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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 MARCH 31, 2007

Or



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

FOR THE TRANSITION PERIOD FROM  TO

Commission File Number 001-15663



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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)



(Former name, former address and former fiscal year, if changed since last
report)



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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 ̈.

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 is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of
accelerated filer in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈.    No  x.

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE

PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.    Yes ̈.    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 |  | 10,143,883                     
|(Class)                      |  | (Outstanding at April 23, 2007)



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##### Table of Contents

AMERICAN REALTY INVESTORS, INC.

FORM 10-Q

TABLE OF CONTENTS



|                              |  |                                                                                                      |  |   
|----------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --
|                              |  | PAGE                                                                                                
|PART I: FINANCIAL INFORMATION |  |                                                                                                     
|                              |  |                                                                                                     
|Item 1.                       |  | Financial Statements                                                                                 |  |   
|                              |  |                                                                                                     
|                              |  | Consolidated Balance Sheets at March 31, 2007 (unaudited) and December 31, 2006                      |  | 3 
|                              |  |                                                                                                     
|                              |  | Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 (unaudited) |  | 4 
|                              |  |                                                                                                     
|                              |  | Consolidated Statement of Shareholders Equity for the three months ended March 31, 2007 (unaudited) |  | 6 
|                              |  |                                                                                                     
|                              |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (unaudited) |  | 7 
|                              |  |                                                                                                     
|                              |  | Notes to Consolidated Financial Statements                                                           |  | 9 
|                              |  |                                                                                                     
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 16
|                              |  |                                                                                                     
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                           |  | 23
|                              |  |                                                                                                     
|Item 4.                       |  | Controls and Procedures                                                                              |  | 23
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                     
|                              |  |                                                                                                     
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                          |  | 24
|                              |  |                                                                                                     
|Item 6.                       |  | Exhibits                                                                                             |  | 25
|                              | 
|SIGNATURE PAGES               |  | 26                                                                                                  



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AMERICAN REALTY INVESTORS, INC.

PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                      |  |                        |           |   |                   |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                      |  | March 31, 2007         |           |   | December 31, 2006 |  
|                                                                                                                                                      |  | (dollars in thousands) |          
|                                                                                                                                                      |  | (unaudited)            |           |   |                   |  
|Assets                                                                                                                                                |  |                        |           |   |                   |   |           |  
|Real estate held for investment                                                                                                                       |  | $                      | 1,478,065 |   |                   | $ | 1,249,833 |  
|Lessaccumulated depreciation                                                                                                                         |  |                        | (184,448  | ) |                   |   | (178,029  | )
|                                                                                                                                                      |  |                        |           |   |                   |   |           |  
|                                                                                                                                                      |  |                        | 1,293,617 |   |                   |   | 1,071,804 |  
|Real estate held for sale, net of depreciation                                                                                                        |  |                        | 34,471    |   |                   |   | 134,593   |  
|Real estate subject to sales contract                                                                                                                 |  |                        | 65,600    |   |                   |   | 66,027    |  
|Notes and interest receivable                                                                                                                         |  |                        |           |   |                   |   |           |  
|Performing ($28,976 in 2007 and $25,541 in 2006 from affiliates)                                                                                      |  |                        | 59,162    |   |                   |   | 50,668    |  
|Non-performing                                                                                                                                        |  |                        |          |   |                   |   | 2,963     |  
|                                                                                                                                                      |  |                        |           |   |                   |   |           |  
|                                                                                                                                                      |  |                        | 59,162    |   |                   |   | 53,631    |  
|Lessallowance for estimated losses                                                                                                                   |  |                        | (1,000    | ) |                   |   | (1,000    | )
|                                                                                                                                                      |  |                        |           |   |                   |   |           |  
|                                                                                                                                                      |  |                        | 58,162    |   |                   |   | 52,631    |  
|Marketable securities, at market value                                                                                                                |  |                        | 11,226    |   |                   |   | 9,038     |  
|Cash and cash equivalents                                                                                                                             |  |                        | 4,954     |   |                   |   | 7,035     |  
|Restricted cash                                                                                                                                       |  |                        | 4,778     |   |                   |   | 6,000     |  
|Investments in unconsolidated equity investees                                                                                                        |  |                        | 25,467    |   |                   |   | 25,056    |  
|Other assets ($63,519 in 2007 and $52,793 in 2006 from affiliate)                                                                                     |  |                        | 132,002   |   |                   |   | 121,487   |  
|                                                                                                                                                      |  |                        |           |   |                   |   |           |  
|                                                                                                                                                      |  | $                      | 1,630,277 |   |                   | $ | 1,493,671 |  
|                                                                                                                                                      |  |                        |           |   |                   |   |           |  
|Liabilities and Stockholders Equity                                                                                                                  |  |                        |           |   |                   |   |           |  
|Liabilities:                                                                                                                                          |  |                        |           |   |                   |   |           |  
|Notes payable ($6,766 in 2007 and $7,499 in 2006 to affiliates)                                                                                       |  | $                      | 1,173,040 |   |                   | $ | 1,022,370 |  
|Liabilities related to assets held or sale                                                                                                            |  |                        | 42,783    |   |                   |   | 43,579    |  
|Liabilities subject to sales contract                                                                                                                 |  |                        | 58,099    |   |                   |   | 58,816    |  
|Stock-secured notes payable                                                                                                                           |  |                        | 22,452    |   |                   |   | 22,452    |  
|Accounts payable and other liabilities ($10,752 in 2007 and $10,542 in 2006 to affiliates)                                                            |  |                        | 105,865   |   |                   |   | 107,771   |  
|                                                                                                                                                      |  |                        |           |   |                   |   |           |  
|                                                                                                                                                      |  |                        | 1,402,239 |   |                   |   | 1,254,988 |  
|Commitments and contingencies                                                                                                                         |  |                        |           |   |                   |   |           |  
|                                                                                                                                                      |  |                       
|Minority interest                                                                                                                                     |  |                        | 77,036    |   |                   |   | 78,194    |  
|Stockholders equity:                                                                                                                                 |  |                        |           |   |                   |   |           |  
|Preferred Stock, $2.00 par value, authorized 50,000,000 shares, issued and outstanding Series A
3,389,560 shares in 2007 and 3,391,000 shares in 2006 |  |                        | 4,979     |   |                   |   | 4,979     |  
|Common Stock, $.01 par value, authorized 100,000,000 shares; issued 11,592,272 shares in 2007 and 2006                                                |  |                        | 114       |   |                   |   | 114       |  
|Treasury stock, at cost, 1,446,872 and 1,443,272 shares in 2007 and 2006, respectively                                                                |  |                        | (15,177   | ) |                   |   | (15,146   | )
|Paid-in capital                                                                                                                                       |  |                        | 93,378    |   |                   |   | 93,378    |  
|Retained earnings                                                                                                                                     |  |                        | 66,300    |   |                   |   | 75,380    |  
|Accumulated other comprehensive income                                                                                                                |  |                        | 1,408     |   |                   |   | 1,784     |  
|                                                                                                                                                      |  |                        |           |   |                   |   |           |  
|                                                                                                                                                      |  |                        | 151,002   |   |                   |   | 160,489   |  
|                                                                                                                                                      |  |                        |           |   |                   |   |           |  
|                                                                                                                                                      |  | $                      | 1,630,277 |   |                   | $ | 1,493,671 |  
|                                                                                                                                                      |  |                        |           |   |                   |   |           |  

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



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AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                                                                       |  |                                     |         |   |      |   |         |  
|-------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                       |  | For the Three MonthsEnded March 31, |        
|                                                                                       |  | 2007                                |         |   | 2006 |  
|                                                                                       |  | (dollars in thousands)              |        
|Property revenue:                                                                      |  |                                     |         |   |      |   |         |  
|Rental and other property revenues ($350 in 2007 and $259 in 2006 from affiliates)     |  | $                                   | 51,107  |   |      | $ | 44,224  |  
|                                                                                       |  |                                    
|Expenses:                                                                              |  |                                     |         |   |      |   |         |  
|Property operating expenses ($2,120 in 2007 and $1,923 in 2006 to affiliates)          |  |                                     | 32,503  |   |      |   | 27,960  |  
|Depreciation and amortization                                                          |  |                                     | 6,798   |   |      |   | 6,211   |  
|General and administrative ($2,181 in 2007 and $567 in 2006 to affiliates)             |  |                                     | 4,740   |   |      |   | 3,316   |  
|Advisory fee to affiliate                                                              |  |                                     | 3,299   |   |      |   | 3,081   |  
|                                                                                       |  |                                     |         |   |      |   |         |  
|Total operating expenses                                                               |  |                                     | 47,340  |   |      |   | 40,568  |  
|                                                                                       |  |                                     |         |   |      |   |         |  
|Operating income                                                                       |  |                                     | 3,767   |   |      |   | 3,656   |  
|                                                                                       |  |                                    
|Other income (expense):                                                                |  |                                     |         |   |      |   |         |  
|Interest income from notes receivable ($714 in 2007 and $657 in 2006 from affiliates)  |  |                                     | 1,554   |   |      |   | 1,146   |  
|Gain on foreign currency transaction                                                   |  |                                     | 131     |   |      |   | 2       |  
|Other income ($1,168 in 2007 and $953 in 2006 from affiliate)                          |  |                                     | 2,544   |   |      |   | 1,608   |  
|Mortgage and loan interest ($59 in 2007 and $669 in 2006 to affiliates)                |  |                                     | (25,393 | ) |      |   | (18,034 | )
|Net income fee to affiliate                                                            |  |                                     | 704     |   |      |   |        |  
|Litigation settlement                                                                  |  |                                     | 24      |   |      |   |        |  
|                                                                                       |  |                                     |         |   |      |   |         |  
|Total other income (expense)                                                           |  |                                     | (20,436 | ) |      |   | (15,278 | )
|                                                                                       |  |                                     |         |   |      |   |         |  
|Loss before gain on land sales, minority interest, and equity in earnings of investees |  |                                     | (16,669 | ) |      |   | (11,622 | )
|Gain on land sales                                                                     |  |                                     | 4,898   |   |      |   | 2,740   |  
|Minority interest                                                                      |  |                                     | (224    | ) |      |   | 830     |  
|Equity in income of investees                                                          |  |                                     |        |   |      |   | 175     |  
|                                                                                       |  |                                     |         |   |      |   |         |  
|Loss from continuing operations                                                        |  |                                     | (11,995 | ) |      |   | (7,877  | )
|Income (loss) from discontinued operations                                             |  |                                     | 3,537   |   |      |   | (198    | )
|                                                                                       |  |                                     |         |   |      |   |         |  
|Net loss                                                                               |  |                                     | (8,458  | ) |      |   | (8,075  | )
|Preferred dividend requirement                                                         |  |                                     | (622    | ) |      |   | (614    | )
|                                                                                       |  |                                     |         |   |      |   |         |  
|Net loss applicable to common shares                                                   |  | $                                   | (9,080  | ) |      | $ | (8,689  | )
|                                                                                       |  |                                     |         |   |      |   |         |  

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



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AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS  Continued

(unaudited)



|                                                                     |  |                                     |            |   |      |   |            |  
|-------------------------------------------------------------------- |  | ----------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                     |  | For the Three Months EndedMarch 31, |           
|                                                                     |  | 2007                                |            |   | 2006 |  
|                                                                     |  | (dollars in thousands)              |           
|Basic earnings per share:                                            |  |                                     |            |   |      |   |            |  
|Loss from continuing operations                                      |  | $                                   | (1.24      | ) |      | $ | (0.84      | )
|Income from discontinued operations                                  |  |                                     | 0.35       |   |      |   | (0.02      | )
|                                                                     |  |                                     |            |   |      |   |            |  
|Net loss applicable to common shares                                 |  | $                                   | (0.89      | ) |      | $ | (0.86      | )
|                                                                     |  |                                     |            |   |      |   |            |  
|                                                                     |  |                                    
|Diluted earnings per share:                                          |  |                                     |            |   |      |   |            |  
|Income (loss) from continuing operations                             |  | $                                   | (1.24      | ) |      | $ | (0.84      | )
|Income from discontinued operations                                  |  |                                     | 0.35       |   |      |   | (0.02      | )
|                                                                     |  |                                     |            |   |      |   |            |  
|Net income (loss) applicable to common shares                        |  | $                                   | (0.89      | ) |      | $ | (0.86      | )
|                                                                     |  |                                     |            |   |      |   |            |  
|                                                                     |  |                                    
|Weighted average common shares used in computing earnings per share: |  |                                     |            |   |      |   |            |  
|Basic                                                                |  |                                     | 10,147,848 |   |      |   | 10,149,000 |  
|Diluted                                                              |  |                                     | 13,106,924 |   |      |   | 13,106,924 |  

Series A Cumulative Convertible Preferred Stock (3,389,560 and 3,391,000 shares of Preferred Stock convertible
into common stock estimated to be 4,025,606 and 4,027,316 common shares for the period ended March 31, 2007 and 2006, respectively) and options to purchase 70,750 shares of ARIs common stock were excluded from the computation of diluted
earnings per share for the three months ended March 31, 2007 and 2006, because the effect of their inclusion would be antidilutive.

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



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AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

For the Three Months Ended March 31, 2007

(dollars in thousands)

(unaudited)



|                                                         |  |                 |  |              |       |       |            |         |   |               |  |   |                |   |                  |   |        |                                            |   |        |                     |  |   |       |   |  |   |         |  
|-------------------------------------------------------- |  | --------------- |  | ------------ | ----- | ----- | ---------- | ------- | - | ------------- |  | - | -------------- | - | ---------------- | - | ------ | ------------------------------------------ | - | ------ | ------------------- |  | - | ----- | - |  | - | ------- | -
|                                                         |  |                 |  |              |       |       |            |         |   | TreasuryStock |  |   | Paid-inCapital |   | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome/(Loss) |   |        | StockholdersEquity | 
|                                                         |  | Preferred Stock |  | Common Stock |       |       |            |         |  
|                                                         |  | Stock           |  | Capital      |       | Stock |            | Capital |   |               |  |   |               
|Balance, January 1, 2007                                 |  | 3,389,560       |  | $            | 4,979 |       | 11,592,272 |         | $ | 114           |  | $ | (15,146        | ) |                  | $ | 93,378 |                                            | $ | 75,380 |                     |  | $ | 1,784 |   |  | $ | 160,489 |  
|                                                         |  |                 |  |              |       |       |            |         |  
|Comprehensive income                                     |  |                 |  |              |       |       |            |         |   |               |  |   |                |   |                  |   |        |                                            |   |        |                     |  |   |       |   |  |   |         |  
|Unrealized gain on foreign currency translation          |  |                |  |              |      |       |           |         |   |              |  |   |               |   |                  |   |       |                                            |   |       |                     |  |   | (879  | ) |  |   | (879    | )
|Unrealized gain on marketable Securities                 |  |                |  |              |      |       |           |         |   |              |  |   |               |   |                  |   |       |                                            |   |       |                     |  |   | 503   |   |  |   | 503     |  
|Net loss                                                 |  |                |  |              |      |       |           |         |   |              |  |   |               |   |                  |   |       |                                            |   | (8,458 | )                   |  |   |      |   |  |   | (8,458  | )
|Repurchase of common stock                               |  |                |  |              |      |       |           |         |   |              |  |   | (31            | ) |                  |   |       |                                            |   |       |                     |  |   |      |   |  |   | (31     | )
|Series A preferred stock cash dividend ($1.00 per share) |  |                |  |              |      |       |           |         |   |              |  |   |               |   |                  |   |       |                                            |   | (622   | )                   |  |   |      |   |  |   | (622    | )
|                                                         |  |                 |  |              |       |       |            |         |   |               |  |   |                |   |                  |   |        |                                            |   |        |                     |  |   |       |   |  |   |         |  
|Balance, March 31, 2007                                  |  | 3,389,560       |  | $            | 4,979 |       | 11,592,272 |         | $ | 114           |  | $ | (15,177        | ) |                  | $ | 93,378 |                                            | $ | 66,300 |                     |  | $ | 1,408 |   |  | $ | 151,002 |  
|                                                         |  |                 |  |              |       |       |            |         |   |               |  |   |                |   |                  |   |        |                                            |   |        |                     |  |   |       |   |  |   |         |  

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



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AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                              |  |                                     |          |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ----------------------------------- | -------- | - | ---- | - | ------- | -
|                                                                              |  | For the Three MonthsEnded March 31, |         
|                                                                              |  | 2007                                |          |   | 2006 |  
|                                                                              |  | (dollars in thousands)              |         
|Cash Flows From Operating Activities:                                         |  |                                     |          |   |      |   |         |  
|Income (loss) from continuing operations                                      |  | $                                   | (11,995  | ) |      | $ | (7,877  | )
|Adjustments to reconcile net income to net cash used in operating activities: |  |                                     |          |   |      |   |         |  
|Gain on sale of land and real estate                                          |  |                                     | (4,898   | ) |      |   | (2,740  | )
|Depreciation and amortization                                                 |  |                                     | 6,798    |   |      |   | 6,211   |  
|Amortization of deferred borrowing costs                                      |  |                                     | 1,332    |   |      |   | 1,209   |  
|Equity in (income) loss of investees                                          |  |                                     |         |   |      |   | (175    | )
|Gain on foreign currency transaction                                          |  |                                     | (131     | ) |      |   | (2      | )
|Changes in assets and liabilities:                                            |  |                                     |          |   |      |   |         |  
|Accrued interest receivable                                                   |  |                                     | (646     | ) |      |   | (427    | )
|Other assets                                                                  |  |                                     | (6,654   | ) |      |   | (6,587  | )
|Accrued interest payable                                                      |  |                                     | 3,116    |   |      |   | (70     | )
|Minority interest                                                             |  |                                     | (205     | ) |      |   | (36     | )
|Other liabilities                                                             |  |                                     | (5,108   | ) |      |   | 5,261   |  
|                                                                              |  |                                     |          |   |      |   |         |  
|Net cash used in operating activities                                         |  |                                     | (18,391  | ) |      |   | (5,233  | )
|                                                                              |  |                                     |          |   |      |   |         |  
|                                                                              |  |                                    
|Cash Flows From Investing Activities:                                         |  |                                     |          |   |      |   |         |  
|Collections on notes receivable                                               |  |                                     | 1,205    |   |      |   | 8,716   |  
|Funding of notes receivable                                                   |  |                                     | (1,447   | ) |      |   | (2,670  | )
|Acquisition of real estate                                                    |  |                                     | (109,911 | ) |      |   | (49,239 | )
|Investment in real estate entities                                            |  |                                     |         |   |      |   | (1,568  | )
|Real estate improvement                                                       |  |                                     | (9,298   | ) |      |   | (4,655  | )
|Real estate construction and development                                      |  |                                     | (38,349  | ) |      |   |        |  
|Proceeds from sale of land                                                    |  |                                     | 9,609    |   |      |   | 6,747   |  
|Distributions to equity investees                                             |  |                                     | (3,544   | ) |      |   |        |  
|Deposits on pending purchases and financings                                  |  |                                     | 4,728    |   |      |   | (660    | )
|                                                                              |  |                                     |          |   |      |   |         |  
|Net cash provided by (used in) investing activities                           |  |                                     | (147,007 | ) |      |   | (43,329 | )
|                                                                              |  |                                     |          |   |      |   |         |  
|                                                                              |  |                                    
|Cash Flows From Financing Activities:                                         |  |                                     |          |   |      |   |         |  
|Proceeds from notes payable                                                   |  |                                     | 176,579  |   |      |   | 55,842  |  
|Principal amortization of notes payable                                       |  |                                     | (3,018   | ) |      |   | (12,686 | )
|Payments on maturing notes payable                                            |  |                                     | (1,609   | ) |      |   |        |  
|Payments on notes payable related to asset sales and refinancing              |  |                                     | (33,837  | ) |      |   |        |  
|Proceeds from construction loans                                              |  |                                     | 36,756   |   |      |   |        |  
|Deferred borrowing costs                                                      |  |                                     | (6,352   | ) |      |   | (2,568  | )
|Net advances from (payments to) affiliates                                    |  |                                     | (9,554   | ) |      |   | 3,482   |  
|Restricted cash                                                               |  |                                     | 1,222    |   |      |   |        |  
|Purchase of treasury stock                                                    |  |                                     | (31      | ) |      |   |        |  
|Preferred dividends paid                                                      |  |                                     | (622     | ) |      |   | (483    | )
|                                                                              |  |                                     |          |   |      |   |         |  
|Net cash (used in) provided by financing activities                           |  |                                     | 159,534  |   |      |   | 43,587  |  
|                                                                              |  |                                     |          |   |      |   |         |  
|                                                                              |  |                                    
|Discontinued Operations:                                                      |  |                                     |          |   |      |   |         |  
|Cash used in operating activities                                             |  |                                     | (855     | ) |      |   | (198    | )
|Cash used in financing activities  pay off note                              |  |                                     | (18,116  | ) |      |   |        |  
|Cash provided by investing activities  sale of income producing properties   |  |                                     | 22,754   |   |      |   |        |  
|                                                                              |  |                                     |          |   |      |   |         |  
|Net cash provided (used) by discontinued operations                           |  |                                     | 3,783    |   |      |   | (198    | )
|                                                                              |  |                                     |          |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                          |  |                                     | (2,081   | ) |      |   | (5,173  | )
|Cash and cash equivalents, beginning of period                                |  |                                     | 7,035    |   |      |   | 13,904  |  
|                                                                              |  |                                     |          |   |      |   |         |  
|Cash and cash equivalents, end of period                                      |  | $                                   | 4,954    |   |      | $ | 8,731   |  
|                                                                              |  |                                     |          |   |      |   |         |  

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



7



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AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWSContinued

(unaudited)



|                                                                    |  |                                    |        |      |   |       
|------------------------------------------------------------------- |  | ---------------------------------- | ------ | ---- | - | ------
|                                                                    |  | For the ThreeMonths EndedMarch 31,
|                                                                    |  | 2007                               |        | 2006
|                                                                    |  | (dollars in thousands)            
|Supplemental Disclosures of Cash Flow Information:                  |  |                                    |        |      |   |       
|Cash paid for interest                                              |  | $                                  | 16,695 |      | $ | 18,301
|                                                                    |  |                                   
|Schedule of Non-Cash Investing and Financing Activities:            |  |                                    |        |      |   |       
|Increase in minority interest related to acquisition of real estate |  |                                    |       |      |   | 14,835

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



8



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AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying condensed
consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities
and Exchange Commission and accordingly, do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of management of
American Realty Investors, Inc. (ARI), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of ARIs consolidated financial position, consolidated results of operations and
consolidated cash flows have been included. Operating results for the three month period ended March 31, 2007, are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.

The consolidated balance sheet at December 31, 2006 was derived from the audited consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles in the United States of America for complete financial statements.

You
should read these consolidated financial statements in conjunction with the consolidated financial statements and footnotes thereto in our annual report on Form 10-K for the year ended December 31, 2006. Certain balances for 2006 have been
reclassified to conform to the 2007 presentation. Hereafter in this document, American Realty Investors, Inc. is referred to as ARI or The Company.

NOTE 2. REAL ESTATE

In 2007, ARI purchased the following properties:



|                |  |                    |  |                 |  |                |         |               |   |               |  |              |        |  |               |   |  |     
|--------------- |  | ------------------ |  | --------------- |  | -------------- | ------- | ------------- | - | ------------- |  | ------------ | ------ |  | ------------- | - |  | ----
|Property        |  | Location           |  | Acres/Sq. Ft.   |  | Purchase Price |         | Net Cash Paid |   | Debt Incurred |  | InterestRate |        |  | Maturity Date
|Land            |  |                    |  |                 |  |                |         |               |   |               |  |              |        |  |               |   |  |     
|Audubon Terrace |  | Natchez, MS        |  | 48.2 Acres      |  | $              | 285     |               | $ | 504           |  | $            |       |  |              | % |  |    
|Keller Springs  |  | Addison, TX        |  | 5.6 Acres       |  |                | 2,526   |               |   | 369           |  |              | 2,021  |  | Prime+1       |   |  | 2/08
|                |  |                    |  |                 |  |                |         |               |   |               |  |              |        |  |               |   |  |     
|                |  |                    |  |                 |  |                | 2,811   |               |   | 873           |  |              | 2,021  |  |               |   |  |     
|                |  |                    |  |                 |  |                |         |               |   |               |  |              |        |  |               |   |  |     
|Buildings       |  |                    |  |                 |  |                |         |               |   |               |  |              |        |  |               |   |  |     
|Parkwest I      |  | Farmers Branch, TX |  | 383,114 Sq. Ft. |  |                | 39,350  |               |   |              |  |              | 35,000 |  | 6.06          |   |  | 1/09
|Parkwest II     |  | Farmers Branch, TX |  | 707,559 Sq. Ft. |  |                | 67,750  |               |   | 3,375         |  |              | 62,000 |  | 9.32          |   |  | 1/13
|                |  |                    |  |                 |  |                |         |               |   |               |  |              |        |  |               |   |  |     
|                |  |                    |  |                 |  |                | 107,100 |               |   | 3,375         |  |              | 97,000 |  |               |   |  |     
|                |  |                    |  |                 |  |                |         |               |   |               |  |              |        |  |               |   |  |     
|                |  |                    |  |                 |  | $              | 109,911 |               | $ | 4,248         |  | $            | 99,021 |  |               |   |  |     
|                |  |                    |  |                 |  |                |         |               |   |               |  |              |        |  |               |   |  |     

In 2006, ARI purchased the following properties:



|                        |  |                    |  |               |  |               |        |     |               |   |               |  |              |        |  |               |      |  |      
|----------------------- |  | ------------------ |  | ------------- |  | ------------- | ------ | --- | ------------- | - | ------------- |  | ------------ | ------ |  | ------------- | ---- |  | -----
|Property                |  | Location           |  | Acres/Units   |  | PurchasePrice |        |     | Net Cash Paid |   | Debt Incurred |  | InterestRate |        |  | Maturity Date
|Land                    |  |                    |  |               |  |               |        |     |               |   |               |  |              |        |  |               |      |  |      
|Circle C Ranch          |  | Austin, TX         |  | 1,092.0 Acres |  | $             | 21,000 |     |               | $ |              |  | $            | 21,000 |  | 8.75          | %(1) |  | 3/08 
|Pioneer Crossing        |  | Austin, TX         |  | 38.5 Acres    |  |               | 614    | (2) |               |   | 614           |  |              | 1,515  |  | 8.75          | (1)  |  | 6/08 
|Southwood 1394          |  | Tallahassee, FL    |  | 14.5 Acres    |  |               | 1,150  |     |               |   | 477           |  |              | 748    |  | 8.50          | (1)  |  | 2/08 
|Valley Ranch 20         |  | Farmers Branch, TX |  | 20.0 Acres    |  |               | 4,673  |     |               |   | 1,892         |  |              | 3,038  |  | 8.50          | (1)  |  | 2/08 
|Woodmont Fairway Office |  | Dallas, TX         |  | 5.9 Acres     |  |               | 3,833  |     |               |   | 1,014         |  |              | 3,000  |  | 8.25          | (1)  |  | 1/07 
|Woodmont Merit Drive    |  | Dallas, TX         |  | 9.3 Acres     |  |               | 4,560  |     |               |   | 1,868         |  |              | 2,964  |  | 8.00          |      |  | 3/07 
|                        |  |                    |  |               |  |               |        |     |               |   |               |  |              |        |  |               |      |  |      
|                        |  |                    |  |               |  |               | 35,830 |     |               |   | 5,865         |  |              | 32,265 |  |               |      |  |      
|                        |  |                    |  |               |  |               |        |     |               |   |               |  |              |        |  |               |      |  |      
|Apartments              |  |                    |  |               |  |               |        |     |               |   |               |  |              |        |  |               |      |  |      
|Anderson Estates        |  | Oxford, MS         |  | 48 Units      |  |               | 1,144  | (3) |               |   | 148           |  |              | 996    |  | 9.50          | (1)  |  | 12/20
|David Jordan Phase II   |  | Greenwood, MS      |  | 32 Units      |  |               | 743    | (3) |               |   | 98            |  |              | 645    |  | 8.50          | (1)  |  | 4/19 
|David Jordan Phase III  |  | Greenwood, MS      |  | 40 Units      |  |               | 812    | (3) |               |   | 122           |  |              | 690    |  | 8.75          | (1)  |  | 7/22 
|Leflore Estates         |  | Greenwood, MS      |  | 104 Units     |  |               | 2,114  | (3) |               |   | 337           |  |              | 1,777  |  | 7.00          |      |  | 2/22 
|Monticello III Estates  |  | Monticello, AR     |  | 32 Units      |  |               | 644    | (3) |               |   | 96            |  |              | 548    |  | 7.00          |      |  | 1/22 



9



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AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|                   |  |               |  |          |  |   |        |     |  |   |       |  |   |        |  |      |     |  |     
|------------------ |  | ------------- |  | -------- |  | - | ------ | --- |  | - | ----- |  | - | ------ |  | ---- | --- |  | ----
|Riverwalk Phase I  |  | Greenwood, MS |  | 32 Units |  |   | 455    | (3) |  |   | 99    |  |   | 356    |  | 8.50 |     |  | 2/19
|Riverwalk Phase II |  | Greenwood, MS |  | 72 Units |  |   | 1,584  | (3) |  |   | 226   |  |   | 1,358  |  | 8.25 | (1) |  | 2/19
|                   |  |               |  |          |  |   |        |     |  |   |       |  |   |        |  |      |     |  |     
|                   |  |               |  |          |  |   | 7,496  |     |  |   | 1,126 |  |   | 6,370  |  |      |     |  |     
|                   |  |               |  |          |  |   |        |     |  |   |       |  |   |        |  |      |     |  |     
|                   |  |               |  |          |  | $ | 43,326 |     |  | $ | 6,991 |  | $ | 38,635 |  |      |     |  |     
|                   |  |               |  |          |  |   |        |     |  |   |       |  |   |        |  |      |     |  |     

---

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

|(2) | Purchased from ARI; purchase price is equal to ARIs cost.
|--- | ----------------------------------------------------------

|(3) | Net of minority interest and other liabilities assumed.
|--- | -------------------------------------------------------

In January 2007,
the Company acquired four office buildings containing approximately 1,072,000 rentable square feet and a 4.7 acre tract of undeveloped land located in Farmers Branch, TX, known as Park West. The properties were acquired for a total
purchase price of $107.1 million plus closing costs. The acquisition was financed with a two year, $62 million loan from a commercial bank and a six-year, $35 million loan from a life insurance company. The combined weighted average interest rate at
closing was approximately 8.15%. The loans are collateralized by the properties and guaranteed by ARI.

In 2007, ARI sold the following properties:



|                      |  |                 |  |             |  |             |  |                          |  |                 |  |             
|--------------------- |  | --------------- |  | ----------- |  | ----------- |  | ------------------------ |  | --------------- |  | ------------
|Property              |  | Location        |  | Acres/Units |  | Sales Price |  | Net Cash Received/(Paid) |  | Debt Discharged |  | Gain on Sale
|Land                  |  |                 |  |             |  |             |  |                          |  |                 |  |             
|Grapevine Yards       |  | Grapevine, TX   |  | 4.6 Acres   |  | $2,928      |  | $1,015                   |  | $1,758          |  | $1,040      
|McKinney Ranch Land   |  | McKinney, TX    |  | 15.1 Acres  |  | 2,785       |  | 793                      |  | 1,850           |  | 1,122       
|Metro Center Land     |  | Nashville, TN   |  | 22.4 Acres  |  | 3,896       |  | 706                      |  | 2,985           |  | 2,728       
|                      |  |                 |  |             |  |             |  |                          |  |                 |  |             
|                      |  |                 |  |             |  | 9,609       |  | 2,514                    |  | 6,593           |  | 4,890       
|                      |  |                 |  |             |  |             |  |                          |  |                 |  |             
|Apartments            |  |                 |  |             |  |             |  |                          |  |                 |  |             
|Bluffs at Vista Ridge |  | Lewisville, TX  |  | 272 Units   |  | 24,650      |  | 3,126                    |  | 15,518          |  | 3,648       
|Mediterranean Villa   |  | San Antonio, TX |  | 140 Units   |  | 4,110       |  | 1,039                    |  | 2,598           |  | 744         
|                      |  |                 |  |             |  |             |  |                          |  |                 |  |             
|                      |  |                 |  |             |  | 28,760      |  | 4,165                    |  | 18,116          |  | 4,392       
|                      |  |                 |  |             |  |             |  |                          |  |                 |  |             
|                      |  |                 |  |             |  | $38,369     |  | $6,679                   |  | $24,709         |  | $9,282      
|                      |  |                 |  |             |  |             |  |                          |  |                 |  |             

In 2006, ARI sold the following properties:



|                 |  |                    |  |            |  |             |  |                          |  |                 |  |             
|---------------- |  | ------------------ |  | ---------- |  | ----------- |  | ------------------------ |  | --------------- |  | ------------
|Property         |  | Location           |  | Acres      |  | Sales Price |  | Net Cash Received/(Paid) |  | Debt Discharged |  | Gain on Sale
|Land             |  |                    |  |            |  |             |  |                          |  |                 |  |             
|Hollywood Casino |  | Farmers Branch, TX |  | 10.5 Acres |  | $3,225      |  | $1,207                   |  | $              |  | $1,831      
|Vineyards II     |  | Grapevine, TX      |  | 1.5 Acres  |  | 1,272       |  | 429                      |  | 745             |  | 578         
|                 |  |                    |  |            |  |             |  |                          |  |                 |  |             
|                 |  |                    |  |            |  | 4,497       |  | 1,636                    |  | 745             |  | 2,409       
|                 |  |                    |  |            |  |             |  |                          |  |                 |  |             
|Land             |  |                    |  |            |  |             |  |                          |  |                 |  |             
|Elm Fork         |  | Carrollton, TX     |  | 27.6 Acres |  | 3,500       |  | (827)                    |  | 2,800           |  | 1,596       
|Nashville        |  | Nashville, TN      |  | 16.4 Acres |  | 2,512       |  |                         |  | 2,416           |  | 1,700       
|Nashville        |  | Nashville, TN      |  | 2.4 Acres  |  | 462         |  |                         |  | 429             |  | 323         
|                 |  |                    |  |            |  |             |  |                          |  |                 |  |             
|                 |  |                    |  |            |  | 6,474       |  | (827)                    |  | 5,645           |  | 3,619       
|                 |  |                    |  |            |  |             |  |                          |  |                 |  |             
|                 |  |                    |  |            |  | $10,971     |  | $809                     |  | $6,390          |  | $6,028      
|                 |  |                    |  |            |  |             |  |                          |  |                 |  |             

---

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



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AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



At March 31, 2007, ARI had the following apartment properties under construction:



|                     |  |                    |  |           |  |                 |        |                           |   |                         |  |   |       
|-------------------- |  | ------------------ |  | --------- |  | --------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------
|Property             |  | Location           |  | Units     |  | Amount Expended |        | AdditionalAmountto Expend |   | ConstructionLoanFunding
|Apartments           |  |                    |  |           |  |                 |        |                           |   |                         |  |   |       
|Bolivar Homes        |  | Cleveland, MS      |  | 65 Units  |  | $               | 1,218  |                           | $ | 7,390                   |  | $ | 1,300 
|Broadway Estates     |  | Greenville, MS     |  | 104 Units |  |                 | 788    |                           |   | 7,569                   |  |   | 850   
|Lago Vista           |  | Farmers Branch, TX |  | 212 Units |  |                 | 8,104  |                           |   | 18,346                  |  |   | 2,924 
|Laguna Vista         |  | Farmers Branch, TX |  | 206 Units |  |                 | 9,950  |                           |   | 12,250                  |  |   | 14,719
|Legends of El Paso   |  | El Paso, TX        |  | 240 Units |  |                 | 13,972 |                           |   | 7,919                   |  |   | 14,988
|Longfellow Arms      |  | Longview, TX       |  | 216 Units |  |                 | 397    |                           |   | 7,914                   |  |   | 126   
|Mason Park           |  | Houston, TX        |  | 312 Units |  |                 | 1,991  |                           |   | 17,409                  |  |   | 4,407 
|Mission Oaks         |  | San Antonio, TX    |  | 228 Units |  |                 | 15,921 |                           |   |                        |  |   | 11,376
|Parc at Clarksville  |  | Clarksville, TN    |  | 206 Units |  |                 | 7,880  |                           |   | 6,011                   |  |   | 6,992 
|Parc at Maumelle     |  | Maumelle, AR       |  | 240 Units |  |                 | 19,011 |                           |   |                        |  |   | 13,105
|Parc at Metro Center |  | Nashville, TN      |  | 144 Units |  |                 | 12,375 |                           |   |                        |  |   | 8,340 
|Parc at Rogers       |  | Rogers, AR         |  | 152 Units |  |                 | 7,560  |                           |   | 13,265                  |  |   | 7,011 
|Pecan Pointe         |  | Temple, TX         |  | 232 Units |  |                 | 4,174  |                           |   | 12,663                  |  |   | 2,852 
|Sunflower Estates    |  | Indianola, MS      |  | 65 Units  |  |                 | 755    |                           |   | 7,674                   |  |   | 810   
|Yazoo Estates        |  | Yazoo City, MS     |  | 96 Units  |  |                 | 789    |                           |   | 7,556                   |  |   | 835   

NOTE 3. NOTES AND INTEREST RECEIVABLE



|                                  |  |              |  |               |   |  |        |        |          |                                           
|--------------------------------- |  | ------------ |  | ------------- | - |  | ------ | ------ | -------- | ------------------------------------------
|Borrower                          |  | MaturityDate |  | Interest Rate |   |  | Amount |        | Security
|Performing loans:                 |  |              |  |               |   |  |        |        |          |                                           
|400 St. Paul                      |  | 10/08        |  | 8.00          | % |  | $      | 3,612  |          | Office building, Dallas, TX               
|Basic Capital Management(1)       |  | 4/08         |  | Prime+2.00    |   |  |        | 1,252  |          | Industrial building, Arlington, TX        
|Basic Capital Management(1)       |  | 4/08         |  | Prime+2.00    |   |  |        | 1,523  |          | Retail building, Cary, NC                 
|Carrollton TH, LP                 |  | 3/09         |  | 15.00         |   |  |        | 1,500  |          | 27.5 acres Elm Fork Ranch, Carrollton, TX 
|Countryside LP(2)                 |  | 1/07         |  | 7.25          |   |  |        | 2,300  |          | Class A LP Units                          
|Dallas Fund XVII LP               |  | 10/06        |  | 9.00          |   |  |        | 3,162  |          | Partnership interests and lawsuit proceeds
|Garden Centura LP                 |  | N/A          |  | 7.00          |   |  |        | 6,392  |          | Excess cash flow from partnership         
|Miscellaneous related party notes |  | Various      |  | Various       |   |  |        | 5,712  |          | Various security interests                
|One Realco(2)                     |  | 2/07         |  | Prime+3.00    |   |  |        | 9,949  |          | Subordinate pledge of One Realco Stock    
|Park Plaza Associates LP          |  | 9/17         |  | 10.00         |   |  |        | 3,297  |          | Assignment of partnership interests       
|Pioneer Austin Development        |  | 10/08        |  | 10.00         |   |  |        | 3,178  |          | 33 acres undeveloped land, Austin, TX     
|Realty Advisors                   |  | 11/08        |  | Prime+12.00   |   |  |        | 5,633  |          | 850 shares of 10ARI stock owned by BCM    
|Unified Housing of Harvest Hill   |  | 10/13        |  | 12.00         |   |  |        | 7,034  |          | Surplus cash note                         
|Accrued interest                  |  |              |  |               |   |  |        | 4,618  |          |                                           
|                                  |  |              |  |               |   |  |        |        |          |                                           
|Total                             |  |              |  |               |   |  | $      | 59,162 |          |                                           
|                                  |  |              |  |               |   |  |        |        |          |                                           

---

|(1) | Related party.
|--- | --------------

|(2) | Note is being extended.
|--- | -----------------------



11



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AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



NOTE 4. INVESTMENTS IN UNCONSOLIDATED ENTITIES

ARIs investment in real estate entities at March 31, 2007 was as follows:



|                                     |  |                                         |   |  |                                              |        |                                               |   |      
|------------------------------------ |  | --------------------------------------- | - |  | -------------------------------------------- | ------ | --------------------------------------------- | - | -----
|Investee                             |  | Percentage ofOwnership atMarch 31, 2007 |   |  | Carrying Valueof Investment atMarch 31, 2007 |        | Market Value(a)of Investment atMarch 31, 2007
|IORI                                 |  | 24.9                                    | % |  | $                                            | 6,370  |                                               | $ | 6,057
|Garden Centura, LP(1)                |  | 5.0                                     |   |  |                                              | 1,989  |                                               |   |     
|Gruppa Florentina, LLC (Gruppa)(1) |  | 20.0                                    |   |  |                                              | 4,627  |                                               |   |     
|Other(1)                             |  | Various                                 |   |  |                                              | 12,481 |                                               |   |     
|                                     |  |                                         |   |  |                                              |        |                                               |   |      
|                                     |  |                                         |   |  | $                                            | 25,467 |                                               |   |      
|                                     |  |                                         |   |  |                                              |        |                                               |   |      

---

|(1) | The entity is not publicly traded and no readily determinable market value exists.
|--- | ----------------------------------------------------------------------------------

Set forth below are summarized results of operations of investments in unconsolidated entities for the three months ended March 31, 2007 and 2006:



|                              |  |      |        |   |      |   |        |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                              |  | 2007 |        |   | 2006 |  
|Restaurant sales              |  | $    | 9,418  |   |      | $ |       |  
|Revenues                      |  |      | 2,089  |   |      |   | 5,775  |  
|                              |  |      |        |   |      |   |        |  
|                              |  |      | 11,507 |   |      |   | 5,775  |  
|                              |  |     
|Restaurant cost of sales      |  |      | 7,119  |   |      |   |       |  
|Property operating expenses   |  |      | 1,659  |   |      |   | 3,078  |  
|                              |  |      |        |   |      |   |        |  
|                              |  |      | 8,778  |   |      |   | 3,078  |  
|                              |  |      |        |   |      |   |        |  
|                              |  |     
|Income from operations        |  |      | 2,729  |   |      |   | 2,697  |  
|Other income (expense):       |  |      |        |   |      |   |        |  
|General and administrative    |  |      | (1,437 | ) |      |   |       |  
|Equity in loss of partnership |  |      | (38    | ) |      |   |       |  
|Interest expense              |  |      | (1,693 | ) |      |   | (1,506 | )
|Interest income               |  |      | 1,099  |   |      |   |       |  
|Other                         |  |      | 243    |   |      |   |       |  
|                              |  |      |        |   |      |   |        |  
|                              |  |     
|Income before taxes           |  |      | 903    |   |      |   | 1,191  |  
|Income tax                    |  |      | (280   | ) |      |   |       |  
|                              |  |      |        |   |      |   |        |  
|Net income                    |  | $    | 623    |   |      | $ | 1,191  |  
|                              |  |      |        |   |      |   |        |  

NOTE 5. MARKETABLE EQUITY SECURITIES

ARI owns equity securities of Realty Korea CR-REIT Co., Ltd. No. 1 representing approximately a 9.2% ownership interest. This investment is considered an available-for-sale security. ARI recognized an unrealized
gain of $2.2 million for the three month period ending March 31, 2007 due to an increase in market price.

NOTE 6. NOTES PAYABLE

On February 23, 2007, ARI received $4.9 million in proceeds from a $5.0 million loan with a commercial bank. The note accrues interest at Prime plus 1% which is
payable monthly, commencing April 1, 2007, until maturity on February 23, 2008. At maturity all accrued and unpaid interest and outstanding principal are due. The loan is secured by 235.0 acres in Farmers Branch, Texas and 97.3 acres in
Austin, Texas known as Pioneer Crossing.



12



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AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



On March 16, 2007, ARI refinanced the note secured by the Piccadilly Shaw Hotel through a commercial bank. The
Company received $6.5 million in proceeds, paid down a $5.2 million note and acquired new debt of $12.8 million. The note accrues interest at 8%. The note is payable in monthly principal payments of $16,234 plus accrued interest. The payments
commence April 1, 2007, and are payable through maturity, February 29, 2012. At maturity, all accrued and unpaid interest and outstanding principal are due.

On March 16, 2007, ARI refinanced the note secured by the Piccadilly Airport Hotel through a commercial bank. The Company received $6.8 million in proceeds, paid down a $4.5 million note and acquired new debt of
$12.2 million. The note accrues interest at 8%. The note is payable in monthly principal payments of $16,994 plus accrued interest. The payments commence April 1, 2007, and are payable through maturity, February 29, 2012. At maturity, all
accrued and unpaid interest and outstanding principal are due.

On March 22, 2007, ARI entered into a promissory note with an unrelated individual
lender. The Company received $6.5 million in proceeds and acquired $6.5 million in debt. The note accrues interest at 12.5%, and matures April 26, 2007, at which time all accrued and unpaid interest and outstanding principal are due.

In 2007, ARI financed/refinanced or obtained second mortgage financing on the following:



|                           |  |                      |  |             |  |              |        |                |   |                        |  |   |              |     |  |              |   |  |     
|-------------------------- |  | -------------------- |  | ----------- |  | ------------ | ------ | -------------- | - | ---------------------- |  | - | ------------ | --- |  | ------------ | - |  | ----
|                           |  | Location             |  | Acres/Rooms |  | DebtIncurred |        | DebtDischarged |   | Net CashReceived/ Paid |  |   | InterestRate |     |  | MaturityDate
|Land                       |  |                      |  |             |  |              |        |                |   |                        |  |   |              |     |  |              |   |  |     
|Crowley & Wilmer Land      |  | Crowley & Wilmer, TX |  | 142.6 Acres |  | $            | 3,390  |                | $ |                       |  | $ | 2,633        |     |  | 10.00        | % |  | 7/07
|Grapevine Vineyard         |  | Grapevine, TX        |  | 6.2 Acres   |  |              | 1,758  |                |   | 265                    |  |   | 1,385        |     |  | 9.75         |   |  | 7/07
|Payne I Land               |  | Irving, TX           |  | 109.8 Acres |  |              | 6,500  |                |   |                       |  |   | 6,500        |     |  | 12.00        |   |  |    
|Manhattan Land             |  | Farmers Branch, TX   |  | 108.8 Acres |  |              | 7,000  |                |   |                       |  |   | 6,620        |     |  | 10.00        |   |  | 1/08
|Pioneer Crossing           |  | Austin, TX           |  | 97.3 Acres  |  |              | 5,000  |                |   |                       |  |   | 4,916        | (1) |  | Prime+1      |   |  | 2/08
|                           |  |                      |  |             |  |              |        |                |   |                        |  |   |              |     |  |              |   |  |     
|                           |  |                      |  |             |  |              | 23,648 |                |   | 265                    |  |   | 22,054       |     |  |              |   |  |     
|                           |  |                      |  |             |  |              |        |                |   |                        |  |   |              |     |  |              |   |  |     
|Hotels                     |  |                      |  |             |  |              |        |                |   |                        |  |   |              |     |  |              |   |  |     
|City Suites Hotel          |  | Chicago, IL          |  | 45 Rooms    |  |              | 7,300  |                |   | 3,551                  |  |   | 307          |     |  |             |   |  |    
|Piccadilly Airport Hotel   |  | Fresno, CA           |  | 185 Rooms   |  |              | 12,200 |                |   | 4,478                  |  |   | 6,778        |     |  | 8.00         |   |  | 2/12
|Piccadilly Chateau Hotel   |  | Fresno, CA           |  | 78 Rooms    |  |              | 3,700  |                |   | 1,884                  |  |   | 1,436        |     |  | 8.00         |   |  | 2/12
|Piccadilly Shaw Hotel      |  | Fresno, CA           |  | 194 Rooms   |  |              | 12,800 |                |   | 5,200                  |  |   | 6,451        |     |  | 8.00         |   |  | 2/12
|The Majestic Hotel         |  | Chicago, IL          |  | 55 Rooms    |  |              | 6,000  |                |   |                       |  |   | 2,866        |     |  |             |   |  |    
|Willows Surf Hotel         |  | Chicago, IL          |  | 52 Rooms    |  |              | 5,160  |                |   |                       |  |   | 1,529        |     |  |             |   |  |    
|                           |  |                      |  |             |  |              |        |                |   |                        |  |   |              |     |  |              |   |  |     
|                           |  |                      |  |             |  |              | 47,160 |                |   | 15,113                 |  |   | 19,367       |     |  |              |   |  |     
|                           |  |                      |  |             |  |              |        |                |   |                        |  |   |              |     |  |              |   |  |     
|Debt                       |  |                      |  |             |  |              |        |                |   |                        |  |   |              |     |  |              |   |  |     
|ART Loan from Bank Midwest |  |                      |  |             |  |              | 5,000  |                |   |                        |  |   | 4,916        | (1) |  |              |   |  | 2/07
|RMR Investments, Inc.      |  |                      |  |             |  |              | 1,758  |                |   |                        |  |   | 1,385        |     |  | 9.75         |   |  | 7/07
|                           |  |                      |  |             |  |              |        |                |   |                        |  |   |              |     |  |              |   |  |     
|                           |  |                      |  |             |  |              | 6,758  |                |   |                        |  |   | 6,301        |     |  |              |   |  |     
|                           |  |                      |  |             |  |              |        |                |   |                        |  |   |              |     |  |              |   |  |     
|                           |  |                      |  |             |  | $            | 77,566 |                |   |                        |  | $ | 47,722       |     |  |              |   |  |     
|                           |  |                      |  |             |  |              |        |                |   |                        |  |   |              |     |  |              |   |  |     

In 2006, ARI financed/refinanced or obtained second mortgage financing on the following:



|                 |  |               |  |             |  |              |        |     |                |   |                        |  |   |              |     |  |              |      |  |     
|---------------- |  | ------------- |  | ----------- |  | ------------ | ------ | --- | -------------- | - | ---------------------- |  | - | ------------ | --- |  | ------------ | ---- |  | ----
|                 |  | Location      |  | Acres/Units |  | DebtIncurred |        |     | DebtDischarged |   | Net CashReceived/ Paid |  |   | InterestRate |     |  | MaturityDate
|Apartments       |  |               |  |             |  |              |        |     |                |   |                        |  |   |              |     |  |              |      |  |     
|Hunters Glen     |  | Midland, TX   |  | 212 Units   |  | $            | 2,475  |     |                | $ | 1,804                  |  | $ | 421          |     |  | 7.23         | %(1) |  | 2/09
|                 |  |               |  |             |  |              |       
|Land             |  |               |  |             |  |              |        |     |                |   |                        |  |   |              |     |  |              |      |  |     
|Nashville        |  | Nashville, TN |  | 100.9 Acres |  |              | 2,500  |     |                |   |                       |  |   | 2,500        | (2) |  | 12.50        |      |  | 5/06
|Palmer Lane      |  | Austin, TX    |  | 367.4 Acres |  |              | 14,000 |     |                |   | 14,300                 |  |   | (893         | )   |  | 8.50         | (1)  |  | 8/07
|Pioneer Crossing |  | Austin, TX    |  | 235.0 Acres |  |              | 11,750 | (3) |                |   | 4,000                  |  |   |             |     |  | 12.50        |      |  | 4/07
|West End         |  | Dallas, TX    |  | 5.3 Acres   |  |              | 9,000  |     |                |   | 2,000                  |  |   | 6,079        |     |  | 8.00         | (1)  |  | 3/07
|                 |  |               |  |             |  |              |        |     |                |   |                        |  |   |              |     |  |              |      |  |     
|                 |  |               |  |             |  |              | 37,250 |     |                |   | 20,300                 |  |   | 7,686        |     |  |              |      |  |     
|                 |  |               |  |             |  |              |        |     |                |   |                        |  |   |              |     |  |              |      |  |     
|                 |  |               |  |             |  | $            | 39,725 |     |                | $ | 22,104                 |  | $ | 8,107        |     |  |              |      |  |     
|                 |  |               |  |             |  |              |        |     |                |   |                        |  |   |              |     |  |              |      |  |     



13



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AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



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

|(2) | Cash received by affiliate, increasing ARIs affiliate receivable.
|--- | ------------------------------------------------------------------

|(3) | Various affiliate notes extended and collateralized by ARI, increasing ARI affiliate receivable.
|--- | ------------------------------------------------------------------------------------------------

NOTE 7. STOCK-SECURED NOTES PAYABLE

ARI has margin arrangements with various financial institutions and brokerage
firms, which provide for borrowings of up to 50.0% of the market value of marketable equity securities. ARI also has other notes payable secured by stock. The borrowings under such margin arrangements and notes are secured by the equity securities
of IORI and TCI, and ARIs trading portfolio securities and bear interest rates ranging from 9.5% to 24.0% per annum. Stock-secured notes payable and margin borrowings totaled $22.5 million at March 31, 2007 and December 31,
2006.

NOTE 8. RELATED PARTY TRANSACTIONS

The
following table reconciles the beginning and ending balances of accounts receivable from and (accounts payable) to affiliates as of March 31, 2007.



|                                               |  |       |         |  
|---------------------------------------------- |  | ----- | ------- | -
|                                               |  | PRIME |        
|Balance, January 1, 2007                       |  | $     | 44,739  |  
|Cash transfers to affiliates                   |  |       | 38,477  |  
|Cash transfers from affiliates                 |  |       | (27,015 | )
|Advances through receipt of financing proceeds |  |       | (117    | )
|Payables clearing through affiliates           |  |       | (3,752  | )
|                                               |  |       |         |  
|Balance, March 31, 2007                        |  | $     | 52,332  |  
|                                               |  |       |         |  

At March 31, 2007, ARIs other assets include $318,875 due from affiliates for rent and interest. Also
at March 31, 2007, ARI owed $1.1 million to Regis Property Management for management fees and sales commissions.

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 and other expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their net operating income and cash flow. Excluded from
operating segment assets are assets of $100.0 million in 2007and $200.6 million in 2006, 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 Akademia (Poland), which began operations in 2002.

Presented below are ARIs reportable segments operating
income for the three months ended March 31, 2007 and 2006, and segment assets at March 31, 2007 and 2006.



|                                          |  |                      |         |            |   |         |        |  |   |        |   |  |                   |         |   |       |   |       |   |  |   |           |  
|----------------------------------------- |  | -------------------- | ------- | ---------- | - | ------- | ------ |  | - | ------ | - |  | ----------------- | ------- | - | ----- | - | ----- | - |  | - | --------- | -
|For the Three Months Ended March 31, 2007 |  | CommercialProperties |         | Apartments |   |         | Hotels |  |   | Land   |   |  | Receivables/Other |         |   | Total |  
|Operating revenue                         |  | $                    | 20,508  |            | $ | 23,389  |        |  | $ | 7,023  |   |  | $                 | 151     |   |       | $ | 36    |   |  | $ | 51,107    |  
|Operating expenses                        |  |                      | 11,412  |            |   | 13,776  |        |  |   | 5,695  |   |  |                   | 1,597   |   |       |   | 23    |   |  |   | 32,503    |  
|Depreciation                              |  |                      | 2,896   |            |   | 3,246   |        |  |   | 645    |   |  |                   | 6       |   |       |   | 5     |   |  |   | 6,798     |  
|Mortgage and loan interest                |  |                      | 5,700   |            |   | 8,621   |        |  |   | 2,919  |   |  |                   | 6,076   |   |       |   | 2,077 |   |  |   | 25,393    |  
|Interest income                           |  |                      |        |            |   | 5       |        |  |   |       |   |  |                   | 62      |   |       |   | 1,487 |   |  |   | 1,554     |  
|Gain on land sales*                       |  |                      |        |            |   |        |        |  |   |       |   |  |                   | 4,898   |   |       |   |      |   |  |   | 4,898     |  
|                                          |  |                      |         |            |   |         |        |  |   |        |   |  |                   |         |   |       |   |       |   |  |   |           |  
|Segment operating income (loss)           |  | $                    | 500     |            | $ | (2,249  | )      |  | $ | (2,236 | ) |  | $                 | (2,568  | ) |       | $ | (582  | ) |  | $ | (7,135    | )
|                                          |  |                      |         |            |   |         |        |  |   |        |   |  |                   |         |   |       |   |       |   |  |   |           |  
|                                          |  |                      |         |            |   |        
|Capital expenditures                      |  | $                    | 2,895   |            | $ | 266     |        |  | $ | 38     |   |  | $                 | 1,311   |   |       | $ |      |   |  | $ | 4,510     |  
|Assets                                    |  |                      | 405,251 |            |   | 591,822 |        |  |   | 78,191 |   |  |                   | 402,518 |   |       |   | 283   |   |  |   | 1,478,065 |  
|                                          |  |                      |         |            |   |         |        |  |   |        |   |  |                   |         |   |       |   |       |   |  |   |           |  



14



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AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|                               |  |   |   |  |   |        |  |   |   |  |   |       |  |   |   |  |   |       
|------------------------------ |  | - | - |  | - | ------ |  | - | - |  | - | ----- |  | - | - |  | - | ------
|Property Sales:                |  |   |   |  |   |        |  |   |   |  |   |       |  |   |   |  |   |       
|Sales price                    |  | $ |  |  | $ | 28,760 |  | $ |  |  | $ | 9,701 |  | $ |  |  | $ | 38,461
|Cost of sale                   |  |   |  |  |   | 24,368 |  |   |  |  |   | 4,803 |  |   |  |  |   | 29,171
|Recognized prior deferred gain |  |   |  |  |   |       |  |   |  |  |   |      |  |   |  |  |   |      
|                               |  |   |   |  |   |        |  |   |   |  |   |       |  |   |   |  |   |       
|Gain on sale**                 |  | $ |  |  | $ | 4,392  |  | $ |  |  | $ | 4,898 |  | $ |  |  | $ | 9,290 
|                               |  |   |   |  |   |        |  |   |   |  |   |       |  |   |   |  |   |       



|                                          |  |                      |         |            |   |         |        |  |   |        |   |  |                   |         |   |       |   |       |   |  |   |           |  
|----------------------------------------- |  | -------------------- | ------- | ---------- | - | ------- | ------ |  | - | ------ | - |  | ----------------- | ------- | - | ----- | - | ----- | - |  | - | --------- | -
|For the Three Months Ended March 31, 2006 |  | CommercialProperties |         | Apartments |   |         | Hotels |  |   | Land   |   |  | Receivables/Other |         |   | Total |  
|Operating revenue                         |  | $                    | 15,810  |            | $ | 20,202  |        |  | $ | 7,792  |   |  | $                 | 165     |   |       | $ | 255   |   |  | $ | 44,224    |  
|Operating expenses                        |  |                      | 8,880   |            |   | 11,786  |        |  |   | 6,588  |   |  |                   | 832     |   |       |   | (126  | ) |  |   | 27,960    |  
|Depreciation                              |  |                      | 3,013   |            |   | 2,337   |        |  |   | 851    |   |  |                   | 7       |   |       |   | 3     |   |  |   | 6,211     |  
|Mortgage and loan interest                |  |                      | 3,825   |            |   | 7,651   |        |  |   | 1,248  |   |  |                   | 4,227   |   |       |   | 1,083 |   |  |   | 18,034    |  
|Interest income                           |  |                      |        |            |   |        |        |  |   |       |   |  |                   |        |   |       |   | 1,146 |   |  |   | 1,146     |  
|Gain on land sales*                       |  |                      |        |            |   |        |        |  |   |       |   |  |                   | 2,740   |   |       |   |      |   |  |   | 2,740     |  
|                                          |  |                      |         |            |   |         |        |  |   |        |   |  |                   |         |   |       |   |       |   |  |   |           |  
|Segment operating income (loss)           |  | $                    | 92      |            | $ | (1,572  | )      |  | $ | (895   | ) |  | $                 | (2,161  | ) |       | $ | 441   |   |  | $ | (4,095    | )
|                                          |  |                      |         |            |   |         |        |  |   |        |   |  |                   |         |   |       |   |       |   |  |   |           |  
|                                          |  |                      |         |            |   |        
|Capital expenditures                      |  | $                    | 2,153   |            | $ | 1,746   |        |  | $ | 250    |   |  | $                 | 345     |   |       | $ |      |   |  | $ | 4,494     |  
|Assets                                    |  |                      | 222,597 |            |   | 536,707 |        |  |   | 76,364 |   |  |                   | 333,481 |   |       |   |      |   |  |   | 1,169,149 |  
|                                          |  |                      |         |            |   |        
|Property Sales:                           |  |                      |         |            |   |         |        |  |   |        |   |  |                   |         |   |       |   |       |   |  |   |           |  
|Sales price                               |  | $                    |        |            | $ |        |        |  | $ |       |   |  | $                 | 5,111   |   |       | $ |      |   |  | $ | 5,111     |  
|Cost of sale                              |  |                      |        |            |   |        |        |  |   |       |   |  |                   | 4,202   |   |       |   |      |   |  |   | 4,202     |  
|Recognized prior deferred gain            |  |                      |        |            |   |        |        |  |   |       |   |  |                   | 1,831   |   |       |   |      |   |  |   | 1,831     |  
|                                          |  |                      |         |            |   |         |        |  |   |        |   |  |                   |         |   |       |   |       |   |  |   |           |  
|Gain on sale**                            |  | $                    |        |            | $ |        |        |  | $ |       |   |  | $                 | 2,740   |   |       | $ |      |   |  | $ | 2,740     |  
|                                          |  |                      |         |            |   |         |        |  |   |        |   |  |                   |         |   |       |   |       |   |  |   |           |  

---

|* | Does not include gains from sale of income producing properties.
|- | ----------------------------------------------------------------

|** | Includes gains from sale of income producing properties.
|-- | --------------------------------------------------------

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



|                                             |  |                                     |         |   |      |   |        |  
|-------------------------------------------- |  | ----------------------------------- | ------- | - | ---- | - | ------ | -
|                                             |  | For the Three MonthsEnded March 31, |        
|                                             |  | 2007                                |         |   | 2006 |  
|Segment operating (loss)                     |  | $                                   | (7,135  | ) |      | $ | (4,095 | )
|Other non-segment items of income (expense): |  |                                     |         |   |      |   |        |  
|General and administrative                   |  |                                     | (4,740  | ) |      |   | (3,316 | )
|Advisory fee                                 |  |                                     | (3,299  | ) |      |   | (3,081 | )
|Gain on foreign currency transaction         |  |                                     | 131     |   |      |   | 2      |  
|Other income                                 |  |                                     | 2,544   |   |      |   | 1,608  |  
|Net income fee                               |  |                                     | 704     |   |      |   |       |  
|Litigation settlement                        |  |                                     | 24      |   |      |   |       |  
|Equity in income of investees                |  |                                     |        |   |      |   | 175    |  
|Minority interest                            |  |                                     | (224    | ) |      |   | 830    |  
|                                             |  |                                     |         |   |      |   |        |  
|Loss from continuing operations              |  | $                                   | (11,995 | ) |      | $ | (7,877 | )
|                                             |  |                                     |         |   |      |   |        |  

NOTE 10. DISCONTINUED OPERATIONS

For the three months ended March 31, 2007 and 2006, income from discontinued operations relates to Milanos Restaurants and 6 properties ARI sold during 2006 and 2 properties ARI sold or held-for-sale in 2007. The
following table summarizes revenue and expense information for these properties sold and held-for-sale.



15



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AMERICAN REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|                                           |  |                                     |        |   |      |   |        |  
|------------------------------------------ |  | ----------------------------------- | ------ | - | ---- | - | ------ | -
|                                           |  | For the Three MonthsEnded March 31, |       
|                                           |  | 2007                                |        |   | 2006 |  
|Revenue:                                   |  |                                     |        |   |      |   |        |  
|Rental                                     |  | $                                   | 1,938  |   |      | $ | 4,188  |  
|Restaurant operations                      |  |                                     |       |   |      |   | 9,349  |  
|                                           |  |                                     |        |   |      |   |        |  
|                                           |  |                                     | 1,938  |   |      |   | 13,537 |  
|Expenses:                                  |  |                                     |        |   |      |   |        |  
|Property Operations                        |  |                                     | 1,358  |   |      |   | 3,700  |  
|Restaurant cost of sales                   |  |                                     |       |   |      |   | 6,915  |  
|                                           |  |                                     |        |   |      |   |        |  
|                                           |  |                                     | 1,358  |   |      |   | 10,615 |  
|                                           |  |                                     |        |   |      |   |        |  
|                                           |  |                                     | 580    |   |      |   | 2,922  |  
|Other (expenses):                          |  |                                     |        |   |      |   |        |  
|Interest                                   |  |                                     | (1,286 | ) |      |   | (2,413 | )
|Depreciation                               |  |                                     | (149   | ) |      |   | (707   | )
|                                           |  |                                     |        |   |      |   |        |  
|                                           |  |                                    
|Loss from discontinued operations          |  |                                     | (855   | ) |      |   | (198   | )
|Gain on sale of real estate                |  |                                     | 4,392  |   |      |   |       |  
|                                           |  |                                     |        |   |      |   |        |  
|Income (loss) from discontinued operations |  | $                                   | 3,537  |   |      | $ | (198   | )
|                                           |  |                                     |        |   |      |   |        |  

NOTE 11. COMMITMENTS AND CONTINGENCIES

Liquidity.ARIs principal liquidity needs are funding normal recurring expenses, meeting debt service requirements, funding capital expenditures, funding development costs not otherwise covered by
construction loans and funding new property acquisitions not otherwise covered by acquisition financing. In 2007, ARI will rely on aggressive land sales, selected income producing property sales and, to the extent necessary, additional borrowings to
meet its cash requirement.

Partnership Obligations. ARI is the limited partner in 10 partnerships that are currently constructing residential
properties. As permitted in the respective partnership agreements, ARI presently intends to purchase the interests of the general and any other limited partners in these partnerships subsequent to the final completion of these construction projects.
The amounts paid to buyout the non-affiliated partners are limited to development fees earned by the non-affiliated partners, and are set forth in the respective partnership agreements. The total amount of the expected buyouts as of March 31,
2007 is approximately $3.0 million.

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
12. SUBSEQUENT EVENTS

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



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

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



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



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



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



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



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



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



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



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



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



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

The risks included here are not exhaustive. Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from
those expressed or implied by forward-looking statements, include among others, the factors listed and described at Item 1A Risk Factors in the Companys Annual Report on Form 10-K, which investors should review. There have
been no changes from the risk factors previously described in the Companys Form 10-K for the fiscal year ended December 31, 2006 (the Form 10-K).

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

Overview

ARI was organized in 1999. In August 2000, ARI acquired American Realty Trust, Inc. (ART) and
National Realty, L.P. (NRLP). ART was the successor to a business trust 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. The business trust merged into ART in 1987. 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 owned a portfolio of real estate and mortgage loan investments.

At March 31, 2007, ARI subsidiaries owned approximately 82% of the outstanding shares of common stock of Transcontinental Realty Investors, Inc., a Nevada corporation (TCI), which has its common stock listed and traded on
the New York Stock Exchange, Inc. (NYSE). The ownership of the TCI shares was achieved through a series of transactions, including a cash tender offer completed March 19, 2003, an exchange by certain ARI subsidiaries of securities
with Basic Capital Management, Inc. (BCM) and a sale of a participating interest in a line of credit receivable from One Realco Corporation (One Realco) to BCM, as well as certain open market purchases of TCI shares in
December 2003. ARI has consolidated TCIs accounts and operations since March 31, 2003. At March 31, 2007, TCI owned approximately 25% of the outstanding common stock of Income Opportunity Realty Investors, Inc., (IORI), a
public company whose shares are listed and traded on the American Stock Exchange.

ARI is an externally advised and managed real estate investment company
that owns a diverse portfolio of income-producing properties and land held for development. The Companys portfolio of income-producing properties includes residential apartment communities, office buildings, hotels, a trade mart located in
Denver, Colorado and other commercial properties. ARIs investment strategy includes acquiring existing income-producing properties as well as developing new properties on land already owned or acquired for a specific development project. ARI
acquires land primarily in in-fill locations or high-growth suburban markets. ARI is an active buyer and seller and during 2007 acquired over $109 million and sold over $38 million of land and income-producing properties. As of March 31, 2007,
the Company owned 13,552 units in 73 residential apartment communities, 36 commercial properties comprising almost 6.4 million rentable square feet and ten hotels containing a total of 1,235 rooms. In addition, at March 31, 2007, ARI owned
10,844 acres of land held for development and had 2,718 apartment units in 15 projects under construction. The Company currently owns income-producing properties and land in 21 states as well as in the U.S. Virgin Islands and Wroclaw, Poland. ARI
finances its acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial



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banks and institutional lenders. ARI finances its development projects principally with short-term, variable interest rate construction loans that are
converted to long-term, fixed rate amortizing mortgages when the development project is completed and occupancy has been stabilized. The Company will, from time to time, also enter into partnerships with various investors to acquire income-producing
properties or land and to sell interests in certain of its wholly-owned properties. When the Company sells assets, it may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable. The
Company generates operating revenues primarily by leasing apartment units to residents; leasing office, retail and industrial space to commercial tenants; and renting hotel rooms to guests. ARI is advised by Prime under a contractual arrangement
that is reviewed annually by ARIs Board of Directors. ARIs commercial properties are managed by Regis Commercial while the Companys hotels are managed by Regis Hotel. ARI currently contracts with five third-party companies to
manage the Companys apartment communities. Approximately 62% of ARIs common stock is owned by BCM; an additional 13% is owned by Prime and TCI owns approximately seven percent of the outstanding common shares of ARI. Other affiliated
companies own approximately two percent of ARIs outstanding common shares. ARI is a C Corporation for U.S. federal income tax purposes and files an annual consolidated income tax return with TCI. ARI does not qualify as a Real
Estate Investment Trust (REIT) for federal income tax purposes primarily due to ARIs majority ownership of the Company.

The highlights
of the three months ended March 31, 2007 included the following:



| |  |  | On January 1, 2007, we obtained a $7.0 million loan secured by 109 acres and 3 acres of land located in Farmers Branch, Texas. The note accrues interest at 10%
and matures in January 2008.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On January 17, 2007 we refinanced the existing $3.6 million mortgage on City Suites Hotel in Chicago, IL. for a new note of $7.3 million and receiving $3.7
million in cash. The note accrues interest at 8.25% and matures February 2012.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On January 19, 2007, we acquired a 383,114 and a 707,599 square foot office building in Farmers Branch, Texas known as Parkwest I and Parkwest II, respectively
and a 4.7 acre tract of undeveloped land at an aggregate purchase price of $107.1 million. The acquisition was financed with $10.1 million in cash and $97.0 million in new debt. Two separate notes were obtained on this acquisition; a $35.0 million
note which accrues interest at 6.06% maturing January 2009 and a $62.0 million note which accrues interest at a variable rate (currently 9.32%) maturing January 2013.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On February 16, 2007, we sold the Bluffs at Vista Ridge a 272 unit apartment complex in Lewisville, Texas for $24.6 million. The proceeds were used to pay down
the existing mortgage of $15.5 million receiving $9.1 million in cash. A gain of $3.6 million was recorded on this sale.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On February 23, 2007, we obtained a $5.0 million loan secured by 97 acres of Pioneer Crossing land located in Austin, Texas. The note accrues interest at prime
plus 1% and matures February 23, 2008.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On March 5, 2007, we refinanced the existing $3.1 million mortgage on the Majestic Hotel in Chicago, IL, a 55 room hotel with a new note for $6.0 million
receiving $2.9 million in cash. The note accrues interest at 7.76% and matures March 2010.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On March 16, 2007, we refinanced the existing $5.2 million mortgage on the Piccadilly Shaw, a 194 room hotel, located in Fresno, California with a $12.8
million note, receiving $7.6 million in cash. The new note accrues interest at 8.00% and matures on February 2012.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On March 16, 2007, we refinanced the existing $4.5 million mortgage on the Piccadilly Airport, a 185 room hotel, located in Fresno, California with a $12.2
million note, receiving $7.7 million in cash. The new note accrues interest at 8.00% and matures on February 2012.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical
Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America, or GAAP, requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base our estimates on historical experience and on various other assumptions believed to be reasonable
under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the
reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation
of our financial statements. From time to time, we evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current
information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.



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Real Estate

Upon
acquisitions of real estate, ARI assesses the fair value of acquired tangible and intangible assets, including land, buildings, tenant improvements, above-market and below-market leases, origination costs, acquired in-place
leases, other identified intangible assets and assumed liabilities in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and allocates the purchase price to the acquired
assets and assumed liabilities, including land at appraised value and buildings at replacement cost.

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

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

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

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

SFAS No. 144 requires that qualifying assets and liabilities
and the results of operations that have been sold, or otherwise qualify as held for sale, be presented as discontinued operations in all periods presented if the property operations are expected to be eliminated and the Company will not
have significant continuing involvement following the sale. The components of the propertys net income that is reflected as discontinued operations include the net gain (or loss) upon the disposition of the property held for sale, operating
results, depreciation and interest expense (if the property is subject to a secured loan). We generally consider assets to be held for sale when the transaction has been approved by our Board of Directors, or a committee thereof, and
there are no known significant contingencies relating to the sale, such that the property sale within one year is considered probable. Following the classification of a property as held for sale, no further depreciation is recorded on
the assets.

A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost,
it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development
properties is guided by SFAS No. 34 Capitalization of Interest Cost and SFAS No. 67 Accounting for Costs and the Initial Rental Operations of Real Estate Properties. The costs of land and buildings under development
include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and
other costs incurred during the period of development. We consider a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy, but no later than one year from cessation of major
construction activity. We cease capitalization on the portion (1) substantially completed and (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction.

Investment in Unconsolidated Real Estate Ventures

Except for
ownership interests in variable interest entities, ARI accounts for our investments in unconsolidated real estate ventures under the equity method of accounting because the Company exercises significant influence over, but does not control, these
entities. These investments are recorded initially at cost, as investments in unconsolidated real estate ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount
of these investments on the Companys balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated real estate ventures over the life of the related asset. Under the equity method
of accounting, ARIs net equity is reflected within the Consolidated Balance Sheets, and our share of net income or loss from the joint ventures is included within the Consolidated Statements of Operations. The joint venture agreements may
designate different percentage allocations among investors for profits



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and losses, however, ARIs recognition of joint venture income or loss generally follows the joint ventures distribution priorities, which may
change upon the achievement of certain investment return thresholds. For ownership interests in variable interest entities, the Company consolidates those in which we are the primary beneficiary.

Recognition of Rental Income

Rental income for commercial property
leases is recognized on a straight-line basis over the respective lease terms. In accordance with SFAS 141, we recognize rental revenue of acquired in-place above-market and below-market leases at their fair values over the
terms of the respective leases. On our Consolidated Balance Sheets we include as a receivable the excess of rental income recognized over rental payments actually received pursuant to the terms of the individual commercial lease agreements.

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

Rental income for residential property leases is recorded when due from residents and is recognized monthly as earned, which is not materially different than on a straight-line basis as lease terms are generally for
periods of one year or less.

For hotel properties, revenues for room sales and guest services are recognized as rooms are occupied and services are
rendered.

An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible.

Revenue Recognition on the Sale of Real Estate

Sales
of real estate are recognized when and to the extent permitted by Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate (SFAS No. 66), as amended by SFAS No. 144. Until the
requirements of SFAS No. 66 for full profit recognition have been met, transactions are accounted for using the deposit, installment, cost recovery or financing method, whichever is appropriate. When ARI provides seller financing, gain is not
recognized at the time of sale unless the buyers initial investment and continuing investment are deemed to be adequate as determined by SFAS 66 guidelines.

Non-performing Notes Receivable

ARI considers a note receivable to be non-performing when the maturity date has passed without principal
repayment and the borrower is not making interest payments. Any new note receivable that results from a modification or extension of a note considered non-performing will also be considered non-performing, without regard to the borrowers
adherence to payment terms.

Interest Recognition on Notes Receivable

Interest income is not recognized on notes receivable that have been delinquent for 60 days or more. In addition, accrued but unpaid interest income is only recognized to the extent that the net realizable value of
the underlying collateral exceeds the carrying value of the receivable.

Allowance for Estimated Losses

A valuation allowance is provided for estimated losses on notes receivable considered to be impaired. Impairment is considered to exist when it is probable that all
amounts due under the terms of the note will not be collected. Valuation allowances are provided for estimated losses on notes receivable to the extent that the investment in the note exceeds managements estimate of fair value of the
collateral securing such note.

Fair Value of Financial Instruments

The following assumptions were used in estimating the fair value of ARIs notes receivable, marketable equity securities and notes payable. For performing notes receivable, the fair value was estimated by
discounting future cash flows using current interest rates for similar loans. For non-performing notes receivable, the estimated fair value of ARIs interest in the collateral property was used. For marketable equity securities, fair value was
based on the year-end closing market price of each security. For notes payable, the fair value was estimated using current rates for mortgages with similar terms and maturities

Results of Operations

The following discussion is based on our Consolidated Financial Statements for the three
months ended March 31, 2007 and 2006.



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ARI had a net loss of $8.5 million, including gains on land sales of $4.9 million and income from discontinued operations
of $3.5 million, for the three months ended March 31, 2007 as compared to a net loss of $8.1million, including gains on land sales of $2.7 million and a net loss from discontinued operations of $198,000, for the same period ended March 31,
2006.

ARI defines its same-store universe for each income-producing asset type (apartments, commercial properties and hotels) as properties with
stabilized occupancy owned and operated for the entire three month period from January 1 to March 31 for the years 2007 and 2006, respectively. For this time period, ARI had 57 apartments, 26 commercial properties and ten hotels in its
same store universe.

Rents and other property revenues increased $6.8 million ($51.1 million in 2007 as compared to $44.2 million in 2006 for the same
period.) A majority of this increase, $5.5 million, came from the acquisition of new properties. Of this amount, $4.3 came from the acquisition of two new commercial properties, Parkwest I and Parkwest II, and $1.2 came from the acquisition or
development of new apartments. Revenues from same store rental revenues increased by $1.3 million. This increase was due to an increase in apartment revenues of $700,000, an increase in revenues from commercial properties of $300,000 and increase in
hotel revenues of $300,000.

Property operations expenses increased $4.6 million ($32.5 million in 2007 as compared to $27.9 million in 2006 for the same
period.) Hotel and land operating expenses increased by $800,000 and $600,000, respectively. The acquisition of various commercial properties and hotels attributed $2.3 million and $900,000, respectively.

Depreciation expense increased approximately $600,000. The increase would be due to properties depreciated for the three month period ended 2007 that were not owned in
the same period of 2006.

General and administrative expenses increased $1.4 million. The increase was due to higher legal fees incurred and higher cost
reimbursements paid to the advisor.

Mortgage loan interest expense increased by $7.3 million. The new loans associated with this increase were from the
acquisition of Windmill Farms $1.0 million, the acquisition of the Parkwest buildings $2.0 million and an additional increase of $1.2 million in interest expense associated with various refinancing and new loans secured by land properties. The
refinancing of various hotels and apartments accounted for an increase of $1.6 million. In addition, $1.5 million of prepayment penalties are included in interest expense for the refinancing of three hotel properties known as the Piccadilly Hotels.

Gain on land sales increased $2.1 million. ARI sold 42 acres of land in 2007 for a net gain of $4.8 million as compared to 14.4 acres of land for a net
gain of $2.7 million for the same three month period ended 2006.

Income (loss) from discontinued operations for the three month period ended
March 31, 2007 and March 31, 2006 was $3.5 million and $(198,000), respectively. Discontinued operations relates to 5 properties sold in 2007 and 10 properties sold in 2006. Operating results for the Pizza World restaurants are also
included in discontinued operations for the three months ended March 31, 2006.



|                                           |  |                                     |        |   |      |   |        |  
|------------------------------------------ |  | ----------------------------------- | ------ | - | ---- | - | ------ | -
|                                           |  | For the Three MonthsEnded March 31, |       
|                                           |  | 2007                                |        |   | 2006 |  
|Revenue:                                   |  |                                     |        |   |      |   |        |  
|Rental                                     |  | $                                   | 1,938  |   |      | $ | 4,188  |  
|Restaurant operations                      |  |                                     |       |   |      |   | 9,349  |  
|                                           |  |                                     |        |   |      |   |        |  
|                                           |  |                                     | 1,938  |   |      |   | 13,537 |  
|Expenses:                                  |  |                                     |        |   |      |   |        |  
|Property Operations                        |  |                                     | 1,358  |   |      |   | 3,700  |  
|Restaurant cost of sales                   |  |                                     |       |   |      |   | 6,915  |  
|                                           |  |                                     |        |   |      |   |        |  
|                                           |  |                                     | 1,358  |   |      |   | 10,615 |  
|                                           |  |                                     |        |   |      |   |        |  
|                                           |  |                                     | 580    |   |      |   | 2,922  |  
|Other (expenses):                          |  |                                     |        |   |      |   |        |  
|Interest                                   |  |                                     | (1,286 | ) |      |   | (2,413 | )
|Depreciation                               |  |                                     | (149   | ) |      |   | (707   | )
|                                           |  |                                     |        |   |      |   |        |  
|                                           |  |                                    
|Loss from discontinued operations          |  |                                     | (855   | ) |      |   | (198   | )
|                                           |  |                                    
|Gain on sale of real estate                |  |                                     | 4,392  |   |      |   |       |  
|                                           |  |                                     |        |   |      |   |        |  
|                                           |  |                                    
|Income (loss) from discontinued operations |  | $                                   | 3,537  |   |      | $ | (198   | )
|                                           |  |                                     |        |   |      |   |        |  



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Liquidity and Capital Resources

General. Cash and cash equivalents at March 31, 2007 totaled $4.9 million, compared with $8.7 million at March 31, 2006. ARIs principal sources of cash have been and will continue to be
from property operations, proceeds from property sales, and the collection of mortgage notes receivable, borrowings and, to a lesser extent, distributions from partnerships. Management anticipates that ARIs cash at March 31, 2007, along
with cash that will be generated in 2007 from property operations, may not be sufficient to meet all of ARIs cash requirements. Management intends to selectively sell land and income producing assets, refinance or extend real estate debt and
seek additional borrowings secured primarily by real estate to meet its liquidity requirements. Historically, management has been successful at extending its current maturity obligations. Management also anticipates funding ongoing real estate
construction projects and the acquisition of new real estate from cash generated by property sales, debt refinancings or extensions, and additional borrowings.

ARI reported a net loss from continuing operations of $11.9 million for the three month period ended March 31, 2007, which included, among other items, the following non-cash charges and credits: gain on sale of real estate of $4.9
million, depreciation and amortization of real estate held for investment of $6.7 million and amortization of deferred borrowing costs of $1.3 million. Other 2007 changes in working capital decreased cash used in operating activities by $9.5
million. Net cash used in operating activities for the three month period ended March 31, 2007 was $18.3 million compared to $5.2 million for the same period ended March 31, 2006.

Net cash used in 2007 investing activities of $147.0 million was primarily due to real estate acquisitions of $109.9 million, real estate construction and development of
$38.3 million, real estate improvements of $9.3 million, funding of notes receivable of $1.4 million, distributions to equity investees of $3.5 million. These outflows were offset by proceeds from the sale of land of $9.6 million, collection of
notes receivable of $1.2 million and deposits of pending purchases and financings of $4.7 million.

Net cash provided by 2007 financing activities of
$159.5 million was primarily due to proceeds from the funding or refinancing of notes payable of $176.5 million, $1.2 million from restricted cash to pay interest expense, and proceeds from construction loans of $36.7 million, offset by $33.8
million to pay down existing notes payable, $6.4 million for financing costs, $9.6 million for cash advances to affiliates, $622,000 in dividends paid, and $31,000 to purchase treasury stock, principal amortization of notes payable of $3.0 million
and payment on maturing notes of $1.6 million.

Discontinued operations provided $3.8 million primarily from the sale of buildings of $22.7 million, offset
by loss from operations of $855,000, and pay off of existing notes of 18.1 million.

ARI expects that funds from existing cash resources, aggressive sales
of land and selected income producing property sales, refinancing of real estate, and borrowings against its real estate will be sufficient to meet the cash requirements associated with ARIs current and anticipated level of operations,
maturing debt obligations and existing commitments. To the extent that ARIs liquidity permits or financing sources are available, ARI will make investments in real estate, primarily in improved and unimproved land, will continue making
investments in real estate entities and marketable equity securities, and will develop and construct income-producing properties.

Equity
Investments. Since 1988, ARI has from time to time purchased shares of IORI and TCI, both of which had the same advisor as ARI until June 2003. The Company may purchase additional equity securities of IORI and TCI through open market and
negotiated transactions to the extent ARIs liquidity permits.

Equity securities of TCI held by ARI (and of IORI held by TCI) may be deemed
restricted securities under Rule 144 of the Securities Act of 1933 (Securities Act). Accordingly, ARI may be unable to sell such equity securities other than in a registered public offering or pursuant to an exemption under
the Securities Act for a one-year period after they are acquired. Such restrictions may reduce ARIs ability to realize the full fair market value of such investments if ARI attempted to dispose of such securities in a short period of time.

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 securing such note. The mortgage note receivable review includes an evaluation of the collateral property securing each 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.

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.



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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 property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in
the rate of inflation also affect the sales values of properties and the ultimate gains to be realized from property sales. To the extent that inflation affects interest rates, earnings from short-term investments and the cost of new financings as
well as the cost of variable interest rate debt will be affected.

Tax Matters

Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, depreciation on owned properties, amortization of
discounts on notes receivable and payable and the difference in the allowance for estimated losses. ARI had a loss for federal income tax purposes in the first three months of 2007 and a loss in the first three months of 2006; therefore, it recorded
no provision for income taxes.

At March 31, 2007, ARI had a net deferred tax asset of $101.6 million due to tax deductions available to it in future
years. However, as management cannot determine that it is more likely than not that ARI will realize the benefit of the deferred tax assets, a 100% valuation allowance has been established.



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

At
March 31, 2007, ARIs exposure to a change in interest rates on its debt is as follows (dollars in thousands except per share):



|                                          |  |         |         |                               |      |   |                                   |   |      
|----------------------------------------- |  | ------- | ------- | ----------------------------- | ---- | - | --------------------------------- | - | -----
|                                          |  | Balance |         | Weighted AverageInterest Rate |      |   | Effect of 1%Increase InBase Rates
|Notes payable:                            |  |         |         |                               |      |   |                                   |   |      
|Variable rate                             |  | $       | 380,549 |                               | 8.50 | % |                                   | $ | 3,805
|                                          |  |         |         |                               |      |   |                                   |   |      
|Total decrease in ARIs annual net income |  |         |         |                               |      |   |                                   |   | 3,805
|                                          |  |         |         |                               |      |   |                                   |   |      
|Per share                                 |  |         |         |                               |      |   |                                   | $ | .38  
|                                          |  |         |         |                               |      |   |                                   |   |      



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

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 Acting Principal Executive Officer and Principal Accounting Officer, of ARIs disclosure controls and procedures pursuant to Exchange Act
Rules 13a-15 and 15d-15. Based upon that evaluation, ARIs Acting Principal Executive Officer and Principal Accounting Officer concluded that ARIs disclosure controls and procedures are effective.

There have been no changes in ARIs internal controls over financial reporting during the quarter ending March 31, 2007, that have materially affected, or are
reasonably likely to materially affect, ARIs internal control over financial reporting.



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PART II. OTHER INFORMATION



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

During
the period of time covered by this report, American Realty Investors, Inc. purchased 3,600 shares of its equity securities. The following table sets forth a summary by month for the quarter indicating purchases made, and the specified number of
shares that may yet be purchased under the program as specified below:



|              |  |                                 |  |                              |      |                                                                        |       |                                                                         |        
|------------- |  | ------------------------------- |  | ---------------------------- | ---- | ---------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------- | -------
|Period        |  | Total Number ofShares Purchased |  | Average Price Paid per Share |      | Total Number of Shares Purchased as Part of Publicly Announced Program |       | Maximum Number of Shares that May Yet be
Purchased Under the Program(1)
|January 2007  |  |                                |  | $                            |     |                                                                        |      |                                                                         | 129,493
|February 2007 |  | 1,900                           |  |                              | 8.41 |                                                                        | 1,900 |                                                                         | 127,593
|March 2007    |  | 1,700                           |  |                              | 8.15 |                                                                        | 1,700 |                                                                         | 125,893
|              |  |                                 |  |                              |      |                                                                        |       |                                                                         |        
|Total         |  | 3,600                           |  | $                            | 8.28 |                                                                        | 3,600 |                                                                         |        
|              |  |                                 |  |                              |      |                                                                        |       |                                                                         |        

---

|(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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



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|ITEM 6. | EXHIBITS
|------- | --------

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



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                         
|3.0           |  | Certificate of Restatement of Articles of Incorporation of American Realty Investors, Inc. dated August 3, 2000 (incorporated by reference to Exhibit 3.0 to the Registrants Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000).                                                                                                                                         
|              | 
|3.1           |  | Certificate of Correction of Restated Articles of Incorporation of American Realty Investors, Inc. dated August 29, 2000 (incorporated by reference to Exhibit 3.1 to Registrants Quarterly
Report on Form 10-Q dated September 30, 2000).                                                                                                                                                    
|              | 
|3.2           |  | Articles of Amendment to the Restated Articles of Incorporation of American Realty Investors, Inc. decreasing the number of authorized shares of and eliminating Series B Cumulative Convertible
Preferred Stock dated August 23, 2003 (incorporated by reference to Exhibit 3.3 to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).                      
|              | 
|3.3           |  | Articles of Amendment to the Restated Articles of Incorporation of American Realty Investors, Inc., decreasing the number of authorized shares of and eliminating Series I Cumulative Preferred
Stock dated October 1, 2003 (incorporated by reference to Exhibit 3.4 to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).                                 
|              | 
|3.4           |  | Bylaws of American Realty Investors, Inc. (incorporated by reference to Exhibit 3.2 to Registrants Registration Statement on Form S-4 filed December 30, 1999).                                                                                                                                                                                                                               
|              | 
|4.1           |  | Certificate of Designations, Preferences and Relative Participating or Optional or Other Special Rights, and Qualifications, Limitations or Restrictions Thereof of Series F Redeemable Preferred
Stock of American Realty Investors, Inc., dated June 11, 2001 (incorporated by reference to Exhibit 4.1 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2001).
|              | 
|4.2           |  | Certificate of Withdrawal of Preferred Stock, Decreasing the Number of Authorized Shares of and Eliminating Series F Redeemable Preferred Stock, dated June 18, 2002 (incorporated by reference to
Exhibit 3.0 to the Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).                                                                                         
|              | 
|4.3           |  | Certificate of Designation, Preferences and Rights of the Series I Cumulative Preferred Stock of American Realty Investors, Inc., dated February 3, 2003 (incorporated by reference to Exhibit 4.3
to the Registrants Annual Report on Form 10-K for the year ended December 31, 2002).                                                                                                       
|              | 
|4.4           |  | Certificate of Designation for Nevada Profit Corporations designating the Series J 8% Cumulative Convertible Preferred Stock as filed with the Secretary of State of Nevada on March 16, 2006
(incorporated by reference to Registrant current report on Form 8-K for event of March 16, 2006).                                                                                                
|              | 
|10.1          |  | Advisory Agreement between American Realty Investors, Inc. and Prime Income Asset Management, LLC, dated October 1, 2003 (incorporated by reference to Exhibit 10.0 to the Registrants
Current Report on Form 8-K, dated October 1, 2003).                                                                                                                                                    
|              | 
|10.2          |  | Second Amendment to Modification of Stipulation of Settlement dated October 17, 2001 (incorporated by reference to Exhibit 10.1 to the Registrants Registration Statement on Form S-4, dated
February 24, 2002).                                                                                                                                                                              
|              | 
|31.1*         |  | Certification pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                                                        
|              | 
|31.2*         |  | Certification pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                                                        
|              | 
|32.1*         |  | Certification pursuant to 18 U.S.C. 1350.                                                                                                                                                                                                                                                                                                                                                      

---

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



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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: May 15, 2007 |  |  |  | By:                             |  | /s/ Daniel J. Moos                                  
|                   |  |  |  |                                 |  | Daniel J. Moos                                      
|                   |  |  |  |                                 |  | President and Chief Operating Officer               
|                   |  |  |  |                                 |  | (Principal Executive Officer)                       
|                   |  |  | 
|Date: May 15, 2007 |  |  |  | By:                             |  | /s/ Steven A. Abney                                 
|                   |  |  |  |                                 |  | Steven A. Abney                                     
|                   |  |  |  |                                 |  | Executive Vice President and Chief Financial Officer
|                   |  |  |  |                                 |  | (Principal Financial and Accounting Officer)        



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AMERICAN REALTY INVESTORS, INC.

EXHIBITS TO

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended March 31, 2007



|               |  |                                                                                                        
|-------------- |  | -------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                
|31.1*          |  | Certification pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.
|               | 
|31.2*          |  | Certification pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.
|               | 
|32.1*          |  | Certification pursuant to 18 U.S.C. 1350.                                                              

---

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