receivable                                                    |  |                                   | 398      |   |             |   |        |  
|Equity in loss of investees                                                             |  |                                   | 201      |   |             |   | 4,075   |  
|Writedown of assets held for sale                                                       |  |                                   |         |   |             |   | 2,352   |  
|Gain on foreign currency transaction                                                    |  |                                   | (1,249   | ) |             |   | (31     | )
|(Increase) decrease in accrued interest receivable                                      |  |                                   | 662      |   |             |   | (4,679  | )
|(Increase) decrease in other assets                                                     |  |                                   | 15,396   |   |             |   | (1,224  | )
|Increase in accrued interest payable                                                    |  |                                   | 386      |   |             |   | 909     |  
|Increase (decrease) in accounts payable and other liabilities                           |  |                                   | (3,362   | ) |             |   | 695     |  
|Increase in minority interest                                                           |  |                                   | 573      |   |             |   | 315     |  
|                                                                                        |  |                                   |          |   |             |   |         |  
|Net cash used in operating activities                                                   |  |                                   | (1,407   | ) |             |   | (17,780 | )
|                                                                                        |  |                                  
|Cash Flows From Investing Activities:                                                   |  |                                   |          |   |             |   |         |  
|Collections on notes receivable                                                         |  |                                   | 79       |   |             |   | 11,479  |  
|Proceeds from sale of notes receivable                                                  |  |                                   | 6,227    |   |             |   | 26,346  |  
|Acquisition of real estate (including $498 in 2004 from affiliates and related parties) |  |                                   | (24,273  | ) |             |   | (10,561 | )
|Pizza parlor equipment purchased                                                        |  |                                   | (725     | ) |             |   | (1,286  | )
|Proceeds from sale of real estate                                                       |  |                                   | 84,733   |   |             |   | 54,673  |  
|Notes receivable funded                                                                 |  |                                   | (90      | ) |             |   | (165    | )
|Earnest money/escrow deposits                                                           |  |                                   | (2,334   | ) |             |   | (1,427  | )
|Investment in real estate entities, net of cash acquired                                |  |                                   | (2,625   | ) |             |   | (22,593 | )
|Real estate improvements                                                                |  |                                   | (104,467 | ) |             |   | (23,105 | )
|Payments under interest rate swap contract                                              |  |                                   |         |   |             |   | (31     | )
|Distributions from (to) equity investees                                                |  |                                   | 47       |   |             |   | (548    | )
|                                                                                        |  |                                   |          |   |             |   |         |  
|Net cash (used in) provided by investing activities                                     |  |                                   | (43,428  | ) |             |   | 32,782  |  
|                                                                                        |  |                                  
|Cash Flows From Financing Activities:                                                   |  |                                   |          |   |             |   |         |  
|Proceeds from notes payable                                                             |  |                                   | 198,198  |   |             |   | 77,056  |  
|Payments on notes payable                                                               |  |                                   | (161,234 | ) |             |   | (97,528 | )
|Deferred borrowing costs                                                                |  |                                   | (3,996   | ) |             |   | (3,851  | )
|Net advances from affiliates                                                            |  |                                   | 11,473   |   |             |   | 9,422   |  
|Repurchase of Common Stock                                                              |  |                                   | (335     | ) |             |   |        |  
|Margin payments, net                                                                    |  |                                   | (511     | ) |             |   | (2,408  | )
|Preferred dividends paid                                                                |  |                                   | (1,300   | ) |             |   | (1,176  | )
|                                                                                        |  |                                   |          |   |             |   |         |  
|Net cash provided by (used in) financing activities                                     |  |                                   | 42,295   |   |             |   | (18,485 | )
|                                                                                        |  |                                  
|Net decrease in cash and cash equivalents                                               |  |                                   | (2,540   | ) |             |   | (3,483  | )
|                                                                                        |  |                                  
|Cash and cash equivalents, beginning of period                                          |  |                                   | 9,543    |   |             |   | 8,432   |  
|                                                                                        |  |                                   |          |   |             |   |         |  
|Cash and cash equivalents, end of period                                                |  | $                                 | 7,003    |   |             | $ | 4,949   |  
|                                                                                        |  |                                   |          |   |             |   |         |  



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



7



---

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWSContinued



|                                                      |  |                                  |        |      |   |       
|----------------------------------------------------- |  | -------------------------------- | ------ | ---- | - | ------
|                                                      |  | For the Six MonthsEnded June 30,
|                                                      |  | 2004                             |        | 2003
|                                                      |  | (dollars in thousands)          
|Supplemental Disclosures of Cash Flow Information:    |  |                                  |        |      |   |       
|Cash paid for interest                                |  | $                                | 36,020 |      | $ | 40,902
|                                                      |  |                                 
|Schedule of noncash investing and financing:          |  |                                  |        |      |   |       
|Notes payable assumed by buyer on sale of real estate |  | $                                | 23,657 |      | $ | 15,394
|Notes payable assumed on purchase of real estate      |  |                                  | 5,027  |      |   |      
|Notes receivable from sale of real estate             |  |                                  | 10,448 |      |   | 21,191
|Disposal of property to satisfy debt                  |  |                                  |       |      |   | 6,000 
|Issuance of Preferred Stock                           |  |                                  | 2,500  |      |   |      
|Note payable paid by affiliate                        |  |                                  | 10,823 |      |   |      
|Funds collected by affiliate for property financing   |  |                                  | 16,787 |      |   | 1,500 
|Acquisition of property to satisfy debt               |  |                                  | 2,585  |      |   | 1,059 
|Assumed debt of seller on purchase of real estate     |  |                                  |       |      |   | 6,349 
|Exchange of interest in note receivable for stock     |  |                                  |       |      |   | 5,764 
|Note receivable from exchange of stock with affiliate |  |                                  |       |      |   | 526   



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



8



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1. BASIS OF PRESENTATION



The
accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Dollar amounts in tables are in thousands,
except per share amounts. Certain balances for 2003 have been reclassified to conform to the 2004 presentation. Hereafter in this document, American Realty Investors, Inc. is referred to as ARI.



Operating results for the six-month period ended June 30, 2004, are not necessarily
indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the Consolidated Financial Statements and Notes thereto included in ARIs Annual Report on Form 10-K for the year ended
December 31, 2003 (the 2003 Form 10-K).



On November 15, 2002, ARI,
through wholly-owned subsidiaries, commenced a tender offer for the common shares of Transcontinental Realty Investors, Inc. (TCI) and Income Opportunity Realty Investors, Inc. (IORI) not already owned by ARI. The tender
offer was completed on March 19, 2003. ARI paid $19.00 cash per IORI share and $17.50 cash per TCI share for the stock of non-affiliated stockholders. Pursuant to the tender offer, ARI acquired 265,036 IORI shares and 1,213,226 TCI shares.



After the tender offer, ARI subsidiaries owned 64.8% of the outstanding shares
of TCI and 62.5% of the outstanding shares of IORI (46.9% owned directly by ARI subsidiaries and 15.6% through TCIs ownership of IORI shares). ARI began consolidation of TCIs and IORIs accounts and operations effective March 31,
2003. The effect of consolidating TCIs and IORIs operations from the completion of the tender offer through March 31, 2003 was determined to be immaterial. Through June 30, 2003, ARI had the same advisor as TCI and IORI, and TCI and IORI
had the same board of directors. At June 30, 2004, ARI and TCI have the same advisor and Board of Directors. One Director of ARI (Ted Stokely) also serves as a Director of IORI.



On June 2, 2003, ARI subsidiaries exchanged all of their 674,971 IORI shares with Basic Capital Management, Inc. (BCM),
receiving 650,000 TCI shares from BCM. In addition, BCM executed a promissory note in favor of ARI in the amount of $526,000 (see NOTE 3. NOTES AND INTEREST RECEIVABLE). After the exchange, ARI subsidiaries owned 72.9% of the outstanding
shares of TCI. On June 30, 2003, ARI sold a participating interest in $5.8 million of its $15.5 million line of credit receivable from One Realco Corporation (One Realco) to BCM, receiving 314,141 TCI shares from BCM (see NOTE 3.
NOTES AND INTEREST RECEIVABLE). After the transaction, ARI subsidiaries owned 76.8% of the outstanding shares of TCI. In December 2003, ARI subsidiaries purchased 88,600 TCI shares in market transactions and 204,633 TCI shares in
transactions with related parties for a total of $1.4 million. At December 31, 2003 and June 30, 2004, ARI subsidiaries owned 80.0% of the outstanding shares of TCI. ARI no longer directly owns any IORI shares. At December 31, 2003 and June 30,
2004, ARI subsidiaries owned 19.2% of IORI through TCIs ownership of IORI shares. ARI ceased consolidation of IORIs accounts and operations effective June 2, 2003.



Effective July 1, 2003, Prime Asset Management, Inc. (PAMI) became the advisor to ARI and TCI. PAMI is owned by Realty Advisors,
Inc. (Realty Advisors) (79%) and Syntek West, Inc. (Syntek West) (21%), related parties. Syntek West is owned by Gene Phillips. Effective August 18, 2003, PAMI changed its name to Prime Income Asset Management, Inc.
(PIAMI). On October 1, 2003, Prime Income Asset Management, LLC (Prime), which is 100% owned by PIAMI, replaced PIAMI as the advisor to ARI and TCI.



The following pro forma information reflects the results of operations for ARI as though the consolidation of TCIs operations had
begun on January 1 of 2003.



|                               |  |                                |         |  
|------------------------------ |  | ------------------------------ | ------- | -
|                               |  | Six Months Ended June 30, 2003 |        
|Revenue, as reported           |  | $                              | 91,247  |  
|Revenue, pro forma             |  |                                | 115,708 |  
|                               | 
|Net income, as reported        |  |                                | 1,417   |  
|Net income, pro forma          |  |                                | 484     |  
|                               | 
|Income (loss) per share:       |  |                                |         |  
|Basic and diluted, as reported |  | $                              | .02     |  
|Basic, pro forma               |  | $                              | (.07    | )



9



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



NOTE 1. BASIS OF PRESENTATION (Continued)



Stock-based employee compensation. ARI accounts for stock options using the intrinsic method pursuant to Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations. In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and
Disclosure (SFAS No. 148), which amended SFAS 123, Accounting for Stock-Based Compensation (SFAS 123). The new standard provides alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in the annual and interim financial statements for fiscal years ending
after December 15, 2002. In compliance with SFAS 148, ARI has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangement as defined by APB 25. If ARI had elected to recognize
compensation cost for the issuance of options based on the fair value at the grant dates for awards consistent with the fair value method prescribed by SFAS No. 123, net income (loss) and income (loss) per share would have been impacted as follows:



|                                                                                                                                             |  |                            |         |   |                          |   |        |      |  |   |        |   |  |   |    
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ---
|                                                                                                                                             |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30,
|                                                                                                                                             |  | 2004                       |         |   | 2003                     |   |        | 2004 |  |   | 2003  
|Net income (loss) applicable to common shares, as reported                                                                                   |  | $                          | (10,102 | ) |                          | $ | (6,407 | )    |  | $ | (9,367 | ) |  | $ | 196
|                                                                                                                                             |  |                            |         |  
|Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax
effects |  |                            |        |   |                          |   |       |      |  |   | 22     |   |  |   | 19 
|                                                                                                                                             |  |                            |         |   |                          |   |        |      |  |   |        |   |  |   |    
|Pro forma net income (loss) applicable to common shares                                                                                      |  | $                          | (10,102 | ) |                          | $ | (6,407 | )    |  | $ | (9,389 | ) |  | $ | 177
|                                                                                                                                             |  |                            |         |   |                          |   |        |      |  |   |        |   |  |   |    
|Net income (loss) per share:                                                                                                                 |  |                            |         |   |                          |   |        |      |  |   |        |   |  |   |    
|Basic and diluted, as reported                                                                                                               |  | $                          | (.95    | ) |                          | $ | (.60   | )    |  | $ | (.88   | ) |  | $ | .02
|Basic, pro forma                                                                                                                             |  | $                          | (.95    | ) |                          | $ | (.60   | )    |  | $ | (.88   | ) |  | $ | .02



NOTE 2. REAL ESTATE



In 2004, ARI purchased the following property:



|                           |  |                |  |             |  |               |       |                          |   |      |              |  |   |              |     |  |              |     |  |      
|-------------------------- |  | -------------- |  | ----------- |  | ------------- | ----- | ------------------------ | - | ---- | ------------ |  | - | ------------ | --- |  | ------------ | --- |  | -----
|Property                   |  | Location       |  | Units/Acres |  | PurchasePrice |       | Net CashPaid/ (Received) |   |      | DebtIncurred |  |   | InterestRate |     |  | MaturityDate
|First Quarter              |  |                |  |             |  |               |       |                          |   |      |              |  |   |              |     |  |              |     |  |      
|Apartments                 |  |                |  |             |  |               |       |                          |   |      |              |  |   |              |     |  |              |     |  |      
|288 City Park(1)           |  | Houston, TX    |  | 240 Units   |  | $             | 3,056 |                          | $ | 612  |              |  | $ | 2,444        |     |  | 5.95         | %   |  | 04/45
|Blue Lake Villas II(1)     |  | Waxahachie, TX |  | 70 Units    |  |               | 729   |                          |   | (164 | )            |  |   | 729          |     |  | 5.80         |     |  | 04/45
|Bridges on Kinsey(1)       |  | Tyler, TX      |  | 232 Units   |  |               | 2,291 |                          |   | 596  |              |  |   | 1,687        |     |  | 5.74         |     |  | 08/45
|Dakota Arms(1)             |  | Lubbock, TX    |  | 208 Units   |  |               | 2,472 |                          |   | 681  |              |  |   | 1,791        |     |  | 5.85         |     |  | 06/45
|Lake Forest(1)             |  | Houston, TX    |  | 240 Units   |  |               | 2,316 |                          |   | (470 | )            |  |   | 2,316        |     |  | 5.60         |     |  | 03/45
|Vistas of Vance Jackson(1) |  | San Antonio,TX |  | 240 Units   |  |               | 3,550 |                          |   | 771  |              |  |   | 2,779        |     |  | 5.78         |     |  | 06/45
|                           |  |                |  |             |  |               |      
|Land                       |  |                |  |             |  |               |       |                          |   |      |              |  |   |              |     |  |              |     |  |      
|Lubbock                    |  | Lubbock, TX    |  | 2.9 Acres   |  |               | 224   |                          |   | 224  |              |  |   |             |     |  |             |     |  |     
|Meloy Road                 |  | Kent, OH       |  | 54.2 Acres  |  |               | 4,900 |                          |   | 343  |              |  |   | 4,900        |     |  | 5.00         | (2) |  | 01/06
|Railroad                   |  | Dallas, TX     |  | .3 Acres    |  |               | 708   |                          |   | 704  |              |  |   |             |     |  |             |     |  |     
|                           |  |                |  |             |  |               |      
|Second Quarter             |  |                |  |             |  |               |       |                          |   |      |              |  |   |              |     |  |              |     |  |      
|Apartments                 |  |                |  |             |  |               |       |                          |   |      |              |  |   |              |     |  |              |     |  |      
|Treehouse(3)               |  | Irving, TX     |  | 160 Units   |  |               | 8,017 |                          |   | (498 | )            |  |   | 5,027        | (4) |  | 5.00         |     |  | 08/13
|Wildflower Villas(1)       |  | Temple, TX     |  | 220 Units   |  |               | 2,045 |                          |   | 79   |              |  |   | 1,966        |     |  | 5.99         |     |  | 10/45



10



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|              |  |               |  |             |  |               |  |                          |  |              |  |              |  |             
|------------- |  | ------------- |  | ----------- |  | ------------- |  | ------------------------ |  | ------------ |  | ------------ |  | ------------
|Property      |  | Location      |  | Units/Acres |  | PurchasePrice |  | Net CashPaid/ (Received) |  | DebtIncurred |  | InterestRate |  | MaturityDate
|Land          |  |               |  |             |  |               |  |                          |  |              |  |              |  |             
|Cooks Lane(1) |  | Ft. Worth, TX |  | 23.2 Acres  |  | 1,000         |  | 1,034                    |  |             |  |             |  |            
|Rogers(1)     |  | Rogers, AR    |  | 20.1 Acres  |  | 1,390         |  | 619                      |  | 1,130        |  | 10.50        |  | 04/05       

---

|(1) | Land purchased for apartment construction.
|--- | ------------------------------------------

|(2) | Variable interest rate.
|--- | -----------------------

|(3) | Purchased from IORI, a related party, for assumption of debt and a note receivable, less $750,000 in cash received.
|--- | -------------------------------------------------------------------------------------------------------------------

|(4) | Assumed debt of seller.
|--- | -----------------------



In 2003, ARI purchased the following property:



|                  |  |                    |  |             |  |               |       |              |   |              |  |   |              |     |  |              |   |  |      
|----------------- |  | ------------------ |  | ----------- |  | ------------- | ----- | ------------ | - | ------------ |  | - | ------------ | --- |  | ------------ | - |  | -----
|Property          |  | Location           |  | Units/Acres |  | PurchasePrice |       | Net CashPaid |   | DebtIncurred |  |   | InterestRate |     |  | MaturityDate
|First Quarter     |  |                    |  |             |  |               |       |              |   |              |  |   |              |     |  |              |   |  |      
|Apartments        |  |                    |  |             |  |               |       |              |   |              |  |   |              |     |  |              |   |  |      
|Capitol Hill(1)   |  | Little Rock, AR    |  | 156 Units   |  | $             | 1,904 |              | $ | 615          |  | $ | 1,289        |     |  | 5.50         | % |  | 10/44
|                  |  |                    |  |             |  |               |      
|Second Quarter    |  |                    |  |             |  |               |       |              |   |              |  |   |              |     |  |              |   |  |      
|Apartments        |  |                    |  |             |  |               |       |              |   |              |  |   |              |     |  |              |   |  |      
|Breakwater Bay(1) |  | Beaumont, TX       |  | 176 Units   |  |               | 1,979 |              |   | 383          |  |   | 1,554        |     |  | 5.50         |   |  | 08/44
|Longwood          |  | Long Beach, MS     |  | 200 Units   |  |               | 6,349 |              |   | 334          |  |   | 6,349        | (2) |  | 7.60         |   |  | 04/12
|                  |  |                    |  |             |  |               |      
|Land              |  |                    |  |             |  |               |       |              |   |              |  |   |              |     |  |              |   |  |      
|Pulaski           |  | Pulaski County, AR |  | 21.9 Acres  |  |               | 2,000 |              |   | 695          |  |   | 1,400        |     |  | 6.50         |   |  | 05/05

---

|(1) | Land purchased for apartment construction.
|--- | ------------------------------------------

|(2) | Assumed debt of seller.
|--- | -----------------------



In 2004, ARI sold the following property:



|                      |  |                   |  |                     |  |            |        |                  |   |                |  |   |                    |     |  |   |       |    
|--------------------- |  | ----------------- |  | ------------------- |  | ---------- | ------ | ---------------- | - | -------------- |  | - | ------------------ | --- |  | - | ----- | ---
|Property              |  | Location          |  | Units/Sq. Ft./Acres |  | SalesPrice |        | Net CashReceived |   | DebtDischarged |  |   | Gain/(Loss)on Sale |    
|First Quarter         |  |                   |  |                     |  |            |        |                  |   |                |  |   |                    |     |  |   |       |    
|Apartments            |  |                   |  |                     |  |            |        |                  |   |                |  |   |                    |     |  |   |       |    
|Tiberon Trails        |  | Merrillville, IN  |  | 376 Units           |  | $          | 10,325 |                  | $ | 2,618          |  | $ | 6,189              | (1) |  | $ | 49    |    
|                      |  |                   |  |                     |  |           
|Office Buildings      |  |                   |  |                     |  |            |        |                  |   |                |  |   |                    |     |  |   |       |    
|Brandeis(6)           |  | Omaha, NE         |  | 319,234 Sq. Ft.     |  |            |       |                  |   |               |  |   | 8,750              |     |  |   | (92   | )  
|Countryside Harmon    |  | Sterling, VA      |  | 5,000 Sq. Ft.       |  |            | 2,650  |                  |   | 216            |  |   | 2,200              |     |  |   | 1,861 |    
|Countryside Retail    |  | Sterling, VA      |  | 133,422 Sq. Ft.     |  |            | 27,100 |                  |   | 3,408          |  |   | 22,800             |     |  |   | 6,807 |    
|                      |  |                   |  |                     |  |           
|Land                  |  |                   |  |                     |  |            |        |                  |   |                |  |   |                    |     |  |   |       |    
|Allen                 |  | Collin County, TX |  | 492.5 Acres         |  |            | 19,962 |                  |   | 7,956          |  |   | 4,088              |     |  |   | 7,915 | (2)
|Mason Goodrich        |  | Houston, TX       |  | 5.7 Acres           |  |            | 686    |                  |   | 45             |  |   | 588                |     |  |   | 379   |    
|Mason Goodrich        |  | Houston, TX       |  | 8.0 Acres           |  |            | 1,045  |                  |   | 248            |  |   | 200                |     |  |   | 617   |    
|Red Cross             |  | Dallas, TX        |  | 2.9 Acres           |  |            | 8,500  |                  |   | 2,842          |  |   | 4,450              |     |  |   |      |    
|                      |  |                   |  |                     |  |           
|Industrial Warehouses |  |                   |  |                     |  |            |        |                  |   |                |  |   |                    |     |  |   |       |    
|Kelly (Pinewood)      |  | Dallas, TX        |  | 100,000 Sq. Ft.     |  |            | 1,650  |                  |   | 65             |  |   | 1,376              |     |  |   | 153   |    
|Ogden Industrial      |  | Ogden, UT         |  | 107,112 Sq. Ft.     |  |            | 2,600  |                  |   | 668            |  |   | 1,775              |     |  |   | 1,474 |    
|Texstar Warehouse     |  | Arlington, TX     |  | 97,846 Sq. Ft.      |  |            | 2,400  |                  |   |               |  |   | 1,148              | (1) |  |   | 1,157 | (3)



11



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|                       |  |                 |  |                     |  |            |  |                  |     |  |                |     |  |                    |    
|---------------------- |  | --------------- |  | ------------------- |  | ---------- |  | ---------------- | --- |  | -------------- | --- |  | ------------------ | ---
|Property               |  | Location        |  | Units/Sq. Ft./Acres |  | SalesPrice |  | Net CashReceived |     |  | DebtDischarged |     |  | Gain/(Loss)on Sale |    
|Shopping Centers       |  |                 |  |                     |  |            |  |                  |     |  |                |     |  |                    |    
|K-Mart                 |  | Cary, NC        |  | 92,033 Sq. Ft.      |  | 3,200      |  |                 |     |  | 1,677          | (1) |  | 521                | (3)
|Plaza on Bachman Creek |  | Dallas, TX      |  | 80,278 Sq. Ft.      |  | 7,850      |  | 1,808            |     |  | 5,358          |     |  | 3,682              |    
|                       |  |                 |  |                     |  |           
|Second Quarter         |  |                 |  |                     |  |            |  |                  |     |  |                |     |  |                    |    
|Office Buildings       |  |                 |  |                     |  |            |  |                  |     |  |                |     |  |                    |    
|4135 Beltline          |  | Addison, TX     |  | 90,000 Sq. Ft.      |  | 4,900      |  | 2,472            |     |  | 2,009          |     |  | 337                |    
|Atrium                 |  | Palm Beach, FL  |  | 74,603 Sq. Ft.      |  | 5,775      |  | 1,842            |     |  | 3,772          |     |  | 708                |    
|                       |  |                 |  |                     |  |           
|Apartments             |  |                 |  |                     |  |            |  |                  |     |  |                |     |  |                    |    
|Cliffs of El Dorado(5) |  | McKinney, TX    |  | 208 Units           |  | 13,442     |  | 10               |     |  | 10,323         | (1) |  | 2,542              |    
|Park Avenue            |  | Tallahassee, FL |  | 121 Units           |  | 6,225      |  | 876              |     |  | 4,320          | (1) |  | 3,922              |    
|Sandstone              |  | Mesa, AZ        |  | 238 Units           |  | 8,650      |  | 2,920            | (4) |  | 5,531          |     |  | 1,688              |    
|                       |  |                 |  |                     |  |           
|Third Quarter          |  |                 |  |                     |  |            |  |                  |     |  |                |     |  |                    |    
|Industrial Warehouses  |  |                 |  |                     |  |            |  |                  |     |  |                |     |  |                    |    
|Kelly (Cash Road)      |  | Dallas, TX      |  | 97,150 Sq. Ft.      |  | 1,500      |  | 1,077            |     |  | 422            |     |  | 448                |    
|                       |  |                 |  |                     |  |           
|Land                   |  |                 |  |                     |  |            |  |                  |     |  |                |     |  |                    |    
|Rasor                  |  | Plano, TX       |  | 24.5 Acres          |  | 2,600      |  | 1,340            |     |  | 1,260          |     |  | 220                |    

---

|(1) | Debt assumed by purchaser.
|--- | --------------------------

|(2) | Includes deferred gain of $5.2 million. A portion of the land was sold on a contingent basis for a note receivable of $7.2 million. See Note 3. NOTES AND INTEREST
RECEIVABLE.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Sold to BCM, a related party, for assumption of debt and a note receivable. See Note 3. NOTES AND INTEREST RECEIVABLE. Gain deferred until sale to unrelated party.
Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes a $1.9 million deposit received in February 2004.
|--- | ----------------------------------------------------------

|(5) | Initially sold to Unified Housing Foundation, Inc., a related party, in 2003. See Note 8. RELATED PARTY TRANSACTIONS. Gain deferred until sale to unrelated party.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Returned to lender. See Note 6. NOTES AND INTEREST PAYABLE.
|--- | -------------------------------------------------------------



In 2003, ARI sold the following properties:



|                  |  |                 |  |                           |  |            |        |                         |   |       |                |  |   |                    |     |  |   |       |     
|----------------- |  | --------------- |  | ------------------------- |  | ---------- | ------ | ----------------------- | - | ----- | -------------- |  | - | ------------------ | --- |  | - | ----- | ----
|Property          |  | Location        |  | Units/Sq. Ft./Acres/Rooms |  | SalesPrice |        | Net CashReceived/(Paid) |   |       | DebtDischarged |  |   | Gain/(Loss)on Sale |    
|First Quarter     |  |                 |  |                           |  |            |        |                         |   |       |                |  |   |                    |     |  |   |       |     
|Apartments        |  |                 |  |                           |  |            |        |                         |   |       |                |  |   |                    |     |  |   |       |     
|Bay Anchor        |  | Panama City, FL |  | 12 Units                  |  | $          | 369    |                         | $ |      |                |  | $ | 291                |     |  | $ | 174   |     
|Georgetown        |  | Panama City, FL |  | 44 Units                  |  |            | 1,175  |                         |   | 323   |                |  |   | 789                | (2) |  |   | 72    |     
|Northside Villas  |  | Tallahassee, FL |  | 81 Units                  |  |            | 5,575  |                         |   | 1,806 |                |  |   | 2,784              |     |  |   | 915   |     
|Rolling Hills     |  | Tallahassee, FL |  | 134 Units                 |  |            | 5,061  |                         |   | 1,361 |                |  |   | 2,785              |     |  |   | 1,182 |     
|Seville           |  | Tallahassee, FL |  | 62 Units                  |  |            | 2,795  |                         |   |      |                |  |   | 2,360              |     |  |   | 697   |     
|                  |  |                 |  |                           |  |           
|Shopping Centers  |  |                 |  |                           |  |            |        |                         |   |       |                |  |   |                    |     |  |   |       |     
|Bridgeview Plaza  |  | LaCrosse, WI    |  | 116,008 Sq. Ft.           |  |            | 8,700  |                         |   |      |                |  |   |                   |     |  |   | 8,700 | (1) 
|Cullman           |  | Cullman, AL     |  | 92,466 Sq. Ft.            |  |            | 2,000  |                         |   |      |                |  |   | 2,650              | (2) |  |   | 1,118 | (1) 
|                  |  |                 |  |                           |  |           
|Land              |  |                 |  |                           |  |            |        |                         |   |       |                |  |   |                    |     |  |   |       |     
|Katrina           |  | Palm Desert, CA |  | 89.3 Acres                |  |            | 8,550  |                         |   | (410  | )              |  |   | 2,800              |     |  |   | (40   | )   
|Nashville         |  | Nashville, TN   |  | 8.8 Acres                 |  |            | 235    |                         |   | (11   | )              |  |   | 217                |     |  |   | 114   |     
|                  |  |                 |  |                           |  |           
|Hotels            |  |                 |  |                           |  |            |        |                         |   |       |                |  |   |                    |     |  |   |       |     
|Grand Hotel Sofia |  | Sofia, Bulgaria |  | 136 Rooms                 |  |            | 24,750 |                         |   | 6,258 |                |  |   | 4,209              | (2) |  |   | (31   | )(3)



12



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|                      |  |                    |  |                           |  |            |  |                         |      |  |                |     |  |                    |  
|--------------------- |  | ------------------ |  | ------------------------- |  | ---------- |  | ----------------------- | ---- |  | -------------- | --- |  | ------------------ | -
|Property              |  | Location           |  | Units/Sq. Ft./Acres/Rooms |  | SalesPrice |  | Net CashReceived/(Paid) |      |  | DebtDischarged |     |  | Gain/(Loss)on Sale |  
|Second Quarter        |  |                    |  |                           |  |            |  |                         |      |  |                |     |  |                    |  
|Apartments            |  |                    |  |                           |  |            |  |                         |      |  |                |     |  |                    |  
|Greenbriar            |  | Tallahassee, FL    |  | 50 Units                  |  | 1,700      |  | 594                     |      |  | 976            | (2) |  | 1,025              |  
|Lake Chateau          |  | Thomasville, GA    |  | 98 Units                  |  | 1,600      |  | 460                     |      |  | 1,033          |     |  | 147                |  
|Pinecrest             |  | North Augusta, SC  |  | 120 Units                 |  | 2,707      |  | 1,136                   |      |  | 1,429          |     |  | (304               | )
|Regency               |  | Lincoln, NE        |  | 106 Units                 |  | 4,880      |  | 838                     |      |  | 3,179          |     |  | 2,815              |  
|Willow Wick           |  | North Augusta, SC  |  | 104 Units                 |  | 2,707      |  | 255                     |      |  | 1,943          |     |  | 1,140              |  
|                      |  |                    |  |                           |  |           
|Industrial Warehouses |  |                    |  |                           |  |            |  |                         |      |  |                |     |  |                    |  
|McLeod                |  | Orlando, FL        |  | 110,914 Sq. Ft.           |  | 5,450      |  | 2,980                   |      |  | 1,902          |     |  | 2,805              |  
|Tricon                |  | Atlanta, GA        |  | 570,877 Sq. Ft.           |  | 13,084     |  | 3,364                   |      |  | 9,395          |     |  | 5,579              |  
|                      |  |                    |  |                           |  |           
|Land                  |  |                    |  |                           |  |            |  |                         |      |  |                |     |  |                    |  
|Mason Goodrich        |  | Houston, TX        |  | 8.0 Acres                 |  | 210        |  |                        | (4)  |  |               |     |  | (149               | )
|Mason Goodrich        |  | Houston, TX        |  | 1.6 Acres                 |  | 209        |  | 12                      |      |  | 169            |     |  | 113                |  
|Mason Goodrich        |  | Houston, TX        |  | 7.7 Acres                 |  | 900        |  | 36                      |      |  | 764            |     |  | 466                |  
|Solco-Valley Ranch    |  | Farmers Branch, TX |  | 6.1 Acres                 |  | 1,999      |  | (90                     | )(5) |  |               |     |  | 529                |  
|                      |  |                    |  |                           |  |           
|Hotels                |  |                    |  |                           |  |            |  |                         |      |  |                |     |  |                    |  
|Clarion KC Airport(6) |  | Kansas City, MO    |  | 196 Rooms                 |  | 2,070      |  |                        |      |  | 4,888          |     |  |                   |  

---

|(1) | Sold to TCI to satisfy affiliate debt. Gain deferred until sale to unrelated party.
|--- | -----------------------------------------------------------------------------------

|(2) | Debt assumed by purchaser.
|--- | --------------------------

|(3) | Includes recognition of $3.1 million of accumulated foreign currency translation gains.
|--- | ---------------------------------------------------------------------------------------

|(4) | Cash of $210,000 was received by BCM and applied to ARIs affiliate debt.
|--- | -------------------------------------------------------------------------

|(5) | Cash of $2.0 million was received by BCM and applied to ARIs affiliate debt.
|--- | -----------------------------------------------------------------------------

|(6) | Sold at foreclosure auction. Impairment of $3.3 million and debt forgiveness of $2.8 million were recognized in the fourth quarter of 2003.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



At June 30, 2004, ARI had the following properties under construction:



|                        |  |                 |  |           |  |                |        |                           |   |                         |  |   |       
|----------------------- |  | --------------- |  | --------- |  | -------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------
|Property                |  | Location        |  | Units     |  | AmountExpended |        | AdditionalAmountto Expend |   | ConstructionLoanFunding
|Apartments              |  |                 |  |           |  |                |        |                           |   |                         |  |   |       
|288 City Park           |  | Houston, TX     |  | 240 Units |  | $              | 13,131 |                           | $ | 3,556                   |  | $ | 15,005
|Blue Lake Villas II     |  | Waxahachie, TX  |  | 70 Units  |  |                | 1,632  |                           |   | 3,038                   |  |   | 4,234 
|Bluffs at Vista Ridge   |  | Lewisville, TX  |  | 272 Units |  |                | 12,360 |                           |   | 8,225                   |  |   | 15,500
|Bridges on Kinsey       |  | Tyler, TX       |  | 232 Units |  |                | 5,620  |                           |   | 10,461                  |  |   | 14,477
|Capitol Hill            |  | Little Rock, AR |  | 156 Units |  |                | 10,488 |                           |   | 91                      |  |   | 9,500 
|Dakota Arms             |  | Lubbock, TX     |  | 208 Units |  |                | 2,262  |                           |   | 11,675                  |  |   | 12,549
|Kingsland Ranch         |  | Houston, TX     |  | 398 Units |  |                | 24,247 |                           |   | 1,408                   |  |   | 23,000
|Lake Forest             |  | Houston, TX     |  | 240 Units |  |                | 6,674  |                           |   | 7,763                   |  |   | 12,815
|Vistas at Pinnacle Park |  | Dallas, TX      |  | 322 Units |  |                | 21,127 |                           |   | 54                      |  |   | 19,149
|Vistas of Vance Jackson |  | San Antonio, TX |  | 240 Units |  |                | 5,632  |                           |   | 12,470                  |  |   | 16,056
|Wildflower Villas       |  | Temple, TX      |  | 220 Units |  |                | 2,746  |                           |   | 12,851                  |  |   | 14,073



For the six months ended June 30,
2004, ARI completed the 176 unit Breakwater Bay Apartments in Beaumont, Texas, the 248 unit DeSoto Ranch Apartments in DeSoto, Texas, the 314 unit Verandas at Cityview Apartments in Fort Worth, Texas and the 216 unit Mariposa Villas (Echo Valley) in
Dallas, Texas.



13



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



NOTE 3. NOTES AND INTEREST RECEIVABLE



In March 2004, ARI sold an 8.0 acre tract of its Mason Goodrich land parcel for $1.0 million, receiving $248,000 after payment of closing costs and providing purchase
money financing of $523,000. The loan bears interest at 10.0% per annum, requires monthly payments of accrued interest and matures in March 2006. All principal and accrued but unpaid interest is due at maturity.



In March 2004, ARI sold 492.5 acres in Collin County, Texas to a third party for $20.0
million. ARI provided $7.2 million of the purchase price as seller financing for a portion of the land on a contingent basis. The note bears interest at 7.0% per annum and matures in September 2004. The buyer has the option to convey the contingent
land back to ARI for cancellation of the note. The purchaser also has the option to extend the note to December 2004 with a $1.1 million extension payment prior to the maturity date.



In June 2003, ARI sold the 104 unit Willow Wick Apartments in North Augusta, South Carolina, for $2.7 million and provided $42,000 of the
purchasers closing costs as seller financing. The note bore interest at 5.0% per annum and required all interest and principal payments be paid at maturity in December 2003. This loan was extended until February 2004 and $10,000 was received
in March 2004. The note, including accrued and unpaid interest, was paid in June 2004. ARI agreed to discount the note $2,000 and recognized a loss of $2,000.



In July 2003, an unsecured loan of $22,000 was made to an individual. The note bore interest at a fixed rate of 12.0% and required all interest and principal payments
be paid at maturity in January 2004. This note, including accrued and unpaid interest, was paid in full in March 2004.



In August 2001, ARI agreed to fund up to $5.6 million secured by a second lien on an office building in Dallas, Texas. The note receivable bore interest at a variable
rate, required monthly payments of accrued interest and matured in January 2003. As of June 2004, ARI has funded a total of $4.3 million and the note is classified as nonperforming. The collateral used to secure ARIs second lien was seized by
the first lien holder. In March 2004, ARI agreed to accept an assignment of claims in litigation as security for the note. ARI is also working to secure additional collateral for this note and restructuring the terms of the note, but a new agreement
has not been reached. The current agreement requires interest to accrue at the default rate of 18.0%.



In March 2002, ARI sold the 174,513 sq.ft. Hartford Office Building in Dallas, Texas, for $4.0 million and provided the $4.0 million purchase price as seller financing and an additional $1.4 million line of credit for
leasehold improvements in the form of a first lien mortgage note. The note bears interest at a variable interest rate, currently 7.0% per annum, requires monthly payments of accrued interest and matures in March 2007. As of June 2004, ARI has funded
$354,000 of the additional line of credit.



In July 2002, ARI entered into an
agreement to fund up to $300,000 under a revolving line of credit secured by 100% interest in a partnership of the borrower. The line of credit bears interest at 12.0% per annum, requires monthly payments of accrued interest, and matures in June
2005. As of June 2004, ARI has funded $300,000 of the line of credit.



In
September 2003, ARI sold a 367.4 acre tract of its Pioneer Crossing land parcel for $22.5 million, receiving $4.9 million after payment of closing costs and providing purchase money financing of $16.9 million. The note bears interest at 8.0% per
annum, matures in September 2006 and requires quarterly payments of accrued interest beginning in January 2004. All principal and accrued but unpaid interest are due at maturity. In November 2003, ARI sold an interest in $8.0 million of the note for
$7.5 million, receiving $7.2 million in cash after payment of closing costs and debt paydown. In February 2004, ARI sold an additional interest in $6.6 million of the note for $6.2 million, receiving $6.2 million in cash after payment of closing
costs.



In September 1999, in conjunction with the sale of two apartments in
Austin, Texas, $2.1 million in purchase money financing was provided, secured by limited partnership interests in two limited partnerships owned by the buyer. The financing bore interest at 16.0% per annum, required monthly payments of interest only
at 6.0% per annum beginning in February 2000, required a $200,000 principal paydown in December 1999, which was not received, and matured in August 2000. ARI had the option of obtaining the buyers general and limited partnership interests in
the collateral partnerships in full satisfaction of the financing. In March 2000, ARI agreed to forbear foreclosing on the collateral securing the note and released one of the partnership interests, in exchange for a payment of $250,000 and executed
deeds of trusts on certain properties owned by the buyer. In March 2000, the borrower made a $1.1 million payment, upon receipt of which ARI returned the deeds of trust. The borrower executed a replacement promissory note for the remaining note
balance of $1.0 million, which was unsecured, non-interest bearing and matured in April 2003. In April 2004, a demand letter was sent to the debtor. ARI initiated legal action in June 2004.



14



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



Related Party.In March 2001, ARI funded $13.6 million of a $15.0 million unsecured line of credit to One Realco. A wholly-owned subsidiary of One Realco owns
approximately 2.1% of the outstanding shares of ARIs Common Stock. The line of credit bore interest at 12.0% per annum. All principal and interest were due at maturity in February 2002. The line of credit is guaranteed by BCM. In June 2001,
$394,000 in principal and $416,000 in interest was collected. In December 2001, $21,000 in principal and $804,000 in interest was collected. In February 2002, the line of credit was increased to $18.0 million, accrued but unpaid interest of $217,000
was added to the principal and the maturity date was extended to February 2004. In March 2002, ARI funded an additional $1.8 million, increasing the outstanding principal balance to $15.5 million. In October 2002, $856,900 in interest was collected,
by the return of 85,690 shares of ARI Series A Preferred Stock. In June 2003, ARI sold a participating interest in $5.8 million of the $15.5 million balance to BCM, receiving 314,141 TCI shares from BCM (see NOTE 1. BASIS OF
PRESENTATION.) In February 2004, $2.3 million in interest was collected, accrued but unpaid interest of $161,000 was added to the principal, the maturity date was extended to February 2007, and the interest rate was changed to 2.0% over the
prime rate, currently at 6.5%. All principal and interest are due at maturity. Ronald E. Kimbrough, Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer of ARI until May 31, 2004, was a 10% shareholder of One
Realco. Mr. Kimbrough did not participate in the day-to-day operations or management of One Realco.



In March 2004, ARI sold a K-Mart in Cary, North Carolina to BCM for $3.2 million, including the assumption of debt. ARI also provided $1.5 million of the purchase price as seller financing. The note bears interest at
2.0% over the prime rate, currently 6.5%, and matures in April 2005.



In March
2004, ARI sold the Texstar Warehouse in Arlington, Texas to BCM for $2.4 million, including the assumption of debt. ARI also provided $1.3 million of the purchase price as seller financing. The note bears interest at 2.0% over the prime rate,
currently 6.5%, and matures in April 2005.



NOTE 4. INVESTMENTS IN EQUITY
INVESTEES



Real estate entities. Before 2003, ARIs investment
in real estate entities included equity securities of IORI and TCI, and interests in real estate joint venture partnerships. Prime, ARIs advisor after June 30, 2003, also serves as advisor to TCI.



Through March 31, 2003, ARI accounted for its investment in IORI and TCI and the joint
venture partnerships using the equity method. ARI began consolidation of TCIs and IORIs accounts and operations effective March 31, 2003. ARI ceased consolidation of IORIs accounts and operations effective June 2, 2003. See NOTE 1.
BASIS OF PRESENTATION.



ARIs investment in real estate
entities, accounted for using the equity method, at June 30, 2004, was as follows:



|         |  |                                             |   |  |                                             |       |   |                                           |   |      
|-------- |  | ------------------------------------------- | - |  | ------------------------------------------- | ----- | - | ----------------------------------------- | - | -----
|Investee |  | Percentage ofARIsOwnership atJune 30, 2004 |   |  | Carrying Value ofInvestment atJune 30, 2004 |       |   | Market Valueof Investment atJune 30, 2004
|IORI     |  | 19.2                                        | % |  | $                                           | 5,151 |   |                                           | $ | 4,667
|Other    |  |                                             |   |  |                                             | (170  | ) |                                           |   |      
|         |  |                                             |   |  |                                             |       |   |                                           |   |      
|         |  |                                             |   |  | $                                           | 4,981 |   |                                           |   |      
|         |  |                                             |   |  |                                             |       |   |                                           |   |      



Management continues to believe that
the market value of IORI undervalues its assets and, therefore, ARI may continue to increase its ownership in IORI.



Set forth below are summarized results of operations of equity investees for the six months ended June 30, 2004:



|                                        |  |      |        |  
|--------------------------------------- |  | ---- | ------ | -
|                                        |  | 2004 |       
|Revenues                                |  | $    | 5,605  |  
|Equity in income of partnerships        |  |      | 10     |  
|Property operating and other expenses   |  |      | (3,558 | )
|Depreciation                            |  |      | (636   | )
|Interest                                |  |      | (2,124 | )
|                                        |  |      |        |  
|Loss before gain on sale of real estate |  |      | (703   | )
|Gain on sale of real estate             |  |      | 3,730  |  
|                                        |  |      |        |  
|Net income                              |  | $    | 3,027  |  
|                                        |  |      |        |  



15



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



ARIs share of equity investees loss before gains on the sale of discontinued operations was $55,000 for the six months ended June 30, 2004. ARIs share
of equity investees gain on sale of real estate was $113,000 for the six months ended June 30, 2004.



ARIs cash flow from IORI is dependent on the ability of IORI to make distributions. In the fourth quarter of 2000, IORI suspended distributions.



NOTE 5. MARKETABLE EQUITY SECURITIES



Since 1994, ARI has been purchasing equity securities of entities other than those of IORI and TCI to diversify and increase the liquidity of its margin accounts. Trading
and available-for-sale portfolio securities are carried at market value. In the first six months of 2004, ARI did not purchase or sell any marketable securities. At June 30, 2004, ARI recognized an unrealized increase in the market value of its
trading portfolio securities of $34,000. Unrealized and realized gains and losses on trading portfolio securities are included in other income in the accompanying Consolidated Statements of Operations. Also at June 30, 2004, ARI recorded an
unrealized increase in the market value of its available-for-sale portfolio securities of $397,000. Unrealized gains and losses on available-for-sale portfolio securities are included in accumulated other comprehensive income in the accompanying
Consolidated Balance Sheets.



NOTE 6. NOTES AND INTEREST PAYABLE



In February 2004, the Brandeis office building was returned to the lender via
a Deed in Lieu of Foreclosure process. The outstanding debt and accrued interest was $8.8 million. ARI recorded a net impairment of $4.4 million in the fourth quarter of 2003 for this transaction.



In February 2003, the lender on one of ARIs hotel properties located in Virginia and
three hotel properties in Chicago notified ARI that the loans on the properties were in default, due to ARIs failure to make timely debt service payments. The balance owed on the loans was $21.2 million. In April 2003, the lender and ARI
agreed to terms to cure the default and extend the maturity dates of the loans. In May 2003, ARI failed to satisfy the conditions in the lenders Loan Modification Offer (the Offer), and the Offer was revoked. In August 2003, the
hotels were sold to a related party which then filed for bankruptcy in an effort to restructure the debt on the properties. ARI expects the hotels to emerge as viable assets. The sales were not recorded due to ARI retaining control and having
continuing involvement. In March 2004, ARI paid off these loans through other refinancings. The Virginia hotel was released from bankruptcy protection in March 2004. In August 2004, one of the Chicago hotels was released from bankruptcy.



In 2004, ARI financed/refinanced or obtained second mortgage financing on the following:



|                               |  |                    |  |                          |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|------------------------------ |  | ------------------ |  | ------------------------ |  | ------------ | ------ | -------------- | - | ----------------------- |  | - | ------------ | ---- |  | ------------ | ---- |  | -----
|Property                       |  | Location           |  | Units/Sq. Ft.Rooms/Acres |  | DebtIncurred |        | DebtDischarged |   | Net CashReceived/(Paid) |  |   | InterestRate |      |  | MaturityDate
|First Quarter                  |  |                    |  |                          |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Hotels                         |  |                    |  |                          |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Williamsburg Hospitality House |  | Williamsburg, VA   |  | 296 Rooms                |  | $            | 11,500 |                | $ | 12,332                  |  | $ | (13,689      | )(3) |  | 7.00         | %(1) |  | 03/05
|                               |  |                    |  |                          |  |              |       
|Office Buildings               |  |                    |  |                          |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Centura Tower                  |  | Farmers Branch, TX |  | 410,901 Sq. Ft.          |  |              | 34,000 |                |   | 36,889                  |  |   | (4,588       | )    |  | 5.50         | (1)  |  | 04/06
|                               |  |                    |  |                          |  |              |       
|Land                           |  |                    |  |                          |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Centura                        |  | Farmers Branch, TX |  | 8.8 Acres                |  |              | 4,485  |                |   | 4,000                   |  |   | (183         | )    |  | 7.00         | (1)  |  | 11/04
|Dominion/Hollywood             |  | Farmers Branch, TX |  | 66.1 Acres               |  |              | 6,985  |                |   | 6,222                   |  |   | (67          | )    |  | 7.00         | (1)  |  | 02/05
|Katy                           |  | Harris County, TX  |  | 130.6 Acres              |  |              | 7,500  |                |   |                        |  |   | 18           | (4)  |  | 6.00         | (1)  |  | 02/07
|Marine Creek(2)                |  | Ft. Worth, TX      |  | 54.0 Acres               |  |              | 1,286  |                |   | 991                     |  |   | 192          |      |  | 5.75         |      |  | 06/05
|                               |  |                    |  |                          |  |              |       
|Second Quarter                 |  |                    |  |                          |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Apartments                     |  |                    |  |                          |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Paramount Terrace              |  | Amarillo, TX       |  | 181 Units                |  |              | 3,176  |                |   | 2,663                   |  |   | 323          |      |  | 5.15         |      |  | 06/37
|Treehouse                      |  | Irving, TX         |  | 160 Units                |  |              | 5,780  |                |   | 5,027                   |  |   | 138          |      |  | 5.06         |      |  | 07/34
|                               |  |                    |  |                          |  |              |       
|Office Buildings               |  |                    |  |                          |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|1010 Common                    |  | New Orleans, LA    |  | 494,579 Sq. Ft.          |  |              | 16,250 |                |   | 8,000                   |  |   | 7,829        |      |  | 4.03         | (1)  |  | 07/07
|Two Hickory Centre             |  | Farmers Branch, TX |  | 96,127 Sq. Ft.           |  |              | 7,500  |                |   | 7,500                   |  |   | (164         | )    |  | 3.60         | (1)  |  | 05/06



16



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|                |  |                    |  |                          |  |              |  |                |  |                         |     |  |              |     |  |             
|--------------- |  | ------------------ |  | ------------------------ |  | ------------ |  | -------------- |  | ----------------------- | --- |  | ------------ | --- |  | ------------
|Property        |  | Location           |  | Units/Sq. Ft.Rooms/Acres |  | DebtIncurred |  | DebtDischarged |  | Net CashReceived/(Paid) |     |  | InterestRate |     |  | MaturityDate
|Land            |  |                    |  |                          |  |              |  |                |  |                         |     |  |              |     |  |             
|Lacy Longhorn   |  | Farmers Branch, TX |  | 17.1 Acres               |  | 1,965        |  | 1,800          |  | 78                      |     |  | 4.03         | (1) |  | 07/07       
|Marine Creek    |  | Fort Worth, TX     |  | 28.4 Acres               |  | 1,785        |  | 0              |  | 1,746                   |     |  | 4.03         | (1) |  | 07/07       
|Mason/Goodrich  |  | Houston, TX        |  | 39.4 Acres               |  | 2,133        |  | 714            |  | 1,345                   |     |  | 6.00         | (1) |  | 08/05       
|Third Quarter   |  |                    |  |                          |  |              |  |                |  |                         |     |  |              |     |  |             
|Apartments      |  |                    |  |                          |  |              |  |                |  |                         |     |  |              |     |  |             
|Villager        |  | Fort Walton, FL    |  | 33 Units                 |  | 804          |  | 507            |  | 129                     |     |  | 5.15         |     |  | 06/34       
|Waters Edge III |  | Gulfport, MS       |  | 238 Units                |  | 3,250        |  |               |  |                        | (5) |  | 12.50        |     |  | 12/04       

---

|(1) | Variable interest rate
|--- | ----------------------

|(2) | Construction loan for apartment construction.
|--- | ---------------------------------------------

|(3) | Cash of $11.0 million was received by an affiliate, increasing ARIs affiliate receivable.
|--- | ------------------------------------------------------------------------------------------

|(4) | Cash of $7.4 million was received by an affiliate, increasing ARIs affiliate receivable.
|--- | -----------------------------------------------------------------------------------------

|(5) | Cash of $3.2 million was received by an affiliate, increasing ARIs affiliate receivable.
|--- | -----------------------------------------------------------------------------------------



In July 2004, the stock securing a $2.6 million security loan was released, following substitution of additional collateral (see NOTE 7.
MARGIN BORROWINGS). Accordingly, this loan will be reclassified from Margin borrowings to Notes and interest payable on subsequent Consolidated Balance Sheets.



In July 2004, ARI received an advance of $3.8 million, less fees, on a $10.0 million second
lien note on the Centura Tower building. This note bears interest at 1.0% over the prime rate, currently 5.5%, requires interest-only payments until all of the note is advanced, and matures in April 2006.



Also in July 2004, ARI received a loan of $2.5 million, less fees, that is secured by
ARIs $7.2 million note receivable from the sale of 492 acres of land in Allen, Texas in March 2004. The loan bears interest at 1.5% over the prime rate, currently 6.0%, requires interest-only payments, and matures in December 2004.



In 2003, ARI financed/refinanced or obtained second mortgage financing on the following:



|                      |  |                    |  |                     |  |              |       |                |   |                         |  |   |              |     |  |              |     |  |      
|--------------------- |  | ------------------ |  | ------------------- |  | ------------ | ----- | -------------- | - | ----------------------- |  | - | ------------ | --- |  | ------------ | --- |  | -----
|Property              |  | Location           |  | Sq. Ft. Units/Acres |  | DebtIncurred |       | DebtDischarged |   | Net CashReceived/(Paid) |  |   | InterestRate |     |  | MaturityDate
|First Quarter         |  |                    |  |                     |  |              |       |                |   |                         |  |   |              |     |  |              |     |  |      
|Land                  |  |                    |  |                     |  |              |       |                |   |                         |  |   |              |     |  |              |     |  |      
|Elm Fork              |  | Denton County, TX  |  | 101.0 Acres         |  | $            | 5,000 |                | $ | 1,551                   |  | $ | 2,885        |     |  | 10.75        | %   |  | 03/04
|Nashville             |  | Nashville, TN      |  | 113.8 Acres         |  |              | 6,059 |                |   | 807                     |  |   | 4,725        |     |  | 14.00        |     |  | 03/04
|Vineyards II          |  | Tarrant County, TX |  | 18.6 Acres          |  |              | 3,280 |                |   | 3,750                   |  |   | (583         | )   |  | 6.75         | (1) |  | 02/06
|                      |  |                    |  |                     |  |              |      
|Apartments            |  |                    |  |                     |  |              |       |                |   |                         |  |   |              |     |  |              |     |  |      
|Arlington Place       |  | Pasadena, TX       |  | 230 Units           |  |              | 1,500 |                |   |                        |  |   |             | (2) |  | 5.00         |     |  | 05/03
|                      |  |                    |  |                     |  |              |      
|Second Quarter        |  |                    |  |                     |  |              |       |                |   |                         |  |   |              |     |  |              |     |  |      
|Shopping Centers      |  |                    |  |                     |  |              |       |                |   |                         |  |   |              |     |  |              |     |  |      
|Bridgeview            |  | LaCrosse, WI       |  | 116,008 Sq. Ft.     |  |              | 6,500 |                |   |                        |  |   | 6,152        |     |  | 6.25         | (1) |  | 04/05
|Cullman               |  | Cullman, AL        |  | 92,433 Sq. Ft.      |  |              | 1,700 |                |   | 2,650                   |  |   | 1,048        |     |  | 6.25         | (1) |  | 04/05
|                      |  |                    |  |                     |  |              |      
|Apartments            |  |                    |  |                     |  |              |       |                |   |                         |  |   |              |     |  |              |     |  |      
|Plantation            |  | Tulsa, OK          |  | 138 Units           |  |              | 2,320 |                |   | 1,924                   |  |   | 173          |     |  | 5.60         |     |  | 06/29
|                      |  |                    |  |                     |  |              |      
|Industrial Warehouses |  |                    |  |                     |  |              |       |                |   |                         |  |   |              |     |  |              |     |  |      
|Ogden Industrial      |  | Ogden, UT          |  | 107,112 Sq. Ft.     |  |              | 1,800 |                |   |                        |  |   | 1,722        |     |  | 6.25         | (1) |  | 04/05



17



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|                    |  |                    |  |                     |  |              |     |  |                |  |                         |  |              |     |  |             
|------------------- |  | ------------------ |  | ------------------- |  | ------------ | --- |  | -------------- |  | ----------------------- |  | ------------ | --- |  | ------------
|Property            |  | Location           |  | Sq. Ft. Units/Acres |  | DebtIncurred |     |  | DebtDischarged |  | Net CashReceived/(Paid) |  | InterestRate |     |  | MaturityDate
|Land                |  |                    |  |                     |  |              |     |  |                |  |                         |  |              |     |  |             
|Katrina             |  | Palm Desert, CA    |  | 52.0 Acres          |  | 5,100        |     |  | 3,000          |  | 1,795                   |  | 6.25         | (1) |  | 05/05       
|Keller              |  | Tarrant County, TX |  | 30.1 Acres          |  | 2,016        | (3) |  | 450            |  | 1,494                   |  | 7.50         |     |  | 07/04       
|Lacy Longhorn       |  | Farmers Branch, TX |  | 17.1 Acres          |  |             | (3) |  |               |  |                        |  |             |     |  |            
|Las Colinas         |  | Las Colinas, TX    |  | 13.0 Acres          |  |             | (3) |  |               |  |                        |  |             |     |  |            
|Mason Goodrich      |  | Houston, TX        |  | 84.0 Acres          |  | 3,750        |     |  | 757            |  | 2,850                   |  | 6.25         | (1) |  | 06/04       
|McKinney Corners II |  | Collin County, TX  |  | 11.0 Acres          |  |             | (3) |  |               |  |                        |  |             |     |  |            
|Nashville           |  | Nashville, TN      |  | 113.8 Acres         |  | 941          |     |  |               |  | 737                     |  | 14.00        |     |  | 03/04       
|Thompson            |  | Farmers Branch, TX |  | 3.3 Acres           |  |             | (3) |  |               |  |                        |  |             |     |  |            
|Tomlin              |  | Farmers Branch, TX |  | 9.0 Acres           |  |             | (3) |  |               |  |                        |  |             |     |  |            

---

|(1) | Variable interest rate.
|--- | -----------------------

|(2) | Cash of $1.5 million was received by BCM and applied to ARIs affiliate debt.
|--- | -----------------------------------------------------------------------------

|(3) | Single note, with all properties as collateral.
|--- | -----------------------------------------------



NOTE 7. MARGIN BORROWINGS



ARI has margin arrangements with various financial institutions and brokerage firms which provide for borrowing of up to 50% of the market value of marketable equity
securities. The borrowings under such margin arrangements are secured by equity securities of TCI and ARIs trading portfolio securities and bear interest rates ranging from 5.5% to 24.0%. Margin borrowing totaled $21.5 million at June 30,
2004.



In October 2003, ARI obtained a security loan in the amount of $2.6
million from a financial institution. The loan bears interest at 9.0% over the six-month LIBOR rate, currently 10.96% (not to exceed 10.5%), requires monthly interest payments, and matures in November 2004. In 2003, $1.8 million was advanced to ARI.
In April 2004, an additional $800,000 was advanced. The loan was partially secured by 825,666 shares of TCI common stock held by ARI. In July 2004, additional collateral provided by an affiliate of ARI was substituted for the TCI shares, and the
shares were returned to ARI. Accordingly, this loan will be reclassified from Margin borrowings to Notes and interest payable on subsequent Consolidated Balance Sheets.



In October 2001, ARI obtained a security loan in the amount of $1.0 million from a financial
institution. The loan bore interest at 1.0% over the prime rate, currently 5.5% per annum, required monthly payments of interest only and matured in October 2003. The loan is callable upon 60 days prior notice, and is secured by 250,000 shares of
ARI Common Stock held by BCM. In October 2003, the maturity date was extended to December 2003. In February 2004, ARI paid $450,000 in principal, and the maturity date was extended to January 2005. At August 2004, the remaining balance is $263,000.



NOTE 8. RELATED PARTY TRANSACTIONS



In October 2003, ARI obtained a security loan in the amount of $2.6 million from a financial
institution. The loan bears interest at 9.0% over the six-month LIBOR rate, currently 10.96% (not to exceed 10.5%), requires monthly interest payments, and matures in November 2004. In 2003, $1.8 million was advanced to ARI. In April 2004, an
additional $800,000 was advanced. The proceeds were paid to an affiliate, increasing ARIs affiliate receivable.



In January 2004, ARI issued 200,000 shares of Series A 10% Cumulative Convertible Preferred Stock to Prime, ARIs advisor. In February 2004, 50,000 additional shares
were issued to Prime. ARIs affiliate receivable was increased by $2.5 million.



In February 2004, ARI obtained an unsecured loan of $5.0 million. The proceeds of $5.0 million were received by an affiliate, increasing ARIs affiliate receivable.



In February 2004, ARI obtained financing of $7.5 million on the Katy land tract. The funds, along with additional cash of $6.3 million, were
sent to an affiliate. Subsequently, the affiliate paid off the existing loan balance on an ARI property.



18



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



In March 2001, ARI funded $13.6 million of a $15.0 million unsecured line of credit to One Realco. A wholly-owned subsidiary of One Realco owns approximately 2.1% of the
outstanding shares of ARIs Common Stock. The line of credit bore interest at 12.0% per annum. All principal and interest were due at maturity in February 2002. The line of credit is guaranteed by BCM. In June 2001, $394,000 in principal and
$416,000 in interest was collected. In December 2001, $21,000 in principal and $804,000 in interest was collected. In February 2002, the line of credit was increased to $18.0 million, accrued but unpaid interest of $217,000 was added to the
principal and the maturity date was extended to February 2004. In March 2002, ARI funded an additional $1.8 million, increasing the outstanding principal balance to $15.5 million. In October 2002, $856,900 in interest was collected, by the return of
85,690 shares of ARI Series A Preferred Stock. In June 2003, ARI sold a participating interest in $5.8 million of the $15.5 million balance to BCM, receiving 314,141 TCI shares from BCM (see NOTE 1. BASIS OF PRESENTATION.) In February
2004, $2.3 million in interest was collected, accrued but unpaid interest of $161,000 was added to the principal, the maturity date was extended to February 2007, and the interest rate was changed to 2.0% over the prime rate, currently at 6.5%. All
principal and interest are due at maturity. Ronald E. Kimbrough, Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer of ARI until May 31, 2004, was a 10% shareholder of One Realco. Mr. Kimbrough did not
participate in the day-to-day operations or management of One Realco.



In March
2004, ARI obtained financing of $11.5 million on a hotel property. The proceeds of $11.0 million were received by an affiliate, increasing ARIs affiliate receivable.



In March 2004, a related party purchased the loans on ARIs three Chicago hotels for $10.8 million, decreasing ARIs affiliate
receivable.



In May 2004, ARI purchased the Treehouse Apartments from an
affiliate, with a net purchase price of $7.5 million after assumption of debt and a note receivable, less cash received of $498,000. The note receivable was from the sale of the Cliffs of El Dorado Apartments to a related party in 2003. At that
time, the sale of the Cliffs of El Dorado was not recorded as a sale for accounting purposes. ARI recorded the sale of the Cliffs of El Dorado in May 2004, due to payment received for the Cliffs of El Dorado note receivable.



In July, 2004, ARI obtained a loan of $3.2 million secured by a contract for sale of the
Waters Edge III Apartments. The proceeds of $3.2 million were received by an affiliate, increasing ARIs affiliate receivable.



The following table reconciles the beginning and ending balances of accounts receivable from and (accounts payable to) affiliates as of June 30, 2004.



|                                              |  |     |       |   |       |   |         |      |  |   |      |  
|--------------------------------------------- |  | --- | ----- | - | ----- | - | ------- | ---- |  | - | ---- | -
|                                              |  | BCM |       |   | PRIME |   |         | IORI | 
|Balance, December 31, 2003                    |  | $   | 1,999 |   |       | $ | 4,393   |      |  | $ | (627 | )
|Cash transfers to affiliates                  |  |     | 1     |   |       |   | 83,571  |      |  |   |     |  
|Cash transfers from affiliates                |  |     | (574  | ) |       |   | (82,241 | )    |  |   |     |  
|Advance through receipt of financing proceeds |  |     |      |   |       |   | 6,964   |      |  |   |     |  
|Payables clearing through Prime               |  |     |      |   |       |   | (2,783  | )    |  |   | 367  |  
|                                              |  |     |       |   |       |   |         |      |  |   |      |  
|Balance, June 30, 2004                        |  | $   | 1,426 |   |       | $ | 9,904   |      |  | $ | (260 | )
|                                              |  |     |       |   |       |   |         |      |  |   |      |  



In April 2002, ARI and TCI sold 21
apartment properties to partnerships controlled by Metra Capital, LLC (Metra). Innovo Group, Inc. (Innovo) is a limited partner in the partnerships that purchased the properties. Joseph Mizrachi, then a Director of ARI,
controlled approximately 11.67% of the outstanding common stock of Innovo. Management determined to treat the sales as financing transactions, and ARI and TCI continue to report the assets and the new debt incurred by Metra on their financial
statements. The partnership agreements for each of these partnerships state that the Metra Partners, as defined, receive cash flow distributions at least quarterly in an amount sufficient to provide them with a 15% cumulative compounded annual rate
of return on their invested capital, as well as a cumulative compounded annual amount of 0.50% of the average outstanding balance of the mortgage indebtedness secured by any of these properties. These distributions to the Metra Partners have
priority over distributions to any other partners. At June 30, 2004, 16 of the properties remained on ARIs balance sheet, and ARIs other liabilities included $1.1 million owed to the Metra Partners related to cash received by ARI upon
the sale of these apartments in April 2002.



NOTE 9. 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 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 equity in income (loss) of investees, equity in gain on sale of real estate by equity investees and other income which totaled $(777,000) and
$487,000 for the three and six months ended June 30, 2004 and $508,000 and $(3.8) million for 2003. Expenses that are not reflected in the segments are discount on sale of notes receivable, general and administrative expenses, advisory fees, net
income fees, incentive fees, writedown of assets held for sale, minority interest, and income (loss) from discontinued operations which totaled $6.8 million and $16.7 million for the three and six months ended June 30, 2004 and $14.3 million and
$23.1 million for 2003. Excluded from operating segment assets are assets of $76.0 million in 2004 and $89.0 million in



19



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



2003, which are not identifiable with an operating segment. There are no intersegment revenues and expenses, and ARI conducted all of its business within the United
States, with the exception of Hotel Sofia (Bulgaria), which began operations in 2001 and was sold in March 2003; Realty Advisors Korea, Ltd. (South Korea), which ARI acquired in 2002 and sold in 2003, and Hotel Akademia (Poland), which began
operations in 2002.



Presented below are ARIs reportable segments
operating income for the three and six months ended June 30, 2004 and 2003, and segment assets at June 30, 2004 and 2003.



|                                 |  |                      |         |            |   |         |  |      |        |  |              |         |                   |  |       |        |  |   |        |  |   |          
|-------------------------------- |  | -------------------- | ------- | ---------- | - | ------- |  | ---- | ------ |  | ------------ | ------- | ----------------- |  | ----- | ------ |  | - | ------ |  | - | ---------
|Three Months Ended June 30,
2004 |  | CommercialProperties |         | Apartments |   | Hotels  |  | Land |        |  | PizzaParlors |         | Receivables/Other |  | Total
|Operating revenue                |  | $                    | 14,958  |            | $ | 21,534  |  | $    | 10,857 |  | $            | 157     |                   |  | $     | 8,823  |  | $ | 8      |  | $ | 56,337   
|Interest income                  |  |                      |        |            |   |        |  |      |       |  |              |        |                   |  |       |       |  |   | 1,597  |  |   | 1,597    
|Operating expenses               |  |                      | 12,044  |            |   | 14,182  |  |      | 7,386  |  |              | 1,728   |                   |  |       | 6,924  |  |   | 563    |  |   | 42,827   
|                                 |  |                      |         |            |   |         |  |      |        |  |              |         |                   |  |       |        |  |   |        |  |   |          
|Operating income (loss)          |  | $                    | 2,914   |            | $ | 7,352   |  | $    | 3,471  |  | $            | (1,571  | )                 |  | $     | 1,899  |  | $ | 1,042  |  | $ | 15,107   
|                                 |  |                      |         |            |   |         |  |      |        |  |              |         |                   |  |       |        |  |   |        |  |   |          
|Depreciation                     |  | $                    | 3,648   |            | $ | 2,205   |  | $    | 1,052  |  | $            |        |                   |  | $     | 337    |  | $ | 12     |  | $ | 7,254    
|Interest                         |  |                      | 5,205   |            |   | 6,968   |  |      | 1,175  |  |              | 2,687   |                   |  |       | 375    |  |   | 1,212  |  |   | 17,622   
|Capital expenditures             |  |                      | 662     |            |   | 45,846  |  |      | 117    |  |              | 2,007   |                   |  |       | 258    |  |   |       |  |   | 48,890   
|Assets                           |  |                      | 275,607 |            |   | 470,042 |  |      | 87,066 |  |              | 224,854 |                   |  |       | 20,826 |  |   | 76,174 |  |   | 1,154,569
|Property Sales:                  |  |                      |         |            |   |         |  |      |        |  |              |         |                   |  |       |        |  |   |        |  |   |          
|                                 |  |                      |         |            |   |         | 
|Sales price                      |  | $                    | 10,675  |            | $ | 33,317  |  | $    |       |  | $            |        |                   |  | $     |       |  | $ |       |  | $ | 43,992   
|Cost of sale                     |  |                      | 9,630   |            |   | 24,670  |  |      |       |  |              |        |                   |  |       |       |  |   |       |  |   | 34,300   
|Deferred current gain            |  |                      |        |            |   | 3,037   |  |      |       |  |              |        |                   |  |       |       |  |   |       |  |   | 3,037    
|                                 |  |                      |         |            |   |         |  |      |        |  |              |         |                   |  |       |        |  |   |        |  |   |          
|Gain on sale                     |  | $                    | 1,045   |            | $ | 5,610   |  | $    |       |  | $            |        |                   |  | $     |       |  | $ |       |  | $ | 6,655    
|                                 |  |                      |         |            |   |         |  |      |        |  |              |         |                   |  |       |        |  |   |        |  |   |          



|                                 |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|-------------------------------- |  | -------------------- | ------- | ---------- | - | ------- |  | - | ------ | - |  | ------------ | ------- | ----------------- |  | - | ------ |  | - | ------ | - |  | - | ---------
|Three Months Ended June 30,
2003 |  | CommercialProperties |         | Apartments |   | Hotels  |  |   | Land   |   |  | PizzaParlors |         | Receivables/Other |  |   | Total 
|Operating revenue                |  | $                    | 15,818  |            | $ | 17,658  |  | $ | 9,293  |   |  | $            | 166     |                   |  | $ | 8,070  |  | $ | 1,587  |   |  | $ | 52,592   
|Interest income                  |  |                      |        |            |   |        |  |   |       |   |  |              |        |                   |  |   |       |  |   | 3,406  |   |  |   | 3,406    
|Operating expenses               |  |                      | 9,470   |            |   | 12,832  |  |   | 6,409  |   |  |              | 1,600   |                   |  |   | 6,358  |  |   | 27     |   |  |   | 36,696   
|                                 |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|Operating income (loss)          |  | $                    | 6,348   |            | $ | 4,826   |  | $ | 2,884  |   |  | $            | (1,434  | )                 |  | $ | 1,712  |  | $ | 4,966  |   |  | $ | 19,302   
|                                 |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|Depreciation                     |  | $                    | 3,801   |            | $ | 1,437   |  | $ | 787    |   |  | $            |        |                   |  | $ | 248    |  | $ | (11    | ) |  | $ | 6,262    
|Interest                         |  |                      | 6,170   |            |   | 4,627   |  |   | 885    |   |  |              | 3,677   |                   |  |   | 196    |  |   | 3,244  |   |  |   | 18,799   
|Capital expenditures             |  |                      | 1,826   |            |   | 14,981  |  |   | 756    |   |  |              | 430     |                   |  |   | 519    |  |   |       |   |  |   | 18,512   
|Assets                           |  |                      | 403,683 |            |   | 382,828 |  |   | 87,235 |   |  |              | 229,740 |                   |  |   | 22,356 |  |   | 72,287 |   |  |   | 1,198,129
|Property Sales:                  |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|                                 |  |                      |         |            |   |         | 
|Sales price                      |  | $                    | 18,534  |            | $ | 13,594  |  | $ | 5,312  |   |  | $            | 3,318   |                   |  | $ |       |  | $ |       |   |  | $ | 40,758   
|Cost of sale                     |  |                      | 10,150  |            |   | 8,771   |  |   | 5,713  |   |  |              | 2,359   |                   |  |   |       |  |   |       |   |  |   | 26,993   
|                                 |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|Gain (loss) on sale              |  | $                    | 8,384   |            | $ | 4,823   |  | $ | (401   | ) |  | $            | 959     |                   |  |   |       |  |   |       |   |  | $ | 13,765   
|                                 |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          



20



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|                               |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|------------------------------ |  | -------------------- | ------- | ---------- | - | ------- |  | - | ------ | - |  | ------------ | ------- | ----------------- |  | - | ------ |  | - | ------ | - |  | - | ---------
|Six Months Ended June 30,
2004 |  | CommercialProperties |         | Apartments |   | Hotels  |  |   | Land   |   |  | PizzaParlors |         | Receivables/Other |  |   | Total 
|Operating revenue              |  | $                    | 33,927  |            | $ | 43,279  |  | $ | 18,840 |   |  | $            | 313     |                   |  | $ | 16,992 |  | $ | 370    |   |  | $ | 113,721  
|Interest income                |  |                      |        |            |   |        |  |   |       |   |  |              |        |                   |  |   |       |  |   | 2,658  |   |  |   | 2,658    
|Operating expenses             |  |                      | 23,026  |            |   | 28,049  |  |   | 14,734 |   |  |              | 2,682   |                   |  |   | 13,137 |  |   | 344    |   |  |   | 81,972   
|                               |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|Operating income (loss)        |  | $                    | 10,901  |            | $ | 15,230  |  | $ | 4,106  |   |  | $            | (2,369  | )                 |  | $ | 3,855  |  | $ | 2,684  |   |  | $ | 34,407   
|                               |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|Depreciation                   |  | $                    | 7,467   |            | $ | 4,449   |  | $ | 1,980  |   |  | $            |        |                   |  | $ | 664    |  | $ | 25     |   |  | $ | 14,585   
|Interest                       |  |                      | 10,355  |            |   | 14,625  |  |   | 2,761  |   |  |              | 6,148   |                   |  |   | 761    |  |   | 2,578  |   |  |   | 37,228   
|Capital expenditures           |  |                      | 2,555   |            |   | 99,349  |  |   | 378    |   |  |              | 2,185   |                   |  |   | 725    |  |   |       |   |  |   | 105,192  
|Assets                         |  |                      | 275,607 |            |   | 470,042 |  |   | 87,066 |   |  |              | 224,854 |                   |  |   | 20,826 |  |   | 76,174 |   |  |   | 1,154,569
|Property Sales:                |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|Sales price                    |  | $                    | 58,125  |            | $ | 43,642  |  | $ |       |   |  | $            | 30,194  |                   |  | $ |       |  | $ |       |   |  | $ | 131,961  
|Cost of sale                   |  |                      | 41,516  |            |   | 34,947  |  |   |       |   |  |              | 21,283  |                   |  |   |       |  |   |       |   |  |   | 97,746   
|Deferred current gain          |  |                      | 1,678   |            |   | 3,037   |  |   |       |   |  |              | 5,159   |                   |  |   |       |  |   |       |   |  |   | 9,874    
|                               |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|Gain on sale                   |  | $                    | 14,931  |            | $ | 5,658   |  | $ |       |   |  | $            | 3,752   |                   |  | $ |       |  | $ |       |   |  | $ | 24,341   
|                               |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|                               |  |                      |         |            |   |         | 
|Six Months Ended June 30,
2003 |  | CommercialProperties |         | Apartments |   | Hotels  |  |   | Land   |   |  | PizzaParlors |         | Receivables/Other |  |   | Total 
|Operating revenue              |  | $                    | 22,342  |            | $ | 23,478  |  | $ | 15,588 |   |  | $            | 179     |                   |  | $ | 15,937 |  | $ | 1,620  |   |  | $ | 79,144   
|Interest income                |  |                      |        |            |   |        |  |   |       |   |  |              |        |                   |  |   |       |  |   | 5,636  |   |  |   | 5,636    
|Operating expenses             |  |                      | 13,139  |            |   | 16,447  |  |   | 11,285 |   |  |              | 3,170   |                   |  |   | 12,765 |  |   | 33     |   |  |   | 56,839   
|                               |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|Operating income (loss)        |  | $                    | 9,203   |            | $ | 7,031   |  | $ | 4,303  |   |  | $            | (2,991  | )                 |  | $ | 3,172  |  | $ | 7,223  |   |  | $ | 27,941   
|                               |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|Depreciation                   |  | $                    | 4,435   |            | $ | 1,833   |  | $ | 1,268  |   |  | $            |        |                   |  | $ | 694    |  | $ | (7     | ) |  | $ | 8,223    
|Interest                       |  |                      | 7,756   |            |   | 6,471   |  |   | 1,867  |   |  |              | 7,815   |                   |  |   | 402    |  |   | 3,787  |   |  |   | 28,098   
|Capital expenditures           |  |                      | 2,526   |            |   | 14,911  |  |   | 1,091  |   |  |              | 772     |                   |  |   | 1,286  |  |   |       |   |  |   | 20,586   
|Assets                         |  |                      | 403,683 |            |   | 382,828 |  |   | 87,235 |   |  |              | 229,740 |                   |  |   | 22,356 |  |   | 72,287 |   |  |   | 1,198,129
|Property Sales:                |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|Sales price                    |  | $                    | 29,234  |            | $ | 28,570  |  | $ | 30,062 |   |  | $            | 12,103  |                   |  | $ |       |  | $ |       |   |  | $ | 99,969   
|Cost of sale                   |  |                      | 11,032  |            |   | 20,946  |  |   | 30,251 |   |  |              | 11,070  |                   |  |   |       |  |   |       |   |  |   | 73,299   
|Deferred current gain          |  |                      | 9,818   |            |   |        |  |   |       |   |  |              |        |                   |  |   |       |  |   |       |   |  |   | 9,818    
|Recognized prior deferred gain |  |                      |        |            |   |        |  |   |       |   |  |              | 19,897  |                   |  |   |       |  |   |       |   |  |   | 19,897   
|                               |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          
|Gain (loss) on sale            |  | $                    | 8,384   |            | $ | 7,624   |  | $ | (189   | ) |  | $            | 20,930  |                   |  | $ |       |  | $ |       |   |  | $ | 36,749   
|                               |  |                      |         |            |   |         |  |   |        |   |  |              |         |                   |  |   |        |  |   |        |   |  |   |          



NOTE 10. DISCONTINUED
OPERATIONS



Effective January 1, 2002, ARI adopted Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which established a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. This
statement requires that the operations related to properties that have been sold, or properties that are intended to be sold, be presented as discontinued operations in the statement of operations for all periods presented, and the properties
intended to be sold are to be designated as held for sale on the balance sheet. In the event of a future asset sale, ARI is required to reclassify portions of previously reported operations to discontinued operations within the
Statements of Operations.



For the six months ended June 30, 2004 and 2003,
income from discontinued operations relates to 15 properties that ARI sold during 2004 and 32 properties that ARI sold during 2003. The following table summarizes revenue and expense information for these properties sold and held-for-sale.



21



---

AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|                                                          |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------- |  | ---------------------------------- | ----- | ---- | -------------------------------- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                          |  | For the Three monthsEnded June 30, |       |      | For the Six monthsEnded June 30, |       
|                                                          |  | 2004                               |       | 2003 |                                  |        | 2004 |  |   | 2003   |  
|Revenues                                                  |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|Rental                                                    |  | $                                  | 1,744 |      | $                                | 9,934  |      |  | $ | 3,677  |   |  | $ | 16,354 |  
|Property operations                                       |  |                                    | 869   |      |                                  | 6,103  |      |  |   | 2,163  |   |  |   | 10,420 |  
|                                                          |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|                                                          |  |                                    | 875   |      |                                  | 3,831  |      |  |   | 1,514  |   |  |   | 5,934  |  
|Expenses:                                                 |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|Interest                                                  |  |                                    | 422   |      |                                  | 4,315  |      |  |   | 1,482  |   |  |   | 6,497  |  
|Depreciation                                              |  |                                    | 262   |      |                                  | 1,359  |      |  |   | 623    |   |  |   | 1,964  |  
|                                                          |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|                                                          |  |                                    | 684   |      |                                  | 5,674  |      |  |   | 2,105  |   |  |   | 8,461  |  
|                                                          |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|Net income (loss) from discontinued operations            |  |                                    | 191   |      |                                  | (1,843 | )    |  |   | (591   | ) |  |   | (2,527 | )
|Gain on sale of real estate                               |  |                                    | 6,655 |      |                                  | 12,806 |      |  |   | 20,589 |   |  |   | 15,819 |  
|Equity in gain on sale of real estate by equity investees |  |                                    | 113   |      |                                  |       |      |  |   | 896    |   |  |   |       |  
|                                                          |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|Net income from discontinued operations                   |  | $                                  | 6,959 |      | $                                | 10,963 |      |  | $ | 20,894 |   |  | $ | 13,292 |  
|                                                          |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  



Discontinued operations have not been
segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective consolidated statements of operations.



NOTE 11. CORRECTION OF ACCOUNTING ERROR IN PRIOR PERIOD



Subsequent to March 31, 2004, but prior to filing this Form 10-Q, an 80%-owned subsidiary of ARI discovered an error in the depreciation
calculation for a commercial property the subsidiary purchased in March 2003 for $8.7 million. The amount subject to depreciation was $7.8 million and was to be depreciated straight-line over 40 years (480 months). Instead, the property was being
depreciated over 40 months, resulting in depreciation expense being overstated by $1.8 million for 2003 and $1.1 million for 2004. The Consolidated Balance Sheet as of December 31, 2003 has been revised to reflect the correction of the error through
a decrease in accumulated depreciation of $1.8 million, an increase in minority interest of $359,000, and a decrease in accumulated deficit and corresponding increase in total stockholders equity of $1.4 million. The unaudited Consolidated
Statements of Operations for the three and six months ended June 30, 2003, reflect the correction of the impact of this error on depreciation expense of $538,000 and $718,000, respectively. The Consolidated Statement of Stockholders Equity for
December 31, 2003, has been revised to reflect the correction of the error through a decrease in the December 31, 2003 balance of accumulated deficit and increase in total stockholders equity of $1.4 million. ARI does not intend to restate any
previously issued Forms 10-Q or Form 10-K for previous periods, because, in the opinion of management, the effect is not material to the results of operations for any period previously reported on.



NOTE 12. COMMITMENTS AND CONTINGENCIES



Liquidity. Management expects that excess cash generated from operations during the
remainder of 2004 will not be sufficient to discharge all of ARIs debt obligations as they mature. Therefore, ARI will rely on aggressive land sales, selected income producing property sales and, to the extent necessary, additional borrowings
to meet its cash requirements.



Partnership Buyouts. ARI is the limited
partner in 12 partnerships formed to construct residential properties. As permitted in the respective partnership agreements, ARI 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 nonaffiliated partners are limited to development fees earned by the nonaffiliated partners, and are set forth in the respective partnership agreements. The total amount of the expected
buyouts as of June 30, 2004, is approximately $2.4 million.



Commitments.During 2002, Milano Restaurants International, Inc. (MRI), a then wholly-owned subsidiary of ARI, sold two restaurants to a corporation owned in part by an officer of MRI. In conjunction with the sale of
these restaurants, MRI guaranteed the bank debt incurred by the related party. The guaranty applies to all current debt, and to all future debt of the related party until such time as the guaranty is terminated by MRI. The amount of the debt
outstanding that is subject to the guaranty is $1.0 million at June 30, 2004.



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



NOTE 13. SUBSEQUENT EVENTS



Events occurring after the date of these financial statements are included within each note,
as appropriate.



22



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



Introduction



ARI was organized in 1999. In August 2000, ARI acquired American Realty Trust, Inc.
(ART) and National Realty, L.P. (NRLP). ART was organized in 1961 to provide investors with a professionally managed, diversified portfolio of real estate and mortgage loan investments selected to provide opportunities for
capital appreciation as well as current income. ART owns a portfolio of real estate and mortgage loan investments. NRLP was organized in 1987, and subsequently acquired all of the assets and assumed all of the liabilities of 35 public and private
limited partnerships. NRLP also owns a portfolio of real estate and mortgage loan investments.



On November 15, 2002, ARI commenced a tender offer for the common shares of Transcontinental Realty Investors, Inc. (TCI) and Income Opportunity Realty Investors, Inc. (IORI) not already owned
by ARI. The tender offer was completed on March 19, 2003. Pursuant to the tender offer, ARI acquired 265,036 IORI shares and 1,213,226 TCI shares.



After the tender offer, ARI subsidiaries owned 64.8% of the outstanding shares of TCI and 62.5% of the outstanding shares of IORI (46.9% owned directly by ARI
subsidiaries and 15.6% through TCIs ownership of IORI shares). ARI began consolidation of TCIs and IORIs accounts and operations effective March 31, 2003. The effect of consolidating TCIs and IORIs operations from the
completion of the tender offer through March 31, 2003 was determined to be immaterial. Through June 30, 2003, ARI had the same advisor as TCI and IORI, and TCI and IORI had the same board of directors. At June 30, 2004, ARI and TCI have the same
advisor and Board of Directors. One Director of ARI (Ted Stokely) also serves as a director of IORI.



On June 2, 2003, ARI subsidiaries exchanged all of their 674,971 IORI shares with Basic Capital Management, Inc. (BCM), receiving 650,000 TCI shares from BCM. In addition, BCM executed a promissory note in
favor of an ARI subsidiary in the amount of $526,000. After the exchange, ARI subsidiaries owned 72.9% of the outstanding shares of TCI. On June 30, 2003, ARI sold a participating interest in $5.8 million of its $15.5 million line of credit
receivable from One Realco Corporation (One Realco) to BCM, receiving 314,141 TCI shares from BCM. After the transaction, ARI subsidiaries owned 76.8% of the outstanding shares of TCI. In December 2003, ARI subsidiaries purchased 88,600
TCI shares in open market transactions and 204,633 TCI shares in transactions with related parties for a total of $1.4 million. At June 30, 2004, ARI subsidiaries owned 80.0% of the outstanding shares of TCI. ARI no longer directly owns any IORI
shares. At June 30, 2004, TCI owned 24.0% of IORI shares. ARI ceased consolidation of IORIs accounts and operations effective June 2, 2003.



Critical Accounting Policies



Critical accounting policies are those that are both important to the presentation of ARIs financial condition and results of operations and require
managements most difficult, complex or subjective judgments. ARIs critical accounting policies relate to the evaluation of impairment of long-lived assets and the evaluation of the collectibility of accounts and notes receivable.



If events or changes in circumstances indicate that the carrying value of a
rental property to be held and used or land held for development may be impaired, management performs a recoverability analysis based on estimated undiscounted cash flows to be generated from the property in the future. If the analysis indicates
that the carrying value is not recoverable from future cash flows, the property is written down to estimated fair value and an impairment loss is recognized. If management decides to sell rental properties or land held for development, management
evaluates the recoverability of the carrying amounts of the assets. If the evaluation indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written down to estimated fair value less costs to sell and
an impairment loss is recognized within income from continuing operations. ARIs estimates of cash flow and fair values of the properties are based on current market conditions and consider matters such as rental rates and occupancies for
comparable properties, recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. ARIs estimates are subject to revision as market conditions and
ARIs assessments of them change.



ARIs allowance for doubtful
accounts receivable and notes receivable is established based on analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past due accounts. Management considers such information as the nature and age of the
receivable, the payment history of the tenant or other debtor, the financial condition of the tenant or other debtor and ARIs assessment of its ability to meet its lease or interest obligations. ARIs estimate of the required allowance,
which is reviewed on a quarterly basis, is subject to revision as these factors change and is sensitive to the effects of economic and market conditions.



ARIs management periodically discusses criteria for estimates and disclosures of its estimates with the Audit Committee of its Board of Directors.



23



---

Liquidity and Capital Resources



Net cash used in operating activities amounted to $1.4 million for the six months ended June 30, 2004. ARI reported a net loss of $8.1
million for the six months ended June 30, 2004, which included the following non-cash charges and credits: gain on sale of real estate of $25.2 million, depreciation and amortization from real estate held for investment of $15.2 million,
amortization of deferred borrowing costs of $3.7 million, gain on foreign currency transaction of $1.2 million, discount on sale of notes receivable of $398,000, and equity in loss of equity investees of $201,000. Other assets decreased by $15.4
million primarily due to a reduction in escrows and deposits, other liabilities decreased by $3.4 million primarily due to a decrease in accrued expenses, interest receivable decreased by $662,000 due to collection of accrued interest receivable,
minority interest increased by $573,000 and interest payable increased by $386,000.



Net cash used in investing activities of $43.4 million was primarily due to real estate improvements of $104.4 million, acquisitions of real estate of $24.3 million, investment in real estate entities of $2.6 million, earnest money deposits
of $2.3 million, and purchases of pizza parlor equipment of $725,000. These outflows for investing activities were offset by $84.7 million from the sale of real estate and $6.2 million from the sale of notes receivable.



Net cash provided by financing activities of $42.2 million was comprised of proceeds received
from the funding or refinancing of notes payable of $198.2 million and advances from affiliates of $11.5 million; offset by cash payments of $161.2 million to paydown existing notes payable, $4.0 million for financing costs, $1.3 million in
dividends on Preferred Stock, net payments on stock loans of $511,000 and $335,000 to repurchase common stock.



In 2004, ARI purchased the following property:



|                           |  |                 |  |             |  |               |       |                          |   |       |              |  |   |              |     |  |              |     |  |      
|-------------------------- |  | --------------- |  | ----------- |  | ------------- | ----- | ------------------------ | - | ----- | ------------ |  | - | ------------ | --- |  | ------------ | --- |  | -----
|Property                   |  | Location        |  | Units/Acres |  | PurchasePrice |       | Net CashPaid/ (Received) |   |       | DebtIncurred |  |   | InterestRate |     |  | MaturityDate
|First Quarter              |  |                 |  |             |  |               |       |                          |   |       |              |  |   |              |     |  |              |     |  |      
|Apartments                 |  |                 |  |             |  |               |       |                          |   |       |              |  |   |              |     |  |              |     |  |      
|288 City Park(1)           |  | Houston, TX     |  | 240 Units   |  | $             | 3,056 |                          | $ | 612   |              |  | $ | 2,444        |     |  | 5.95         | %   |  | 04/45
|Blue Lake Villas II(1)     |  | Waxahachie, TX  |  | 70 Units    |  |               | 729   |                          |   | (164  | )            |  |   | 729          |     |  | 5.80         |     |  | 04/45
|Bridges on Kinsey(1)       |  | Tyler, TX       |  | 232 Units   |  |               | 2,291 |                          |   | 596   |              |  |   | 1,687        |     |  | 5.74         |     |  | 08/45
|Dakota Arms(1)             |  | Lubbock, TX     |  | 208 Units   |  |               | 2,472 |                          |   | 681   |              |  |   | 1,791        |     |  | 5.85         |     |  | 06/45
|Lake Forest(1)             |  | Houston, TX     |  | 240 Units   |  |               | 2,316 |                          |   | (470  | )            |  |   | 2,316        |     |  | 5.60         |     |  | 03/45
|Vistas of Vance Jackson(1) |  | San Antonio, TX |  | 240 Units   |  |               | 3,550 |                          |   | 771   |              |  |   | 2,779        |     |  | 5.78         |     |  | 06/45
|                           |  |                 |  |             |  |               |      
|Land                       |  |                 |  |             |  |               |       |                          |   |       |              |  |   |              |     |  |              |     |  |      
|Lubbock                    |  | Lubbock, TX     |  | 2.9 Acres   |  |               | 224   |                          |   | 224   |              |  |   |             |     |  |             |     |  |     
|Meloy Road                 |  | Kent, OH        |  | 54.2 Acres  |  |               | 4,900 |                          |   | 343   |              |  |   | 4,900        |     |  | 5.00         | (2) |  | 01/06
|Railroad                   |  | Dallas, TX      |  | .3 Acres    |  |               | 708   |                          |   | 704   |              |  |   |             |     |  |             |     |  |     
|                           |  |                 |  |             |  |               |      
|Second Quarter             |  |                 |  |             |  |               |       |                          |   |       |              |  |   |              |     |  |              |     |  |      
|Apartments                 |  |                 |  |             |  |               |       |                          |   |       |              |  |   |              |     |  |              |     |  |      
|Treehouse(3)               |  | Irving, TX      |  | 160 Units   |  |               | 8,017 |                          |   | (498  | )            |  |   | 5,027        | (4) |  | 5.00         |     |  | 08/13
|Wildflower Villas(1)       |  | Temple, TX      |  | 220 Units   |  |               | 2,045 |                          |   | 79    |              |  |   | 1,966        |     |  | 5.99         |     |  | 10/45
|                           |  |                 |  |             |  |               |      
|Land                       |  |                 |  |             |  |               |       |                          |   |       |              |  |   |              |     |  |              |     |  |      
|Cooks Lane(1)              |  | Ft. Worth, TX   |  | 23.2 Acres  |  |               | 1,000 |                          |   | 1,034 |              |  |   |             |     |  |             |     |  |     
|Rogers(1)                  |  | Rogers, AR      |  | 20.1 Acres  |  |               | 1,390 |                          |   | 506   |              |  |   | 1,130        |     |  | 10.50        |     |  | 04/05

---

|(1) | Land purchased for apartment construction.
|--- | ------------------------------------------

|(2) | Variable interest rate.
|--- | -----------------------

|(3) | Purchased from IORI, a related party, for assumption of debt and a note receivable, less $750,000 in cash received.
|--- | -------------------------------------------------------------------------------------------------------------------

|(4) | Assumed debt of seller.
|--- | -----------------------



24



---

In 2004, ARI sold the following property:



|                       |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|---------------------- |  | ----------------- |  | ------------------- |  | ---------- | ------ | ---------------- | - | ----- | -------------- |  | - | ------------------- | --- |  | - | ----- | ---
|Property               |  | Location          |  | Units/Sq. Ft./Acres |  | SalesPrice |        | Net CashReceived |   |       | DebtDischarged |  |   | Gain/(Loss) on Sale |    
|First Quarter          |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|Apartments             |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|Tiberon Trails         |  | Merrillville, IN  |  | 376 Units           |  | $          | 10,325 |                  | $ | 2,618 |                |  | $ | 6,189               | (1) |  | $ | 49    |    
|                       |  |                   |  |                     |  |           
|Office Buildings       |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|Brandeis(6)            |  | Omaha, NE         |  | 319,234 Sq. Ft.     |  |            |       |                  |   |      |                |  |   | 8,750               |     |  |   | (92   | )  
|Countryside Harmon     |  | Sterling, VA      |  | 5,000 Sq. Ft.       |  |            | 2,650  |                  |   | 216   |                |  |   | 2,200               |     |  |   | 1,861 |    
|Countryside Retail     |  | Sterling, VA      |  | 133,422 Sq. Ft.     |  |            | 27,100 |                  |   | 3,408 |                |  |   | 22,800              |     |  |   | 6,807 |    
|                       |  |                   |  |                     |  |           
|Land                   |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|Allen                  |  | Collin County, TX |  | 492.5 Acres         |  |            | 19,962 |                  |   | 7,956 |                |  |   | 4,088               |     |  |   | 7,915 | (2)
|Mason Goodrich         |  | Houston, TX       |  | 5.7 Acres           |  |            | 686    |                  |   | 45    |                |  |   | 588                 |     |  |   | 379   |    
|Mason Goodrich         |  | Houston, TX       |  | 8.0 Acres           |  |            | 1,045  |                  |   | 248   |                |  |   | 200                 |     |  |   | 617   |    
|Red Cross              |  | Dallas, TX        |  | 2.9 Acres           |  |            | 8,500  |                  |   | 2,842 |                |  |   | 4,450               |     |  |   |      |    
|                       |  |                   |  |                     |  |           
|Industrial Warehouses  |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|Kelly (Pinewood)       |  | Dallas, TX        |  | 100,000 Sq. Ft.     |  |            | 1,650  |                  |   | 65    |                |  |   | 1,376               |     |  |   | 153   |    
|Ogden Industrial       |  | Ogden, UT         |  | 107,112 Sq. Ft.     |  |            | 2,600  |                  |   | 668   |                |  |   | 1,775               |     |  |   | 1,474 |    
|Texstar Warehouse      |  | Arlington, TX     |  | 97,846 Sq. Ft.      |  |            | 2,400  |                  |   |      |                |  |   | 1,148               | (1) |  |   | 1,157 | (3)
|                       |  |                   |  |                     |  |           
|Shopping Centers       |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|K-Mart                 |  | Cary, NC          |  | 92,033 Sq. Ft.      |  |            | 3,200  |                  |   |      |                |  |   | 1,677               | (1) |  |   | 521   | (3)
|Plaza on Bachman Creek |  | Dallas, TX        |  | 80,278 Sq. Ft.      |  |            | 7,850  |                  |   | 1,808 |                |  |   | 5,358               |     |  |   | 3,682 |    
|                       |  |                   |  |                     |  |           
|Second Quarter         |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|Office Buildings       |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|4135 Beltline          |  | Addison, TX       |  | 90,000 Sq. Ft.      |  |            | 4,900  |                  |   | 2,472 |                |  |   | 2,009               |     |  |   | 337   |    
|Atrium                 |  | Palm Beach, FL    |  | 74,603 Sq. Ft.      |  |            | 5,775  |                  |   | 1,842 |                |  |   | 3,772               |     |  |   | 708   |    
|                       |  |                   |  |                     |  |           
|Apartments             |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|Cliffs of El Dorado(5) |  | McKinney, TX      |  | 208 Units           |  |            | 13,442 |                  |   | 10    |                |  |   | 10,323              | (1) |  |   | 2,542 |    
|Park Avenue            |  | Tallahassee, FL   |  | 121 Units           |  |            | 6,225  |                  |   | 876   |                |  |   | 4,320               | (1) |  |   | 3,922 |    
|Sandstone              |  | Mesa, AZ          |  | 238 Units           |  |            | 8,650  |                  |   | 2,920 | (4)            |  |   | 5,531               |     |  |   | 1,688 |    
|                       |  |                   |  |                     |  |           
|Third Quarter          |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|Industrial Warehouses  |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|Kelly (Cash Road)      |  | Dallas, TX        |  | 97,150 Sq. Ft.      |  |            | 1,500  |                  |   | 1,077 |                |  |   | 422                 |     |  |   | 448   |    
|                       |  |                   |  |                     |  |           
|Land                   |  |                   |  |                     |  |            |        |                  |   |       |                |  |   |                     |     |  |   |       |    
|Rasor                  |  | Plano, TX         |  | 24.5 Acres          |  |            | 2,600  |                  |   | 1,340 |                |  |   | 1,260               |     |  |   | 220   |    

---

|(1) | Debt assumed by purchaser.
|--- | --------------------------

|(2) | Includes deferred gain of $5.2 million. A portion of the land was sold on a contingent basis for a note receivable of $7.2 million. See Note 3. NOTES AND INTEREST
RECEIVABLE.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Sold to BCM, a related party, for assumption of debt and a note receivable. See Note 3. NOTES AND INTEREST RECEIVABLE. Gain deferred until sale to unrelated party.
Failure to notify and receive approval from the lender for this transaction may constitute an event of default under the terms of the debt.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes a $1.9 million deposit received in February 2004.
|--- | ----------------------------------------------------------

|(5) | Initially sold to Unified Housing Foundation Inc., a related party, in 2003. See Note 8. RELATED PARTY TRANSACTIONS. Gain deferred until sale to unrelated party.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Returned to lender. See Note 6. NOTES AND INTEREST PAYABLE.
|--- | -------------------------------------------------------------



25



---

In February 2003, the lender on one of ARIs hotel properties located in Virginia and three hotel properties in
Chicago notified ARI that the loans on the properties were in default, due to ARIs failure to make timely debt service payments. The balance owed on the loans was $21.2 million. In April 2003, the lender and ARI agreed to terms to cure the
default and extend the maturity dates of the loans. In May 2003, ARI failed to satisfy the conditions in the lenders Loan Modification Offer (the Offer), and the Offer was revoked. In March 2004, ARI paid off these loans through
other refinancings.



In 2004, ARI financed/refinanced or obtained second
mortgage financing on the following:



|                               |  |                    |  |                           |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|------------------------------ |  | ------------------ |  | ------------------------- |  | ------------ | ------ | -------------- | - | ----------------------- |  | - | ------------ | ---- |  | ------------ | ---- |  | -----
|Property                       |  | Location           |  | Units/Sq. Ft. Rooms/Acres |  | DebtIncurred |        | DebtDischarged |   | Net CashReceived/(Paid) |  |   | InterestRate |      |  | MaturityDate
|First Quarter                  |  |                    |  |                           |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Hotels                         |  |                    |  |                           |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Williamsburg Hospitality House |  | Williamsburg, VA   |  | 296 Rooms                 |  | $            | 11,500 |                | $ | 12,332                  |  | $ | (13,689      | )(3) |  | 7.00         | %(1) |  | 03/05
|                               |  |                    |  |                           |  |              |       
|Office Buildings               |  |                    |  |                           |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Centura Tower                  |  | Farmers Branch, TX |  | 410,901 Sq. Ft.           |  |              | 34,000 |                |   | 36,889                  |  |   | (4,588       | )    |  | 5.50         | (1)  |  | 04/06
|                               |  |                    |  |                           |  |              |       
|Land                           |  |                    |  |                           |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Centura                        |  | Farmers Branch, TX |  | 8.8 Acres                 |  |              | 4,485  |                |   | 4,000                   |  |   | (183         | )    |  | 7.00         | (1)  |  | 11/04
|Dominion/Hollywood             |  | Farmers Branch, TX |  | 66.1 Acres                |  |              | 6,985  |                |   | 6,222                   |  |   | (67          | )    |  | 7.00         | (1)  |  | 02/05
|Katy                           |  | Harris County, TX  |  | 130.6 Acres               |  |              | 7,500  |                |   |                        |  |   | 18           | (4)  |  | 6.00         | (1)  |  | 02/07
|Marine Creek(2)                |  | Ft. Worth, TX      |  | 54.0 Acres                |  |              | 1,286  |                |   | 991                     |  |   | 192          |      |  | 5.75         |      |  | 06/05
|                               |  |                    |  |                           |  |              |       
|Second Quarter                 |  |                    |  |                           |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Apartments                     |  |                    |  |                           |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Paramount Terrace              |  | Amarillo, TX       |  | 181 Units                 |  |              | 3,176  |                |   | 2,663                   |  |   | 323          |      |  | 5.15         |      |  | 06/37
|Treehouse                      |  | Irving, TX         |  | 160 Units                 |  |              | 5,780  |                |   | 5,027                   |  |   | 138          |      |  | 5.06         |      |  | 07/34
|                               |  |                    |  |                           |  |              |       
|Land                           |  |                    |  |                           |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Lacy Longhorn                  |  | Farmers Branch, TX |  | 17.1 Acres                |  |              | 1,965  |                |   | 1,800                   |  |   | 78           |      |  | 4.03         | (1)  |  | 07/07
|Marine Creek                   |  | Fort Worth, TX     |  | 28.4 Acres                |  |              | 1,785  |                |   | 0                       |  |   | 1,746        |      |  | 4.03         | (1)  |  | 07/07
|Mason Goodrich                 |  | Houston, TX        |  | 39.4 Acres                |  |              | 2,133  |                |   | 714                     |  |   | 1,345        |      |  | 6.00         | (1)  |  | 08/05
|                               |  |                    |  |                           |  |              |       
|Office Buildings               |  |                    |  |                           |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|1010 Common                    |  | New Orleans, LA    |  | 494,579 Sq. Ft.           |  |              | 16,250 |                |   | 8,000                   |  |   | 7,829        |      |  | 4.03         | (1)  |  | 07/07
|Two Hickory Centre             |  | Farmers Branch, TX |  | 96,127 Sq. Ft.            |  |              | 7,500  |                |   | 7,500                   |  |   | (164         | )    |  | 3.60         | (1)  |  | 05/06
|                               |  |                    |  |                           |  |              |       
|Third Quarter                  |  |                    |  |                           |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Apartments                     |  |                    |  |                           |  |              |        |                |   |                         |  |   |              |      |  |              |      |  |      
|Villager                       |  | Fort Walton, FL    |  | 33 Units                  |  |              | 804    |                |   | 507                     |  |   | 129          |      |  | 5.15         |      |  | 06/34
|Waters Edge III                |  | Gulfport, MS       |  | 238 Units                 |  |              | 3,250  |                |   |                        |  |   |             | (5)  |  | 12.50        |      |  | 12/04

---

|(1) | Variable interest rate.
|--- | -----------------------

|(2) | Construction loan for apartment construction.
|--- | ---------------------------------------------

|(3) | Cash of $11.0 million was received by an affiliate, increasing ARIs affiliate receivable.
|--- | ------------------------------------------------------------------------------------------

|(4) | Cash of $7.4 million was received by an affiliate, increasing ARIs affiliate receivable.
|--- | -----------------------------------------------------------------------------------------

|(5) | Cash of $3.2 million was received by an affiliate, increasing ARIs affiliate receivable.
|--- | -----------------------------------------------------------------------------------------



ARI has margin arrangements with various financial institutions and brokerage firms which provide for borrowing up to 50% of the market
value of ARIs marketable equity securities. The borrowings under such margin arrangements are secured by equity securities of IORI and TCI and ARIs trading portfolio and bear interest rates ranging from 5.5% to 24.0%. Margin borrowing
totaled $21.5 million at June 30, 2004.



Management expects that it will be
necessary for ARI to sell or refinance $60.2 million, $10.5 million and $31.6 million of its land holdings during each of the next three years to satisfy the debt on such land as it matures. If ARI is unable to sell at least the minimum amount of
land to satisfy the debt obligations on such land as it matures, or, if it is not able to extend such debt, ARI intends to sell other of its assets, specifically income producing properties, to pay the debt.



26



---

Management reviews the carrying values of ARIs properties and mortgage notes receivable at least annually and
whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying
amount of the property. For notes receivable, impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. If impairment is found to exist, a provision for loss is recorded by a charge
against earnings to the extent that the investment in the note exceeds managements estimate of the fair value of the collateral property securing each note. The mortgage note receivable review includes an evaluation of the collateral property
securing such note. The property review generally includes: (1) selective property inspections; (2) a review of the propertys current rents compared to market rents; (3) a review of the propertys expenses; (4) a review of maintenance
requirements; (5) a review of the propertys cash flow; (6) discussions with the manager of the property; and (7) a review of properties in the surrounding area.



Related Party Transactions



In January 2004, ARI issued 200,000 shares of Series A 10% Cumulative Convertible Preferred Stock to Prime, ARIs advisor. In February
2004, 50,000 additional shares were issued to Prime. ARIs affiliate receivable was increased by $2.5 million.



In February 2004, ARI obtained an unsecured loan of $5.0 million. The proceeds of $5.0 million were received by an affiliate of ARI, increasing ARIs affiliate
receivable.



In February 2004, ARI obtained financing of $7.5 million on the
Katy land tract. The funds, along with additional cash of $6.3 million, were sent to an affiliate. Subsequently, the affiliate paid off the existing loan balance on an ARI property.



In March 2004, ARI obtained financing of $11.5 million on a hotel property. The proceeds of $11.0 million were received by an affiliate,
increasing ARIs affiliate receivable.



In March 2004, a related party
purchased the loans on ARIs three Chicago hotels for $10.8 million. This amount increased the affiliate payable balance by $10.8 million.



In May 2004, ARI purchased the Treehouse Apartments from an affiliate, with a net purchase price of $7.5 million after assumption of debt and a note receivable, less cash
received of $498,000. The note receivable was from the sale of the Cliffs of El Dorado Apartments to a related party in 2003. At that time, the sale of the Cliffs of El Dorado was not recorded as a sale for accounting purposes. ARI recorded the sale
of the Cliffs of El Dorado in May 2004, due to payment received for the Cliffs of El Dorado note receivable.



In July 2004, ARI obtained a loan of $3.2 million secured by a contract for sale of the Waters Edge III Apartments. The proceeds of $3.2 million were received by an affiliate, increasing ARIs affiliate
receivable.



In April 2002, ARI and TCI sold 21 apartment properties to
partnerships controlled by Metra Capital, LLC (Metra). Innovo Group, Inc. (Innovo) is a limited partner in the partnerships that purchased the properties. Joseph Mizrachi, then a Director of ARI, controlled approximately
11.67% of the outstanding common stock of Innovo. Management determined to treat the sales as financing transactions, and ARI and TCI continue to report the assets and the new debt incurred by Metra on their financial statements. The partnership
agreements for each of these partnerships state that the Metra Partners, as defined, receive cash flow distributions at least quarterly in an amount sufficient to provide them with a 15% cumulative compounded annual rate of return on their invested
capital, as well as a cumulative compounded annual amount of 0.50% of the average outstanding balance of the mortgage indebtedness secured by any of these properties. These distributions to the Metra Partners have priority over distributions to any
other partners. At June 30, 2004, 16 of the properties remained on ARIs balance sheet, and ARIs other liabilities included $1.1 million owed to the Metra Partners related to cash received by ARI upon the sale of these apartments in April
2002.



Commitments and Contingencies



ARI has contractual obligations and commitments primarily with regards to
payment of mortgages.



Results of
Operations



For the six months ended June 30, 2004, ARI reported a net
loss of $8.1 million, compared to net income of $1.4 million for the six months ended June 30, 2003. The primary factors contributing to ARIs net income are discussed in the following paragraphs.



ARI began consolidating TCIs operations effective March 31, 2003. The consolidation is
the principal factor for the increase during the six months ended June 30, 2004 in the following areas: rents, property operations expense, interest expense, depreciation and amortization, general and administrative expense, advisory fees, and gain
on sale of real estate. For these items, results for the six months ended June 30, 2004 are also presented without the effect of the consolidation of TCIs operations for the first three months of 2004.



Rents (dollars in thousands)



|           |  |                             |         |                           |   |          |  |                |         |  |   |         |  |   |        
|---------- |  | --------------------------- | ------- | ------------------------- | - | -------- |  | -------------- | ------- |  | - | ------- |  | - | -------
|           |  | Three Months Ended June 30, |         | Six Months Ended June 30,
|           |  | 2004                        |         | 2003                      |   | 2004     |  | 2003          
|           |  |                             |         |                           |   | With TCI |  | Without 1Q TCI |         | 
|Commercial |  | $                           | 14,958  |                           | $ | 15,818   |  | $              | 33,927  |  | $ | 21,504  |  | $ | 22,342 
|Apartments |  |                             | 21,534  |                           |   | 17,658   |  |                | 43,279  |  |   | 27,626  |  |   | 23,478 
|Hotels     |  |                             | 10,857  |                           |   | 9,293    |  |                | 18,840  |  |   | 17,361  |  |   | 15,588 
|Land       |  |                             | 157     |                           |   | 166      |  |                | 313     |  |   | 171     |  |   | 179    
|Other      |  |                             | 8       |                           |   | 1,587    |  |                | 370     |  |   | 370     |  |   | 1,620  
|           |  |                             |         |                           |   |          |  |                |         |  |   |         |  |   |        
|           |  |                             | $47,514 |                           |   | $44,522  |  |                | $96,729 |  |   | $67,032 |  |   | $63,207
|           |  |                             |         |                           |   |          |  |                |         |  |   |         |  |   |        



27



---

The increase in apartment rents was primarily attributable to completed construction. The increase in hotel rents was
primarily attributable to increased occupancy. The decrease in other rents was primarily attributable to the sale of ARIs interest in Realty Advisors Korea, Ltd. as of June 30, 2003. Rents are expected to increase in 2004, as a result of
completed apartment construction.



Property Operations Expenses (dollars in
thousands)



|           |  |                             |        |                           |   |          |  |                |        |  |   |        |  |   |       
|---------- |  | --------------------------- | ------ | ------------------------- | - | -------- |  | -------------- | ------ |  | - | ------ |  | - | ------
|           |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|           |  | 2004                        |        | 2003                      |   | 2004     |  | 2003          
|           |  |                             |        |                           |   | With TCI |  | Without 1Q TCI |        | 
|Commercial |  | $                           | 12,044 |                           | $ | 9,470    |  | $              | 23,026 |  | $ | 15,940 |  | $ | 13,139
|Apartments |  |                             | 14,182 |                           |   | 12,832   |  |                | 28,049 |  |   | 18,730 |  |   | 16,447
|Hotels     |  |                             | 7,386  |                           |   | 6,409    |  |                | 14,734 |  |   | 13,326 |  |   | 11,285
|Land       |  |                             | 1,728  |                           |   | 1,600    |  |                | 2,682  |  |   | 2,305  |  |   | 3,170 
|Other      |  |                             | 563    |                           |   | 27       |  |                | 344    |  |   | 344    |  |   | 33    
|           |  |                             |        |                           |   |          |  |                |        |  |   |        |  |   |       
|           |  | $                           | 35,903 |                           | $ | 30,338   |  | $              | 68,835 |  | $ | 50,645 |  | $ | 44,074
|           |  |                             |        |                           |   |          |  |                |        |  |   |        |  |   |       



The increase in commercial operations
expense for the three and six months ended June 30, 2004, without the effect of the consolidation of TCIs operations was primarily attributable to increased management fees. The increase in apartment operations expense, without the effect of
the consolidation of TCIs operations, was primarily attributable to property replacements and completed apartment construction. The increase in hotel operations expense was primarily attributable to increased personnel costs and an increase in
repairs and replacement expenses. The decrease in land operations expense for the six months ended June 30, 2004, without the effect of the consolidation of TCIs operations, was primarily attributable to lower property taxes due to land sales.
Property operations expenses are expected to increase in 2004, as a result of completed apartment construction.



Pizza parlor sales and cost of sales increased to $8.8 million and $6.9 million, respectively, in the three months ended June 30, 2004 and $16.9 million and $13.1 million
in the six months ended June 30, 2004 from $8.1 million and $6.4 million, respectively, in the three months ended June 30, 2003 and $15.9 million and $12.8 million in the six months ended June 30, 2003. The increase was primarily attributable to a
9.4% increase in same store sales.



Interest income from notes receivable
decreased to $1.6 million and $2.7 million in the three and six months ended June 30, 2004 from $3.4 million and $5.6 million in 2003, due to the collection of $34.3 million of notes receivable in 2003.



Equity in income (loss) of investees decreased to $(55,000) in the three months and improved
to $(201,000) in the six months ended June 30, 2004, from $264,000 and $(4.1) million in 2003. Prior to March 31, 2003, ARIs equity in income (loss) of investees included equity in TCIs operations.



Gain on foreign currency transaction was $1.2 million in the three and six months ended June
30, 2004, due to a strengthening of the Polish zloty against the euro for Hotel Akademia during 2004. Hotel Akademias long-term debt is denominated in euros, and the impact of the translation of euros into zlotys prior to translation into US
dollars is recorded as a gain or loss in the Consolidated Statements of Operations.



Interest Expense (dollars in thousands)



|              |  |                             |        |                           |   |          |  |                |        |  |   |        |  |   |       
|------------- |  | --------------------------- | ------ | ------------------------- | - | -------- |  | -------------- | ------ |  | - | ------ |  | - | ------
|              |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|              |  | 2004                        |        | 2003                      |   | 2004     |  | 2003          
|              |  |                             |        |                           |   | With TCI |  | Without 1Q TCI |        | 
|Commercial    |  | $                           | 5,205  |                           | $ | 6,170    |  | $              | 10,355 |  | $ | 7,425  |  | $ | 7,756 
|Apartments    |  |                             | 6,968  |                           |   | 4,627    |  |                | 14,625 |  |   | 8,818  |  |   | 6,471 
|Hotels        |  |                             | 1,175  |                           |   | 885      |  |                | 2,761  |  |   | 2,207  |  |   | 1,867 
|Land          |  |                             | 2,687  |                           |   | 3,677    |  |                | 6,148  |  |   | 5,060  |  |   | 7,815 
|Pizza parlors |  |                             | 375    |                           |   | 196      |  |                | 761    |  |   | 761    |  |   | 402   
|Other         |  |                             | 1,212  |                           |   | 3,244    |  |                | 2,578  |  |   | 2,578  |  |   | 3,787 
|              |  |                             |        |                           |   |          |  |                |        |  |   |        |  |   |       
|              |  | $                           | 17,622 |                           | $ | 18,799   |  | $              | 37,228 |  | $ | 26,849 |  | $ | 28,098
|              |  |                             |        |                           |   |          |  |                |        |  |   |        |  |   |       



The increase in apartment interest
expense was primarily attributable to completed apartment construction. The decrease in land interest expense was primarily attributable to reduced principal balances payable and reduced interest rates on land mortgages.



28



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Depreciation and Amortization (dollars in thousands)



|              |  |                             |       |             |                           |       |          |  |                |        |             |   |       |  |   |       |  
|------------- |  | --------------------------- | ----- | ----------- | ------------------------- | ----- | -------- |  | -------------- | ------ | ----------- | - | ----- |  | - | ----- | -
|              |  | Three Months Ended June 30, |       |             | Six Months Ended June 30, |      
|              |  | 2004                        |       | 2003        |                           |       | 2004     |  | 2003           |       
|              |  |                             |       | As Restated |                           |       | With TCI |  | Without 1Q TCI |        | As Restated |  
|Commercial    |  | $                           | 3,648 |             | $                         | 3,801 |          |  | $              | 7,467  |             | $ | 4,647 |  | $ | 4,435 |  
|Apartments    |  |                             | 2,205 |             |                           | 1,437 |          |  |                | 4,449  |             |   | 2,647 |  |   | 1,833 |  
|Hotels        |  |                             | 1,052 |             |                           | 787   |          |  |                | 1,980  |             |   | 1,656 |  |   | 1,268 |  
|Pizza parlors |  |                             | 337   |             |                           | 248   |          |  |                | 664    |             |   | 664   |  |   | 694   |  
|Other         |  |                             | 12    |             |                           | (11   | )        |  |                | 25     |             |   | 14    |  |   | (7    | )
|              |  |                             |       |             |                           |       |          |  |                |        |             |   |       |  |   |       |  
|              |  | $                           | 7,254 |             | $                         | 6,262 |          |  | $              | 14,585 |             | $ | 9,628 |  | $ | 8,223 |  
|              |  |                             |       |             |                           |       |          |  |                |        |             |   |       |  |   |       |  



The increase in apartment depreciation
and amortization was primarily due to completed construction.



Discount on sale
of notes receivable decreased to $398,000 in the six months ended June 30, 2004, from $1.6 million in 2003. This represents the discount from the face amount given by ARI to purchasers of notes receivable.



General and administrative expenses decreased to $4.3 million and $8.9 million in the three
and six months ended June 30, 2004, from $7.4 million and $10.7 million in 2003. Without the effect of the consolidation of TCIs operations, general and administrative expenses decreased to $5.9 million in the six months ended June 30, 2004.
The decrease was primarily attributable to reduced legal fees and reduced expense charges from ARIs advisors.



Advisory fees decreased to $2.4 million and increased to $5.2 million in the three and six months ended June 30, 2004, from $2.7 million and $4.7 million in 2003. Without
the effect of the consolidation of TCIs operations, advisory fees decreased to $3.6 million in the six months ended June 30, 2004. The decrease was primarily attributable to a reduction in ARIs net assets, upon which the fee is based.
Also, in 2003, an additional month of fees was recorded.



Net income fee to
affiliate was $(79,000) in the three months ended June 30, 2004, compared to $(452,000) in the three months ended June 30, 2003. The net income fee payable to ARIs advisor is 10% of the year-to-date net income, in excess of a 10% return on
shareholders equity.



Incentive fee to affiliate was $(261,000) in the
three months ended June 30, 2003. The incentive fee is only due if ARI is also subject to the net income fee. This fee represents 10% of the excess of net capital gains over net capital losses from sales of operating properties. The amount of this
fee for the remainder of 2004 will be dependent on the number of operating properties sold, the net capital gains realized and whether the net income fee is due.



Writedown of assets held for sale was $2.4 million in the three and six months ended June 30,2003. The carrying value of an office building
in Encino, California, sold in the third quarter of 2003, was reduced to its net realizable value.



Minority interest decreased to $445,000 and increased to $1.6 million in the three and six months ended June 30, 2004, from $720,000 and $1.3 million in 2003. The changes are primarily attributable to the
consolidation of TCIs operations by ARI, as the 19.99% minority share of TCIs net income (loss) is recorded as minority interest expense by ARI.



Net income from discontinued operations decreased to $7.8 million and increased to $21.8 million in the three and six months ended June 30, 2004 from $11.0 million and
$13.3 million in 2003. The net income relates to 15 properties that ARI sold during 2004 and 32 properties that ARI sold during 2003. The following table summarizes revenue and expense information for the properties sold and held-for-sale.



29



---

|                                                          |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------- |  | ---------------------------------- | ----- | ---- | -------------------------------- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                          |  | For the Three monthsEnded June 30, |       |      | For the Six monthsEnded June 30, |       
|                                                          |  | 2004                               |       | 2003 |                                  |        | 2004 |  |   | 2003   |  
|Revenue:                                                  |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|Rental                                                    |  | $                                  | 1,744 |      | $                                | 9,934  |      |  | $ | 3,677  |   |  | $ | 16,354 |  
|Property operations                                       |  |                                    | 869   |      |                                  | 6,103  |      |  |   | 2,163  |   |  |   | 10,420 |  
|                                                          |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|                                                          |  |                                    | 875   |      |                                  | 3,831  |      |  |   | 1,514  |   |  |   | 5,934  |  
|Expenses:                                                 |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|Interest                                                  |  |                                    | 422   |      |                                  | 4,315  |      |  |   | 1,482  |   |  |   | 6,497  |  
|Depreciation                                              |  |                                    | 262   |      |                                  | 1,359  |      |  |   | 623    |   |  |   | 1,964  |  
|                                                          |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|                                                          |  |                                    | 684   |      |                                  | 5,674  |      |  |   | 2,105  |   |  |   | 8,461  |  
|                                                          |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|Net income (loss) from discontinued operations            |  |                                    | 191   |      |                                  | (1,843 | )    |  |   | (591   | ) |  |   | (2,527 | )
|Gain on sale of real estate                               |  |                                    | 6,655 |      |                                  | 12,806 |      |  |   | 20,589 |   |  |   | 15,819 |  
|Equity in gain on sale of real estate by equity investees |  |                                    | 113   |      |                                  |       |      |  |   | 896    |   |  |   |       |  
|                                                          |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  
|Net income from discontinued operations                   |  | $                                  | 6,959 |      | $                                | 10,963 |      |  | $ | 20,894 |   |  | $ | 13,292 |  
|                                                          |  |                                    |       |      |                                  |        |      |  |   |        |   |  |   |        |  



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. ARI had a taxable loss for
federal income tax purposes for the first six months of 2004 and had a loss for federal income tax purposes after the use of net operating loss carryforwards in the first six months of 2003; therefore, it recorded no provision for income taxes.



At June 30, 2004, ARI had a net deferred tax asset of $109.8 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 asset, a 100% valuation allowance has been established.



TCI had a loss for federal income tax purposes after the use of net operating loss
carryforwards in the first six months of 2004 and a loss for federal income tax purposes in the first six months of 2003; therefore, it recorded no provision for income taxes.



At June 30, 2004, TCI had a net deferred tax asset of $21.2 million due to tax deductions available to it in future years. However, as
management cannot determine that it is more likely than not that TCI will realize the benefit of the deferred tax assets, a 100% valuation allowance has been established.



Environmental Matters



Under various federal, state and local environmental laws, ordinances and regulations, ARI 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 ARIs business, assets or results of operations.



Inflation



The effects of inflation on
ARIs operations are not quantifiable. Revenues from apartment operations fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties and
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 borrowings as well as the cost of variable interest rate debt will be affected.



30



---

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS



At June 30, 2004, ARIs exposure to a change in interest rates on its debt is as
follows:



|                                          |  |         |         |                              |       |   |                                   |   |      
|----------------------------------------- |  | ------- | ------- | ---------------------------- | ----- | - | --------------------------------- | - | -----
|                                          |  | Balance |         | WeightedAverage InterestRate |       |   | Effect of 1%Increase InBase Rates
|Notes payable:                            |  |         |         |                              |       |   |                                   |   |      
|Variable rate                             |  | $       | 186,103 |                              | 5.840 | % |                                   | $ | 1,861
|                                          |  |         |         |                              |       |   |                                   |   |      
|Total decrease in ARIs annual net income |  |         |         |                              |       |   |                                   | $ | 1,861
|                                          |  |         |         |                              |       |   |                                   |   |      
|Per share                                 |  |         |         |                              |       |   |                                   | $ | .18  
|                                          |  |         |         |                              |       |   |                                   |   |      



ITEM 4. CONTROLS AND
PROCEDURES



|(a) | As of the end of the period covered by this report, ARI carried out an evaluation, under the supervision and with the participation of ARIs management, including ARIs
Acting Principal Executive Officer and principal accounting officer, of the effectiveness of the design and operation of ARIs disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 and 15d-15. Based upon the evaluation,
ARIs Acting Principal Executive Officer and principal accounting officer concluded that ARIs disclosure controls and procedures are effective in timely alerting him to material information relating to ARI (including its consolidated
subsidiaries) required to be included in ARIs periodic SEC filings.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | There have been no significant changes in ARIs internal controls or in other factors that could significantly affect ARIs internal controls subsequent to the date ARI
carried out this evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





WARNING CONCERNING FORWARD LOOKING STATEMENTS



This quarterly report on Form 10-Q and ARIs 2003 Form 10-K, referred to herein,
contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and federal securities laws. These statements concern the intent, belief or expectations of ARIs officers with respect to ARIs
ability to lease its properties, tenants ability to pay rents, purchase of additional properties, ability to pay interest and debt principal and make distributions, policies and plans regarding investments and financings, and other matters.
Also, words such as believe, expect, anticipate, intend, plan, estimate, or similar expressions identify forward looking statements. Actual results may differ materially from
those contained in or implied by the forward looking statements as a result of various factors. Such factors include, without limitation, the impact of changes in the economy and the capital markets on ARI and its tenants, competition within the
real estate industry or those industries in which its tenants operate, and changes in federal, state and local legislation. For example: Some of ARIs tenants may not renew expiring leases and ARI may be unable to locate new tenants to maintain
the historical occupancy rates of the properties; rents which ARI can achieve at its properties may decline; tenants may experience losses and become unable to pay rents; and ARI may be unable to identify or to negotiate acceptable purchase prices
for new properties. These results could occur due to many different circumstances, some of which, such as changes in ARIs tenants financial conditions or needs for leased space, or changes in the capital markets or the economy,
generally, are beyond ARIs control. Forward looking statements are only expressions of ARIs present expectations and intentions. Forward looking statements are not guaranteed to occur, and they may not occur. You should not place undue
reliance upon forward looking statements.



PART II. OTHER
INFORMATION



ITEM 1. LEGAL PROCEEDINGS



On August 10, 2004, American Realty Investors, Inc., Transcontinental Realty Investors, Inc.
and Income Opportunity Realty Investors, Inc. instituted an action in Texas State District Court as Cause No. 2004-60231-393 styled American Realty Investors, Inc., Transcontinental Realty Investors, Inc. and Income Opportunity Realty Investors,
Inc., Plaintiffs v. Innovo Realty, Inc. and Innovo Group, Inc., Involuntary Plaintiffs v. Innovo Realty, Inc., Metra Capital LLC, Innovo Group, Inc., Joseph Mizrachi, Simon Mizrachi, Hubert Guez, Third Millennium Partners LLC, Third Millennium
Partners, Inc., Third Millennium Group, LLC and Sunridge Management Group, Inc. Defendants. Plaintiffs complaint alleges that Joseph Mizrachi, a former director of ARI and others, offered a plan to the Plaintiffs to create one or more
joint venture arrangements with one or more of the Plaintiffs to pursue alternative forms of financing or refinancing portions of Plaintiffs real estate portfolios, which entailed the creation of 22 separate limited partnerships to acquire 28
separate apartment complexes in three states (Texas, Florida and Louisiana), the general partners of which are affiliates of, or controlled by, Joseph Mizrachi. Plaintiffs complaint alleges that the overall transaction required the
establishment of a sinking fund by the Defendants and the 22 limited partnerships as a trust for the benefit of certain preferred shareholders of Innovo Group, Inc. and the payment of certain proceeds to the Plaintiffs. Plaintiffs assert that
payments have not been made pursuant to the agreement of the parties. Plaintiffs allege that Defendants conduct constituted a common business enterprise, alleges breach of contract and derivative claims on behalf of Innovo Group, Inc. against
Joseph Mizrachi and others and requests declaratory relief involving the Plaintiffs rights in the partnerships, an accounting of proceeds, and the creation of a constructive trust. Plaintiffs complaint also alleges that Joseph Mizrachi
engaged in fraud, negligent misrepresentation and/or breach of fiduciary duty and seeks unspecified damages, attorneys fees, a constructive trust be established, and other relief.



ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES



|           |  |                                      |  |                                  |      |                                                                                         |        |                                                                                       |        
|---------- |  | ------------------------------------ |  | -------------------------------- | ---- | --------------------------------------------------------------------------------------- | ------ | ------------------------------------------------------------------------------------- | -------
|Period     |  | (a) Total Number of Shares Purchased |  | (b) Average Price Paid per Share |      | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) |        | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
|April 2004 |  | 21,600                               |  | $                                | 9.66 |                                                                                         | 21,600 |                                                                                       | 599,093
|May 2004   |  | 11,300                               |  |                                  | 7.25 |                                                                                         | 11,300 |                                                                                       | 587,793
|June 2004  |  |                                     |  |                                  |     |                                                                                         |       |                                                                                       | 587,793
|           |  |                                      |  |                                  |      |                                                                                         |        |                                                                                       |        
|Total      |  | 32,900                               |  | $                                | 8.83 |                                                                                         | 32,900 |                                                                                       |        
|           |  |                                      |  |                                  |      |                                                                                         |        |                                                                                       |        

---



|(1) | The repurchase program was announced in September, 2000. A total of 1,000,000 shares may be repurchased through the program. The program has no expiration date.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



31



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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) | Exhibits:
|--- | ---------



|              |  |                                                                                                                                                                                         
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                             
|31.1          |  | Certification Required by Rules 13a-14(a) and 15d-14(a) Under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|              | 
|31.2          |  | Certification Required by Rules 13a-14(a) and 15d-14(a) Under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|              | 
|32.1          |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                 



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



A Current Report on Form 8-K, dated May 31, 2004, was filed with respect to Item 4. Changes in Registrants Certifying Accountant, Item
5. Other Events and Regulation FD Disclosure and Item 7. Financial Statements and Exhibits which reports a change in ARIs certifying accountant, effective June 1, 2004, and the resignation of Ronald E. Kimbrough,
ARIs acting principal executive officer, Executive Vice President and Chief Financial Officer.



32



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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 16, 2004 |  | By:                             |  | /s/ J. C. Lowenberg, III                                                                                                 
|                      |  |                                 |  | J. C. Lowenberg, III                                                                                                     
|                      |  |                                 |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Acting Principal Executive Officer)
|                      |  |                                
|                      |  | By:                             |  | /s/ Scott T. Lewis                                                                                                       
|                      |  |                                 |  | Scott T. Lewis                                                                                                           
|                      |  |                                 |  | Vice President and Chief Accounting Officer                                                                              



33



---

AMERICAN REALTY INVESTORS, INC.



EXHIBITS TO



QUARTERLY REPORT ON FORM 10-Q



For the Quarter ended June 30, 2004



|              |  |                                                                                                                                                                          |  |           
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------
|ExhibitNumber |  | Description                                                                                                                                                              |  | PageNumber
|31.1          |  | Certification Required by Rules 13a-14(a) and 15d-14(a) Under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |  |           
|              |  |                                                                                                                                                                         
|31.2          |  | Certification Required by Rules 13a-14(a) and 15d-14(a) Under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |  |           
|              |  |                                                                                                                                                                         
|32.1          |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                  |  |           



34