<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549


                                   FORM 10-Q


             [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2001
                                                            -------------


                         Commission File Number 1-15663
                                                -------



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



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


     1800 Valley View Lane, Suite 300, Dallas, Texas            75234
    ----------------------------------------------------------------------
        (Address of Principal Executive Offices)              (Zip Code)


                                 (469) 522-4200
                        ------------------------------
                        (Registrant's Telephone Number,
                             Including Area Code)

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


                     APPLICABLE ONLY TO CORPORATE ISSUERS:


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


Common Stock, $.01 par value                      11,830,127
----------------------------         --------------------------------
          (Class)                     (Outstanding at July 31, 2001)

                                       1
<PAGE>

                         PART I.  FINANCIAL INFORMATION

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

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

                        AMERICAN REALTY INVESTORS, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<S>                                                                  <C>                 <C>
                                                                              June 30,         December 31,
                                                                               2001               2000
                                                                             ---------          ---------
                                                                                   (dollars in thousands,
                                                                                   except per share)
                        Assets
Real estate held for investment.......................................       $ 523,010          $ 559,461
Less - accumulated depreciation.......................................        (133,024)          (148,690)
                                                                             ---------          ---------
                                                                               389,986            410,771

Real estate held for sale.............................................         231,493            242,973

Notes and interest receivable
 Performing ($19,164 in 2001 and $9,684 in 2000 from
  affiliates).........................................................          23,776             13,346
 Nonperforming ($6,433 in 2001 and $1,540 in 2000
  from affiliates)....................................................           7,551              3,062
                                                                             ---------          ---------
                                                                                31,327             16,408

Less--allowance for estimated losses..................................          (2,577)            (2,577)
                                                                             ---------          ---------
                                                                                28,750             13,831

Pizza parlor equipment................................................          10,871             10,191
Less - accumulated depreciation.......................................          (3,598)            (3,164)
                                                                             ---------          ---------
                                                                                 7,273              7,027

Leasehold interest - oil and gas properties...........................           4,719                 --
Less - accumulated depletion..........................................              --                 --
                                                                             ---------          ---------
                                                                                 4,719                 --

Oilfield equipment....................................................             213                 --
Less - accumulated depreciation.......................................              --                 --
                                                                             ---------          ---------
                                                                                   213                 --

Marketable equity securities, at market value.........................             140                153
Cash and cash equivalents.............................................           5,966              4,177
Investments in equity investees.......................................          74,595             44,777
Intangibles, net of accumulated amortization ($2,326
 in 2001 and $2,233 in 2000)..........................................          15,951             16,075
Other assets..........................................................          40,722             47,231
                                                                             ---------          ---------
                                                                             $ 799,808          $ 787,015
                                                                             =========          =========
</TABLE>

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

                                       2
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
                    CONSOLIDATED BALANCE SHEETS - Continued




<TABLE>
                                                                                June 30,        December 31,
                                                                                 2001              2000
                                                                                --------         --------
<S>                                                                          <C>             <C>
                                                                                 (dollars in thousands,
                                                                                    except per share)
                Liabilities and Stockholders' Equity

Liabilities
Notes and interest payable................................................      $599,365         $616,331
Margin borrowings.........................................................        12,307           13,485
Accounts payable and other liabilities ($29,413 in 2001
 and $3,030 in 2000 to affiliate).........................................        63,713           41,221
                                                                                --------         --------
                                                                                 675,385          671,037

Minority interest.........................................................        37,510           42,576

Series F, 3,968.75 shares in 2001 (liquidation
 preference $3,969).......................................................         3,969               --

Stockholders' equity
Preferred Stock, $2.00 par value, authorized 50,000,000
 shares, issued and outstanding
 Series A, 2,721,332 shares in 2001 and 2000
  (liquidation preference $27,213)........................................         4,843            4,843
 Series E, 50,000 shares in 2001 and 2000 (liquidation
  preference $5,000)......................................................           100              100
Common Stock, $.01 par value, authorized 100,000,000
 shares; issued 11,830,127 shares in 2001 and
 11,829,217 shares in 2000................................................           118              118
Paid-in capital...........................................................       112,167          112,301
Accumulated (deficit).....................................................       (34,268)         (43,943)
Treasury stock at cost, 1,637,000 shares in 2001 and
 1,718,749 shares in 2000.................................................           (16)             (17)
                                                                                --------         --------

                                                                                  82,944           73,402
                                                                                --------         --------

                                                                                $799,808         $787,015
                                                                                ========         ========
</TABLE>

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

                                       3
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                     For the Three Months             For the Six Months
                                                        Ended June 30,                   Ended June 30,
                                                 ----------------------------     ----------------------------
                                                     2001             2000            2001             2000
                                                 -----------      -----------     -----------      -----------
                                                             (dollars in thousands, except per share)
<S>                                             <C>               <C>             <C>             <C>
Property revenue
 Rents.........................................  $    32,823      $    35,424     $    66,036      $    70,503
 Property operations expenses..................       25,643           22,710          49,094           46,675
                                                 -----------      -----------     -----------      -----------
  Operating income.............................        7,180           12,714          16,942           23,828

Land operations
 Sales.........................................       13,087            5,760          33,577           18,953
 Cost of sales.................................       12,163            4,698          28,864           15,442
                                                 -----------      -----------     -----------      -----------
  Gain on land sales...........................          924            1,062           4,713            3,511

Pizza parlor operations
 Sales.........................................        8,733            8,392          16,559           16,264
 Cost of sales.................................        7,129            6,852          13,551           13,340
                                                 -----------      -----------     -----------      -----------
  Gross margin.................................        1,604            1,540           3,008            2,924

Income from operations.........................        9,708           15,316          24,663           30,263

Other income
 Interest income...............................          776              772           1,160            3,012
 Equity in income of investees.................        5,710               94           5,705              296
 Gain on sale of real estate...................       25,840           32,078          42,266           48,232
 Other.........................................           44             (288)             77             (187)
                                                 -----------      -----------     -----------      -----------
                                                      32,370           32,656          49,208           51,353

Other expenses
 Interest......................................       19,111           20,391          37,181           40,573
 Depreciation and amortization.................        4,600            4,544           8,679            8,908
 General and administrative....................        1,557            4,723           4,473            8,832
 Advisory fee to affiliate.....................        2,292            1,283           3,534            2,624
 Net income fee to affiliate...................        1,766               --           1,766               --
 Incentive fee to affiliate....................        4,314               --           5,835               --
 Minority interest.............................          (95)          17,895           1,480           27,266
                                                 -----------      -----------     -----------      -----------
                                                      33,545           48,836          62,948           88,203
                                                 -----------      -----------     -----------      -----------

Net income (loss)..............................        8,533             (864)         10,923           (6,587)
Preferred dividend requirement.................         (606)            (563)         (1,248)          (1,071)
                                                 -----------      -----------     -----------      -----------
Net income (loss) applicable to................  $     7,927      $    (1,427)    $     9,675      $    (7,658)
 Common shares.................................  ===========      ===========     ===========      ===========

Earnings per share
 Net income....................................         $.78            $(.13)           $.96            $(.71)
                                                 ===========      ===========     ===========      ===========

Weighted average Common shares used
 in computing earnings per share...............   10,128,124       10,716,533      10,116,196       10,738,003
                                                 ===========      ===========     ===========      ===========
</TABLE>

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

                                       4
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     For the Six Months Ended June 30, 2001

<TABLE>
<CAPTION>

                                               Series A     Series E
                                              Preferred     Preferred   Common  Treasury  Paid-in   Accumulated  Stockholders'
                                                Stock         Stock     Stock    Stock    Capital    (Deficit)      Equity
                                            --------------  ---------  ------  --------  ---------   ----------   ----------
                                                             (dollars in thousands, except per share)
<S>                                         <C>                 <C>     <C>     <C>     <C>          <C>        <C>
Balance, January 1, 2001..................          $4,843       $100    $118       (17)  $112,301     (43,943)  $73,402

Preferred dividends
 Series A Preferred Stock
  ($.50 per share)........................              --         --      --        --                     --
 Series E Preferred Stock
  ($.30 per share)........................              --         --      --        --                     --

Retirement of Treasury Stock..............              --         --      --         1         (1)         --        --

Repurchase of Common Stock................              --         --      --        --       (133)         --      (133)

Net income................................              --         --      --        --         --      10,923    10,923
                                            --------------  ---------  ------  --------  ---------  ----------  --------

Balance, June 30, 2001....................          $4,843       $100    $118       (16)  $112,167     (34,268)  $82,944
                                            ==============  =========  ======  ========  =========  ==========  ========
</TABLE>


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

                                       5
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                  For the Six Months
                                                                                    Ended June 30,
                                                                               -------------------------
                                                                                 2001             2000
                                                                               --------         --------
                                                                                (dollars in thousands)
<S>                                                                           <C>              <C>
Cash Flows From Operating Activities
 Rents collected.........................................................       $ 65,738         $ 69,984
 Pizza parlor sales collected............................................         16,579           16,299
 Interest collected......................................................            300            3,948
 Distributions received from equity investees' operating
  cash flow..............................................................             53            1,806
 Payments for property operations........................................        (56,666)         (60,701)
 Payments for pizza parlor operations....................................        (13,689)         (13,295)
 Interest paid...........................................................        (31,221)         (32,965)
 Advisory fee paid to affiliate..........................................         (3,534)          (2,624)
 Distributions to minority interest holders..............................         (1,583)          (5,153)
 General and administrative expenses paid................................         (4,473)          (8,832)
 Other...................................................................         (2,497)             764
                                                                                --------         --------
  Net cash (used in) operating activities................................        (30,993)         (30,769)

Cash Flows From Investing Activities
 Collections on notes receivable.........................................          4,471           14,757
 Pizza parlor equipment purchased........................................           (713)            (161)
 Proceeds from sale of real estate.......................................         77,693           42,759
 Purchase of marketable equity securities................................             --          (5,531)
 Proceeds from sale of marketable equity securities......................             --            4,203
 Notes receivable funded.................................................        (13,783)          (9,956)
 Earnest money/escrow deposits...........................................           (960)          (5,944)
 Investment in real estate entities......................................        (36,976)           3,997
 Acquisition of real estate..............................................             --           (1,040)
 Construction and development............................................             --           (8,030)
 Real estate improvements................................................         (6,465)          (5,064)
 Acquisition of leasehold interests......................................           (150)              --
 Purchase of oilfield equipment..........................................           (213)              --
                                                                                --------         --------
  Net cash provided by investing activities..............................         22,904           29,990


Cash Flows from Financing Activities
 Proceeds from notes payable.............................................         77,924          124,201
 Payments on notes payable...............................................        (79,875)         (90,809)
 Deferred borrowing costs................................................         (4,941)          (3,737)
 Net (payments to)/advances from affiliates..............................         18,832          (27,681)
 Issuance of Series E Preferred Stock....................................             --              500
 Margin borrowings, net..................................................         (1,286)             375
 Repurchase of Common Stock..............................................           (133)            (746)
 Preferred dividends paid................................................           (643)          (1,071)
                                                                                --------         --------
  Net cash provided by financing activities..............................          9,878            1,032

  Net increase in cash and cash equivalents..............................          1,789              253

Cash and cash equivalents, beginning of period...........................          4,177            2,479
                                                                                --------         --------
Cash and cash equivalents, end of period.................................       $  5,966         $  2,732
                                                                                ========         ========
</TABLE>

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

                                       6
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
               CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued




<TABLE>
<CAPTION>
                                                                                  For the Six Months
                                                                                     Ended June 30,
                                                                               -------------------------
                                                                                 2001             2000
                                                                               --------         --------
                                                                                 (dollars in thousands)

<S>                                                                             <C>             <C>
Reconciliation of net income (loss) to net cash (used in)
 operating activities
 Net income (loss)......................................................        $ 10,923         $(6,587)
 Adjustments to reconcile net income (loss) to net cash
  (used in) operating activities
  Depreciation and amortization.........................................           8,679           8,908
  Gain on sale of real estate...........................................         (46,979)        (51,743)
  Distributions from equity investees' operating
   cash flow............................................................              53           1,806
  Distributions to minority interest holders............................            (103)         22,113
  Equity in (income) of investees.......................................          (5,705)           (296)
  (Increase) decrease in accrued interest receivable....................            (860)            936
  Decrease in other assets..............................................           3,243           5,314
  Increase (decrease) in accrued interest payable.......................            (243)          2,741
  (Decrease) in accounts payable and other liabilities..................              (1)        (13,961)
                                                                                --------        --------

   Net cash (used in) operating activities..............................         (30,993)        (30,769)
                                                                                ========        ========

Schedule of noncash investing and financing

 Notes payable from acquisition of real estate..........................        $     --        $  2,927

 Notes payable assumed by buyer on sale of real estate..................          18,406          27,914

 Retirement of Common Stock.............................................              --              20

 Exchange of real estate at carrying value..............................           3,726           2,989

 Notes receivable from sale of real estate..............................           4,329              --

 Issuance of Series F Preferred Stock...................................           3,969              --
</TABLE>


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

                                       7
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.   BASIS OF PRESENTATION
-------   ---------------------

The accompanying Consolidated Financial Statements have been prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X.  Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.  Dollar amounts in tables are in thousands, except per share
amounts.  Certain balances for 2000 have been reclassified to conform to the
2001 presentation.

Operating results for the six month period ended June 30, 2001, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001.  For further information, refer to the Consolidated Financial
Statements and Notes thereto included in ARI's Annual Report on Form 10-K for
the year ended December 31, 2000 (the "2000 Form 10-K").

NOTE 2.   NOTES RECEIVABLE
-------   ----------------

In April 2000, a loan with a then principal balance of $1.2 million, secured by
a pledge of a partnership interest in a partnership which owns real estate in
Addison, Texas, matured.  In February 2001, the principal balance was increased
to $1.6 million, the interest rate was increased to 18.0% per annum, and the
maturity date was extended to June 2001.  At August 2001, extension terms are
being negotiated.

At December 31, 2000, a loan with a principal balance of $404,000 to La Quinta
Partners, LLC, was in default.  In March 2001, a settlement was reached, whereby
ARI collected $410,000 in full satisfaction of the note including accrued but
unpaid interest.

In July 2000, ARI sold a 749.1 acre tract of its Keller land parcel for $10.0
million, receiving $8.7 million in cash and providing purchase money financing
of the remaining $1.3 million of the sales price.  The loan bears interest at
12.0% per annum.  In September 2000, $500,000 in principal and interest was
collected.  All remaining principal and interest was due July 31, 2001.  The
loan was secured by 100% of the shares of DM Development, Inc. and an assignment
of land sales proceeds. The loan had a principal balance of $817,000 at December
31, 2000.  In March 2001, the loan was collected in full, including accrued but
unpaid interest.

In August 2000, ARI sold a 20.5 acre tract of its Mason Goodrich land parcel for
$3.6 million, receiving $2.1 million in cash and providing purchase money
financing of the remaining $1.5 million of the sales price.  The loan  matured
in December 2000.  In February 2001, the loan was collected in full, including
accrued but unpaid interest.

In March 2001, ARI sold a 20.0 acre tract of its Katrina land parcel for $2.8
million, receiving $700,000 in cash and providing purchase money

                                       8
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



NOTE 2.   NOTES RECEIVABLE (Continued)
-------   ----------------

financing of the remaining $2.1 million of the sales price.  The loan bears
interest at 12.0% per annum and matured in July 2001.  All principal and
interest are due at maturity.  At August 2001, extension terms are being
negotiated.

In April 2001, ARI sold a 20.0 acre tract of its Katrina land parcel for $2.9
million receiving $700,000 in cash and providing purchase money financing of the
remaining $2.2 million of the sales price.  The loan bore interest at 10.0% per
annum and matured in June 2001.  In May 2001, ARI sold an 80% senior interest in
the note to a financial institution.  In June 2001, the interest rate was
increased to 12.0% and the maturity date was extended to August 2001.  All
principal and accrued but unpaid interest are due at maturity.  In July 2001,
the note was collected in full, including accrued but unpaid interest.

Related Party.  In March 2001, ARI funded $13.6 million of a $15.0 million
unsecured line of credit to One Realco Corporation ("One Realco") which owns
approximately 11.9% of the outstanding shares of ARI's Common Stock.  The line
of credit bears interest at 12.0% per annum.  All principal and interest are due
at maturity in February 2002. The line of credit is guaranteed by Basic Capital
Management, Inc, ("BCM"), ARI's advisor.

In December 2000, an unsecured loan with a principal balance of $1.6 million to
Warwick of Summit, Inc. ("Warwick") matured.  All principal and interest were
due at maturity.  At June 2001, the loan, and $331,000 of accrued interest,
remained unpaid.  Richard D. Morgan, a Warwick shareholder, serves as a director
of ARI.

In December 2000, a loan with a principal balance of $1.6 million to Bordeaux
Investments Two, L.L.C. ("Bordeaux"), matured. The loan is secured by (1) a 100%
interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma;
(2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of
undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of
the Bordeaux members.  At June 2001, the loan, and $379,000 of accrued interest,
remained unpaid.  Richard D. Morgan, a Bordeaux member, serves as a director of
ARI.

In March 2000, a loan with a principal balance of $2.3 million to Lordstown,
L.P., matured.  The loan is secured by a second lien on land in Ohio and
Florida, by 100% of the general and limited partner interest in Partners
Capital,  Ltd., the limited partner of Lordstown, L.P., and a profits interest
in subsequent land sales.  At June 2001, the loan, and $611,000 of accrued
interest, remained unpaid.  A corporation controlled by Richard D. Morgan is the
general partner of Lordstown, L.P. Mr. Morgan serves as a director of ARI.

                                       9
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



NOTE 3.    REAL ESTATE
---------  -----------

In 2001, ARI sold the following properties:


<TABLE>
<CAPTION>
                                              Units/       Sales   Net Cash     Debt      Gain (Loss)
      Property              Location       Sq.Ft./Acres    Price   Received  Discharged     on Sale
---------------------  ------------------  -------------  -------  --------  -----------  ------------
<S>                    <C>                 <C>            <C>        <C>     <C>           <C>
First Quarter
Apartments
Carriage Park          Tampa, FL                46 Units  $ 2,005    $  757  $    1,069       $   663
Rockborough            Denver, CO              345 Units   16,675     3,654      12,215 (1)    13,471

Shopping Center
Regency Pointe         Jacksonville, FL    67,063 Sq.Ft.    7,350     5,126       1,500         2,292

Land
Frisco Bridges         Collin County, TX      27.8 Acres    4,500     4,130          --            25
Katrina                Palm Desert, CA        20.0 Acres    2,831      (124)        596            -- (2)
Las Colinas            Las Colinas, TX         1.7 Acres      825       233         400           539
Plano Parkway          Plano, TX              11.3 Acres    1,446       312         950            --
Scoggins               Tarrant County, TX    232.8 Acres    2,913       892       1,800           181
Scout                  Tarrant County, TX    408.0 Acres    5,087     1,586       3,200         2,969
Tree Farm              Dallas County, TX      10.4 Acres    2,888       (87)      2,644            75

Second Quarter
Apartments
Kimberly Woods         Tucson, AZ              279 Units    8,450     1,667       6,191 (1)     6,052
Place One              Tulsa, OK               407 Units   12,935     3,310       7,539         8,623
Shadowood              Addison, TX             184 Units    7,125     1,980       4,320         4,644
Glenwood               Addison, TX             168 Units    6,650     3,166       2,549          (560)
Bent Tree              Addison, TX             292 Units   12,050     2,480       8,867         7,081

Land
Katrina                Palm Desert, CA        20.0 Acres    2,940        78          --           516
Mason/Goodrich         Houston, TX            22.1 Acres    4,168       (34)      3,750         2,896
Plano Parkway          Plano, TX              12.0 Acres      740       672          --          (991)
Yorktown               Harris County, TX     120.4 Acres    5,239      (160)      4,991        (1,497)

Third Quarter
Apartments
Club Mar               Sarasota, FL            248 Units    8,500     1,805       6,199         5,719

Land
Elm Fork               Denton County, TX      10.0 Acres    1,002       (30)        958           284
Katrina                Palm Desert, CA         6.1 Acres    1,196     1,108          --           570
Chase Oaks             Plano, TX              22.3 Acres    2,875       663       2,027           796
</TABLE>
-----------------

(1)  Debt assumed by purchaser.
(2)  Gain deferred until ARI-provided financing is collected.

In 2000, ARI sold the following properties:

<TABLE>
<CAPTION>
                                           Units/      Sales   Net Cash     Debt      Gain (Loss)
      Property            Location      Sq.Ft./Acres   Price   Received  Discharged     On Sale
---------------------  ---------------  ------------  -------  --------  -----------  -----------
<S>                     <C>             <C>           <C>      <C>       <C>          <C>
First Quarter
Apartments
Summerwind             Reseda, CA          172 Units   $9,000    $3,082   $5,568 (1)       $6,684
Windtree               Reseda, CA          159 Units    8,350     2,911    5,063 (1)        6,170
Whispering Pines       Canoga Park, CA     102 Units    5,300     1,597    3,437 (1)        3,106
</TABLE>


                                       10
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 3.   REAL ESTATE (Continued)
-------   -----------

<TABLE>
<CAPTION>
                                              Units/       Sales   Net Cash     Debt      Gain (Loss)
      Property             Location        Sq.Ft./Acres    Price   Received  Discharged     On Sale
---------------------  -----------------  --------------  -------  --------  -----------  -----------
<S>                    <C>                <C>             <C>      <C>       <C>          <C>
Shopping Center
Katella Plaza          Orange, CA          62,290 Sq.Ft.  $ 1,814    $  283   $   1,188       $   194

Land
Duchense               Duchense, UT            420 Acres       43        42          --            16
Frisco Bridges         Collin County, TX     15.00 Acres    2,675       706       2,000           297
Frisco Bridges         Collin County, TX     19.74 Acres    2,971        --          -- (2)        --
Mason/Goodrich         Houston, TX             1.1 Acres      129        --         116            70
Mason/Goodrich         Houston, TX            12.8 Acres    2,536        --       1,803         1,783
Nashville              Nashville, TN           2.6 Acres      405        --         345           225
Rasor                  Plano, TX              43.0 Acres    1,850        --       1,604            58

Second Quarter
Apartments
Pines                  Little Rock, AR         257 Units    4,650     1,281       3,063         2,441
Four Seasons           Denver, CO              384 Units   16,600     6,543       9,220 (1)     8,191
Sherwood Glen          Urbandale, IA           180 Units    6,250     1,244       4,626 (1)     4,161

Office Building
Marina Playa           Santa Clara, CA    124,205 Sq.Ft.   25,750     6,082       7,766        17,285

Land
Rasor                  Plano, TX               5.4 Acres      915        --         915           705
Salmon River           Salmon River, ID        3.0 Acres       45        44          --            38
Valley Ranch           Irving, TX             22.4 Acres    1,455        --       1,375          (585)
Parkfield              Denver, CO              2.6 Acres      615        (1)        584           512
Frisco Bridges         Collin County, TX      24.3 Acres    4,194      (435)      4,000           260
Vista Business         Travis County, TX       5.4 Acres      620        14         577           173
McKinney Corners II    Collin County, TX      14.6 Acres      500      (599)      1,050           (40)

Third Quarter
Apartments
Fair Oaks              Euless, TX              208 Units    6,850       609       5,711         3,364

Land
Mason/Goodrich         Houston, TX             6.8 Acres    1,198       114         991           807
McKinney Corners
 I,II,III,IV,V         Collin County, TX      82.0 Acres    9,150       613       8,123         1,638
---------------------
</TABLE>

(1)   Debt assumed by purchaser.
(2)   Exchanged for 3.25 acres of Clark land.

In 2001, ARI purchased the following properties:

<TABLE>
<CAPTION>
                                   Units/     Purchase  Net Cash      Debt      Interest   Maturity
    Property        Location    Sq.Ft./Acres   Price      Paid      Incurred      Rate       Date
-----------------  -----------  ------------  --------  ---------  -----------  ---------  --------
<S>                <C>          <C>             <C>     <C>        <C>          <C>        <C>
Second Quarter
Apartments
Glenwood           Addison, TX     168 Units    $6,246      --  (1)  $ 2,549 (2)    9.25%     10/04
--------------
</TABLE>
(1)   8.88 acres of Hollywood Casino land and 10.5 acres of Vista Ridge land
      given as consideration.  Exchanged with a related party.
(2)   Assumed debt of seller.  Exchanged with a related party.

                                       11
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 3.   REAL ESTATE (Continued)
-------   -----------

In 2000, ARI purchased the following properties:

<TABLE>
<CAPTION>
                                          Units/     Purchase  Net Cash     Debt     Interest   Maturity
    Property            Location       Sq.Ft./Acres   Price      Paid     Incurred     Rate       Date
-----------------  ------------------  ------------  --------  --------  ----------  ---------  --------
<S>                <C>                 <C>           <C>       <C>       <C>          <C>       <C>
First Quarter
Land
Clark              Farmers Branch, TX    3.25 Acres    $2,989      $ --   $--   (1)       -- %        --
Kelly lots         Collin County, TX      .75 Acres       130        20     100 (2)      10.0      03/10
Mastenbrook        Collin County, TX   157.86 Acres     3,200       704   2,400 (2)       9.0      09/00

Second Quarter
Land
Sladek             Travis County, TX     63.3 Acres       712       316     427 (2)      10.0      05/04
--------------
</TABLE>
(1)   Exchanged for 19.74 acres of Frisco Bridges land.
(2)   Seller financing.

NOTE 4.   OIL AND GAS OPERATIONS
-------   ----------------------

In May 2001, ARI purchased the leasehold interests in 37 oil and gas mineral
development properties, which include 131 drilled wells.  The total proved
reserves are 5.9 million barrels of oil and 3.0 billion cubic feet of natural
gas.  The total purchase price was $4.7 million, plus a 40% profit
participation.  The Operator's Interest was purchased for $375,000, with $25,000
cash paid at closing.  ARI gave a note payable for the remaining $350,000.  The
note bears no interest, and matures in May 2002.  Monthly principal payments are
required.  The Working Interests were purchased for $4.3 million, with $125,000
cash paid at closing.  ARI gave a note payable for $250,000.  The note bears no
interest, and matures in November 2001.  One-half of the principal is due in
August 2001.  The remaining $4.0 million was paid by issuing 3,968.75 shares of
ARI Series F Preferred Stock, which is redeemable quarterly in an amount equal
to 20% of net cash flow from these oil and gas operations.  The stock has a
liquidation value of $1,000 per share, and pays no dividends.  Production from
these wells began in July 2001.

NOTE 5.   INVESTMENTS IN EQUITY INVESTEES
-------   -------------------------------

Real estate entities.  ARI's investment in real estate entities at June 30,
2001, included equity securities of two affiliated publicly traded real estate
companies, Income Opportunity Realty Investors, Inc. ("IORI") and
Transcontinental Realty Investors, Inc. ("TCI"), and interests in real estate
joint venture partnerships.  BCM, ARI's advisor, serves as advisor to IORI and
TCI.

ARI accounts for its investment in IORI and TCI and the joint venture
partnerships using the equity method.  The equity securities of IORI and TCI are
pledged as collateral for borrowings.  See NOTE 8.  "MARGIN BORROWINGS."

                                       12
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 5.   INVESTMENTS IN EQUITY INVESTEES (Continued)
-------   -------------------------------

ARI's investment in real estate entities, accounted for using the equity method,
at June 30, 2001 was as follows:

<TABLE>
<CAPTION>
                     Percentage              Carrying             Equivalent
                      of ARI's               Value of              Investee              Market Value
                    Ownership at          Investment at          Book Value at         of Investment at
   Investee         June 30, 2001         June 30, 2001          June 30, 2001           June 30, 2001
--------------  ---------------------  --------------------  ---------------------  -----------------------
<S>             <C>                    <C>                    <C>                    <C>
IORI                            27.0%               $ 7,347                $10,408                  $ 3,361
TCI                             46.6%                64,966                 99,940                   52,270
                                                    -------                                         -------
                                                     72,313                                         $55,631
                                                                                                    =======
Other                                                 2,282
                                                    -------
                                                    $74,595
                                                    =======
</TABLE>

Management continues to believe that the market value of both IORI and TCI
undervalues their assets, and, therefore, ARI may continue to increase its
ownership in these entities in 2001, as its liquidity permits.  On October 3,
2000, ARI and IORI entered into a stock option agreement which provided IORI and
ARI with an option to purchase 1,858,900 shares of Common Stock of TCI from a
third party.  On October 19, 2000, IORI assigned all of its rights to purchase
such shares to ARI.  The total cost to purchase the TCI shares was $30.8
million.  In October 2000, ARI paid $5.6 million of the option price.  In April
2001, the remainder of the option price was paid and ARI acquired the TCI
shares.

Set forth below is summarized results of operations of equity investees for the
six months ended June 30, 2001:

<TABLE>
<S>                                                                                     <C>
Revenues.........................................................................        $ 78,973
Equity in income (loss) of equity investees......................................          (1,452)
Property operating expenses......................................................          55,914
Depreciation.....................................................................          11,227
Interest expense.................................................................          25,017
                                                                                         --------
(Loss) before gains on sale of real estate.......................................         (14,637)

Gain on sale of real estate......................................................          27,106
                                                                                         --------
Net income.......................................................................        $ 12,469
                                                                                         ========
</TABLE>
ARI's share of equity investees' loss before gains on the sale of real estate
was $6.5 million for the six months ended June 30, 2001, and its share of equity
investees' gains on sale of real estate was $12.6 million for the six months
ended June 30, 2001.  Also included is a loss of $387,000 from the sale of
stock.

ARI's cash flow from IORI and TCI is dependent on the ability of each of them to
make distributions.  In the fourth quarter of 2000, IORI and TCI suspended
distributions.

In June 2000, ARI sold 1.6 million shares of TCI stock resulting in a $7.7
million loss and 54,000 shares of IORI stock resulting in a

                                       13
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 5. INVESTMENTS IN EQUITY INVESTEES (Continued)
------- -------------------------------

$246,000 loss.  These losses are included in equity in income (loss) of
investees on the Statement of Operations.

ART Florida Portfolio II, Ltd.  In June 2000, Vestavia Lakes Apartments
partnership, in Orlando, Florida, in which ART Portfolio II, Ltd. owned  an
interest, was sold.  A loss was incurred on the sale, of which ARI's share was
$967,000, which is included in equity income (loss) of investees in the
accompanying Consolidated Financial Statements.

Elm Fork Ranch, L.P. In June 2000, ARI sold its partnership interests for $2.0
million in cash, retaining an option to repurchase its interests.  In January
2001, ARI purchased 100% of the partnership interests for $9.2 million,
including financing of $9.0 million.

NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO
------- ------------------------------------------------

Since 1994, ARI has been purchasing equity securities of entities other than
those of IORI and TCI to diversify and increase the liquidity of its margin
accounts.  These equity securities are considered a trading portfolio and are
carried at market value.  In the first six months of 2001, ARI did not purchase
or sell any such securities.  At June 30, 2001, ARI recognized an unrealized
decrease in the market value of its trading portfolio securities of $15,000.
Unrealized and realized gains and losses on trading portfolio securities are
included in other income in the accompanying Consolidated Statements of
Operations.


NOTE 7.    NOTES PAYABLE
---------  -------------

In 2001, ARI financed/refinanced or obtained second mortgage financing on the
following:

<TABLE>
<CAPTION>
                                              Acres/Rooms/     Debt        Debt     Net Cash  Interest   Maturity
       Property               Location           Sq.Ft.      Incurred   Discharged  Received    Rate       Date
-----------------------  -------------------  -------------  ---------  ----------  --------  ---------  --------
<S>                     <C>                   <C>             <C>       <C>         <C>       <C>        <C>
First Quarter
Land
Mason/Goodrich           Houston, TX            235.0 Acres  $  6,750      $    --    $6,302     14.00%     01/02
Pioneer Crossing         Austin, TX             350.1 Acres     7,000           --     6,855     16.90      03/05
Pioneer Crossing         Austin, TX              14.5 Acres     2,500           --     2,350     14.50      01/02

Second Quarter
Land
Hollywood Casino         Farmers Branch, TX      51.7 Acres      2,500 (1)      --     1,916      9.00      04/03
Valwood                  Dallas County, TX       19.4 Acres         -- (1)      --        --        --         --
Katrina                  Palm Desert, CA        300.5 Acres     22,000      15,584     4,417     12.50 (2)  10/01
Jeffries Ranch           Oceanside, CA           82.4 Acres      5,250 (3)     750     3,944     14.50      06/02
Willow Springs           Riverside, CA        1,485.7 Acres         -- (3)      --        --        --         --

Hotel
Williamsburg
 Hospitality House       Williamsburg, VA(4)      296 Rooms    10,309           --     9,851     36.00      01/02
</TABLE>


                                       14
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 7. NOTES PAYABLE (Continued)
------- -------------

<TABLE>
<CAPTION>
                                             Acres/Rooms/     Debt       Debt     Net Cash  Interest   Maturity
       Property              Location           Sq. Ft.     Incurred  Discharged  Received    Rate       Date
----------------------  ------------------  --------------  --------  ----------  --------  --------   --------
<S>                     <C>                 <C>             <C>       <C>         <C>       <C>        <C>
Shopping Center
Cullman                 Cullman, AL          92,486 Sq.Ft.    $   --(3)     $129      $ --        --         --

Third Quarter
Land
Marine Creek            Fort Worth, TX          54.2 Acres     1,500         750       701      9.00%     01/03
------------------
</TABLE>
(1)  Single note, with all properties as collateral.
(2)  Variable interest rate.
(3)  Single note, with all properties as collateral.
(4)  Also secured by 1,846,000 shares of TCI common stock.

In 2000, ARI financed/refinanced or obtained second mortgage financing on the
following:

<TABLE>
<CAPTION>
                                                Acres/        Debt       Debt     Net Cash  Interest   Maturity
       Property              Location        Units/Sq.Ft.   Incurred  Discharged  Received    Rate       Date
----------------------  ------------------  --------------  --------  ----------  --------  --------   --------
<S>                     <C>                 <C>             <C>       <C>         <C>       <C>        <C>
First Quarter
Land
Centura, Clark
 and Woolley            Farmers Branch, TX     10.08 Acres   $ 7,150     $    --   $ 6,960     14.00%     03/03
Frisco Bridges          Collin County, TX     127.41 Acres    18,000      11,900     6,190     13.00      03/01
Frisco Bridges          Collin County, TX      62.84 Acres     7,800       4,985     2,432     14.00      03/02
Nashville               Nashville, TN         144.82 Acres    10,000       2,034     7,039     15.50      07/00

Second Quarter
Apartments
Rockborough             Denver, CO               345 Units     2,222          --     1,942      8.37      11/10
Confederate Point       Jacksonville, FL         206 Units     7,440       5,879     1,039      8.12      05/07
Whispering Pines        Topeka, KS               320 Units     7,530       6,829       302      8.12      05/07
Chateau Bayou           Ocean Springs, MS        122 Units     1,007          --       988      8.36      05/10
Waters Edge             Gulfport, MS             238 Units     7,532       3,993     3,447      8.08      05/07

Land
Katy                    Harris County, TX      130.6 Acres     4,250       4,042       (9)     13.00      05/01

Third Quarter
Office Buildings
Centura Tower           Farmers Branch, TX  410,910 Sq.Ft.    15,000          --    14,612     16.90      07/02
</TABLE>

NOTE 8.    MARGIN BORROWINGS
---------  -----------------

ARI has margin arrangements with various financial institutions and brokerage
firms which provide for borrowing of up to 50% of the market value of marketable
equity securities.  The borrowings under such margin arrangements are secured by
equity securities of IORI and TCI and ARI's trading portfolio securities and
bear interest rates ranging from 7.0% to 11.0%.  Margin borrowing totaled $12.3
million at June 30, 2001.

In April 2000, ARI obtained a security loan in the amount of $5.0 million with a
financial institution.  ARI received net cash of $4.6

                                       15
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



NOTE 8. MARGIN BORROWINGS (Continued)
------- -----------------

million after paying various closing costs.  The loan bears interest at prime
plus 1% per annum (currently 7.75% per annum), requires monthly payments of
interest only and matures in September 2001.  The loan is secured by 1,050,000
shares of ARI Common Stock held by BCM, ARI's advisor.

In March 2001, ARI obtained a security loan in the amount of $3.5 million from a
financial institution.  ARI received net cash of $3.5 million after paying
various closing costs.  The loan bears interest at 16.0% per annum.  In April
and May 2001, a total of $2.0 million in principal paydowns were made.  In July
2001, the loan was repaid in full, including accrued but unpaid interest.  The
loan was secured by 472,000 shares of TCI owned by ARI and 128,000 shares of ARI
owned by One Realco.


NOTE 9. INCOME TAXES
------- ------------

Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
ARI had no taxable income or provision for income taxes in the six months ended
June 30, 2001 or 2000.  A deferred tax liability equal to the deferred tax asset
has been provided due to the uncertainty of the future utilization of the
deferred tax asset.


NOTE 10. OPERATING SEGMENTS
-------- ------------------

Significant differences among the accounting policies of the operating segments
as compared to the Consolidated Financial Statements principally involve the
calculation and allocation of administrative expenses.  Management evaluates the
performance of each of the operating segments and allocates resources to them
based on their net operating income and cash flow.  Expenses that are not
reflected in the segments are $1.6 million and $4.5 million of general and
administrative expenses for the three and six months ended June 30, 2001 and
$4.7 million and $8.8 million for 2000.  Excluded from operating segment assets
are assets of $122.4 million in 2001 and $95.7 million in 2000, which are not
identifiable with an operating segment.  There are no intersegment revenues and
expenses and ARI conducted all of its business within the United States, with
the exception of Hotel Sofia (Bulgaria).

                                       16
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 10. OPERATING SEGMENTS (Continued)
-------- ------------------

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

<TABLE>
<CAPTION>
                                                           Inter-
 Three Months Ended  Commercial                U.S.        national                Pizza    Oil &   Receivables/
   June 30, 2001     Properties  Apartments   Hotels       Hotels        Land     Parlors    Gas       Other      Total
-------------------  ----------  ----------  --------  --------------  --------  --------  ------  ------------  --------
<S>                  <C>         <C>         <C>       <C>             <C>       <C>       <C>     <C>           <C>
Operating
  revenue              $  7,600    $ 15,116   $ 8,937         $ 1,032  $     42   $ 8,733  $   --       $    96  $ 41,556
Interest income              --          --        --              --        --        --      --           776       776
Operating expenses        4,884       8,693     8,448             891     2,625     7,129      --           102    32,772
                       --------    --------   -------         -------  --------   -------  ------       -------  --------
                       $  2,716    $  6,423   $   489         $   141  $ (2,583)  $ 1,604  $   --       $   770  $  9,560
                       ========    ========   =======         =======  ========   =======  ======       =======  ========

Depreciation           $  1,805    $  1,204   $   680         $   650  $     --   $   257  $   --       $     4  $  4,600
Interest                  4,091       5,435     1,006              97     8,078      (463)     --           867    19,111
Capital
  expenditures            2,588          23       168              --       251       375     363            --     3,768
Assets                  162,933     130,110    68,549          28,394   231,493    21,620   4,932        28,750   676,781
</TABLE>

<TABLE>
<CAPTION>
Property Sales:                  Apartments                              Land                                     Total
                                 ----------                            --------                                  --------
<S>                             <C>                                   <C>                                        <C>
Sales price                        $ 47,210                            $ 13,087                                  $ 60,297
Cost of sale                         21,370                              12,163                                    33,533
                                   --------                            --------                                  --------
Gain on sale                       $ 25,840                            $    924                                  $ 26,764
                                   ========                            ========                                  ========
</TABLE>

<TABLE>
<CAPTION>
                                                           Inter-
 Six Months Ended    Commercial                U.S.        national                Pizza    Oil &   Receivables/
   June 30, 2001     Properties  Apartments   Hotels       Hotels        Land     Parlors    Gas       Other       Total
-------------------  ----------  ----------  --------  --------------  --------  --------  ------  ------------  --------
<S>                  <C>         <C>         <C>       <C>             <C>       <C>       <C>     <C>           <C>
Operating revenue.     $ 16,733    $ 31,242   $15,938         $ 1,726  $    105   $16,559  $   --       $   292  $ 82,595
Interest income....          --          --        --              --        --        --      --         1,160     1,160
Operating expenses       10,030      18,519    14,498           1,425     4,544    13,551      --            78    62,645
                       --------    --------   -------         -------  --------   -------  ------       -------  --------
                       $  6,703    $ 12,723   $ 1,440         $   301  $(4,439)   $ 3,008  $   --       $ 1,374  $ 21,110
                       ========    ========   =======         =======  ========   =======  ======       =======  ========

Depreciation.......    $  3,586    $  2,543   $ 1,309         $   650  $     --   $   586  $   --       $     5  $  8,679
Interest...........       8,578      10,620     2,273             194    13,368      (191)     --         2,339    37,181
Capital
  expenditures.....       4,806          23       320           1,000       316       713     363            --     7,541
Assets.............     162,933     130,110    68,549          28,394   231,493    21,620   4,932        28,750   676,781

                     Commercial
Property Sales:      Properties  Apartments                              Land                                     Total
                     ----------  ----------                            --------                                  --------
Sales price........    $  7,350    $ 65,890                            $ 33,577                                  $106,817
Cost of sale.......       5,058      25,916                              28,864                                    59,838
                       --------    --------                            --------                                  --------
Gain on sale.......    $  2,292    $ 39,974                            $  4,713                                  $ 46,979
                       ========    ========                            ========                                  ========
</TABLE>

<TABLE>
<CAPTION>
    Three Months Ended       Commercial                                  Pizza
       June 30, 2000         Properties  Apartments  Hotels     Land    Parlors  Receivables   Total
---------------------------  ----------  ----------  -------  --------  -------  -----------  --------
<S>                          <C>         <C>         <C>      <C>       <C>      <C>          <C>
Operating revenue..........    $  7,048    $ 17,968  $ 9,614  $    794  $ 8,392      $    --  $ 43,816
Interest income............          --          --       --        --       --          772       772
Operating expenses.........       4,934      10,297    5,978     1,501    6,852           --    29,562
                               --------    --------  -------  --------  -------      -------  --------
                               $  2,114    $  7,671  $ 3,636  $   (707) $ 1,540      $   772  $ 15,026
                               ========    ========  =======  ========  =======      =======  ========

Depreciation...............    $  1,887    $  1,618  $   640  $     --  $   396      $    --  $  4,541
Interest...................       4,697       5,469    1,222     7,082      291           --    18,761
Capital expenditures.......      (1,520)      5,435      122       905      116           --     5,058
Assets.....................     191,177     177,085   70,436   312,495   21,882       31,953   805,028

                              Commercial
Property Sales:               Properties    Apartments                      Land                                         Total
                             ------------  -------------                ------------                                 -------------
Sales price................       $25,750        $27,500                      $8,344                                       $61,594
Cost of sale...............         8,465         12,707                       7,282                                        28,454
                                  -------        -------                      ------                                       -------
Gain on sale...............       $17,285        $14,793                      $1,062                                       $33,140
                                  =======        =======                      ======                                       =======
</TABLE>

                                       17
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE 10. OPERATING SEGMENTS (Continued)
-------- ------------------

<TABLE>
<CAPTION>
     Six Months Ended        Commercial                                    Pizza
       June 30, 2000         Properties  Apartments   Hotels     Land     Parlors   Receivables   Total
---------------------------  ----------  ----------  --------  ---------  --------  -----------  --------
<S>                          <C>         <C>         <C>        <C>       <C>       <C>          <C>
Operating revenue..........    $ 16,478    $ 36,309   $16,468   $  1,248   $16,264      $    --  $ 86,767
Interest income............          --          --        --         --        --        3,012     3,012
Operating expenses.........       9,939      20,389    11,460      4,887    13,340           --    60,015
                               --------    --------   -------   --------   -------      -------  --------
                               $  6,539    $ 15,920   $ 5,008   $ (3,639)  $ 2,924      $ 3,012  $ 29,764
                               ========    ========   =======   ========   =======      =======  ========

Depreciation...............    $  3,498    $  3,449   $ 1,238   $     --   $   720      $    --  $  8,905
Interest...................       8,264      10,817     2,452     14,177       569           --    36,279
Capital expenditures.......       1,529       9,488       317      1,760       161           --    13,255
Assets.....................     191,177     177,085    70,436    312,495    21,882       31,953   805,028

                             Commercial
Property Sales:              Properties  Apartments              Land                             Total
                             ----------  ----------            ---------                         --------
Sales price................    $ 27,564    $ 50,150             $ 18,953                         $ 96,667
Cost of sale...............      10,085      19,397               15,442                           44,924
                               --------    --------             --------                         --------
Gain on sale...............    $ 17,479    $ 30,753             $  3,511                         $ 51,743
                               --------    --------             --------                         --------
</TABLE>

NOTE 11.    COMMITMENTS AND CONTINGENCIES
----------  -----------------------------

Liquidity.  Management expects that ARI will generate excess cash from
operations, due to increased rental rates and occupancy at its properties;
however, such excess will not be sufficient to discharge all of ARI's debt
obligations as they mature. ARI will rely on aggressive land sales, selected
income producing property sales and, to the extent necessary, additional
borrowings to meet its cash requirements.

Commitments.  In March 1999, ARI reached an agreement with the Class A
unitholders of Valley Ranch, L.P. to acquire their eight million Class A units
for $1.00 per unit. In 1999, three million units were purchased. Additionally,
one million units were purchased in January 2000 and two million units were
purchased in May 2001. ARI has committed to purchase the remaining two million
units in May 2002.

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

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


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

Introduction
------------

ARI's predecessor was organized in 1961 to provide investors with a
professionally managed, diversified portfolio of equity real estate and mortgage
loan investments selected to provide opportunities for capital appreciation as
well as current income.

                                       18
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
------- -----------------------------------------------------------
        AND RESULTS OF OPERATIONS (Continued)
        -------------------------

Liquidity and Capital Resources
-------------------------------

General.  Cash and cash equivalents at June 30, 2001, totaled $6.0 million,
compared with $4.2 million at December 31, 2000.  Although ARI  anticipates that
during the remainder of 2001 it will generate excess cash flow from property
operations, as discussed below, such excess cash is not sufficient to discharge
all of ARI's debt obligations as they mature.  ARI will therefore continue to
rely on externally generated funds, including borrowings against its investments
in various real estate entities, mortgage notes receivable, refinancing of
properties  and, to the extent necessary, borrowings to meet its debt service
obligations, pay taxes, interest and other non-property related expenses.

At December 31, 2000, notes payable totaling $193.4 million had either scheduled
maturities or required principal reduction payments during 2001.  During the
first six months of 2001, ARI either extended, refinanced, paid down, paid off
or received commitments from lenders to extend or refinance $93.4 million of the
debt scheduled to mature in 2001.

Net cash used in operating activities increased to a use of $31.0 million in the
six months ended June 30, 2001, from a use of $30.8 million in the six months
ended June 30, 2000.  Fluctuations in the components of cash flow from
operations are discussed in the following paragraphs.

Net cash from property operations (rents collected less payments for expenses
applicable to rental income) decreased to $9.0 million in the six months ended
June 30, 2001 from $9.3 million in 2000.  The decrease is primarily attributable
to the sale of nine apartments in 2000.  ARI expects a decrease in cash flow
from property operations during the remainder of 2001.  Such decrease is
expected to result from the continued selective sale of income producing
properties.

Net cash from pizza operations (sales less cost of sales) in the six months
ended June 30, 2001, was $2.9 million approximating the $3.0 million in the six
months ended June 30, 2000.

Interest collected decreased to $300,000 in the six months ended June 30, 2001,
from $3.9 million in 2000.  The decrease was attributable to  the collection of
$36.0 million of mortgage notes receivable in 2000.

Interest paid decreased to $31.2 million in the six months ended June 30, 2001,
from $33.0 million in 2000.  The decrease was attributable to the 13 land
parcels and nine apartments sold in 2000 resulting in the payoff, paydown or
assumption by the purchaser of mortgage debt.

Advisory fees paid increased to $3.5 million in the six months ended June 30,
2001, from $2.6 million in 2000.  The increase is attributable to the inclusion
of National Realty, L.P. assets in the basis for the advisory fees, after August
2000.

                                       19
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
------- -----------------------------------------------------------
        AND RESULTS OF OPERATIONS (Continued)
        -------------------------

Liquidity and Capital Resources (Continued)
-------------------------------

General and administrative expenses paid decreased to $4.5 million in the six
months ended June 30, 2001, from $8.8 million in 2000.  The decrease is
primarily attributable to reduced consulting and partnership fees, and reduced
cost reimbursements paid to the advisor.

ARI's cash flow from its investments in IORI and TCI is dependent on the ability
of each of the entities to make distributions. In the fourth quarter of 2000,
IORI and TCI suspended distributions.  Accordingly, ARI received no current
distributions in the six months ended June 30, 2001, compared to $1.8 million in
the first six months of 2000.  However, in May 2001, ARI received $53,000 in
accumulated dividends on shares of Continental Mortgage and Equity Trust that
should have been exchanged for TCI Common Stock in 1999.

Other cash used in operating activities was $2.5 million in the six months ended
June 30, 2001 compared to $764,000 in other cash from operating activities in
2000.  The change was primarily attributable to an increase in prepaid expenses.

In the first six months of 2001, ARI received a total of $2.7 million on the
collection of three mortgage notes receivable and $1.8 million in partial
paydown of another mortgage note receivable.

In 2001, ARI sold the following properties:

<TABLE>
<CAPTION>
                                                Units/       Sales   Net Cash     Debt      Gain/(Loss)
       Property               Location       Sq.Ft./Acres    Price   Received  Discharged     on Sale
-----------------------  ------------------  -------------  -------  --------  -----------  ------------
<S>                      <C>                 <C>            <C>      <C>       <C>          <C>
First Quarter
Apartments
Carriage Park            Tampa, FL                46 Units  $ 2,005    $  757  $    1,069       $   663
Rockborough              Denver, CO              345 Units   16,675     3,654      12,215 (1)    13,471

Shopping Center
Regency Pointe           Jacksonville, FL    67,063 Sq.Ft.    7,350     5,126       1,500         2,292

Land
Frisco Bridges           Collin County, TX      27.8 Acres    4,500     4,130          --            25
Katrina                  Palm Desert, CA        20.0 Acres    2,831      (124)        596            --   (2)

Las Colinas              Las Colinas, TX         1.7 Acres      825       233         400           539
Plano Parkway            Plano, TX              11.3 Acres    1,446       312         950            --
Scoggins                 Tarrant County, TX    232.8 Acres    2,913       892       1,800           181
Scout                    Tarrant County, TX    408.0 Acres    5,087     1,586       3,200         2,969
Tree Farm                Dallas County, TX      10.4 Acres    2,888       (87)      2,644            75

Second Quarter
Apartments
Kimberly Woods           Tucson, AZ              279 Units    8,450     1,667       6,191 (1)     6,052
Place One                Tulsa, OK               407 Units   12,935     3,310       7,539         8,623
Shadowood                Addison, TX             184 Units    7,125     1,980       4,320         4,644
Glenwood                 Addison, TX             168 Units    6,650     3,166       2,549          (560)
Bent Tree                Addison, TX             292 Units   12,050     2,480       8,867         7,081

Land
Katrina                  Palm Desert, CA        20.0 Acres    2,940        78          --           516

</TABLE>

                                       20
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------  -----------------------------------------------------------
         AND RESULTS OF OPERATIONS (Continued)
         -------------------------

Liquidity and Capital Resources (Continued)
-------------------------------

<TABLE>
<CAPTION>
                                               Units/      Sales   Net Cash     Debt     Gain/(Loss)
       Property              Location       Sq.Ft./Acres   Price   Received  Discharged    on Sale
-----------------------  -----------------  ------------  -------  --------  ----------  -----------
<S>                     <C>                 <C>           <C>      <C>        <C>       <C>
Land - Continued
Mason/Goodrich           Houston, TX          22.1 Acres   $4,168    $  (34)     $3,750      $ 2,896
Plano Parkway            Plano, TX            12.0 Acres      740       672          --         (991)
Yorktown                 Harris County, TX   120.4 Acres    5,239      (160)      4,991       (1,497)

Third Quarter
Apartments
Club Mar                 Sarasota, FL          248 Units    8,500     1,805       6,199        5,719

Land
Elm Fork                 Denton County, TX    10.0 Acres    1,002       (30)        958          284
Katrina                  Palm Desert, CA       6.1 Acres    1,196     1,108          --          570
Chase Oaks               Plano, TX            22.3 Acres    2,875       663       2,027          796
-------------
</TABLE>
(1)  Debt assumed by purchaser.
(2)  Gain deferred until ARI-provided financing is collected.

In 2001, ARI purchased the following properties:

<TABLE>
<CAPTION>
                                   Units/     Purchase  Net Cash      Debt      Interest   Maturity
    Property        Location    Sq.Ft./Acres   Price      Paid      Incurred      Rate       Date
-----------------  -----------  ------------  --------  ---------  -----------  ---------  --------
<S>                <C>          <C>           <C>       <C>        <C>          <C>        <C>
Second Quarter
Apartments
Glenwood           Addison, TX     168 Units    $6,246    -   (1)   $2,549 (2)      9.25%     10/04
--------------
</TABLE>
(1)  8.88 acres of Hollywood Casino land and 10.5 acres of Vista Ridge land
     given as consideration.  Exchanged with a related party.
(2)  Assumed debt of seller.  Exchanged with a related party.

In 2001, ARI financed/refinanced or obtained second mortgage financing on the
following:

<TABLE>
<CAPTION>
                                                               Debt        Debt     Net Cash  Interest   Maturity
       Property               Location            Acres      Incurred   Discharged  Received    Rate       Date
-----------------------  -------------------  -------------  ---------  ----------  --------  ---------  --------
<S>                      <C>                    <C>          <C>        <C>         <C>         <C>     <C>
First Quarter
Land
Mason/Goodrich           Houston, TX            235.0 Acres  $  6,750      $    --    $6,302     14.00%      01/02
Pioneer Crossing         Austin, TX             350.1 Acres     7,000           --     6,855     16.90       03/05
Pioneer Crossing         Austin, TX              14.5 Acres     2,500           --     2,350     14.50       01/02

Second Quarter
Land
Hollywood Casino         Farmers Branch, TX      51.7 Acres     2,500 (1)       --     1,916      9.00       04/03
Valwood                  Dallas County, TX       19.4 Acres        -- (1)       --        --        --          --
Katrina                  Palm Desert, CA        300.5 Acres    22,000       15,584     4,417      12.50 (2)  10/01
Jeffries Ranch           Oceanside, CA           82.4 Acres     5,250 (3)      750     3,944      14.50      06/02
Willow Springs           Riverside, CA        1,485.7 Acres        -- (3)       --        --         --         --

Hotel
Williamsburg
 Hospitality House       Williamsburg, VA(4)      296 Rooms    10,309           --     9,851      36.00      01/02

Shopping Center
Cullman                  Cullman, AL          92,486 Sq.Ft.        -- (3)      129        --         --         --
-----------------------  -------------------  -------------  --------   ----------    ------    -------      -----
</TABLE>

                                       21
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
------- -----------------------------------------------------------
        AND RESULTS OF OPERATIONS (Continued)
        -------------------------

Liquidity and Capital Resources (Continued)
-------------------------------

<TABLE>
<CAPTION>
                                                      Debt       Debt     Net Cash  Interest   Maturity
       Property            Location       Acres     Incurred  Discharged  Received    Rate       Date
-----------------------  -------------  ----------  --------  ----------  --------  ---------  --------
<S>                      <C>            <C>         <C>       <C>         <C>       <C>         <C>
Third Quarter
Land
Marine Creek             Ft. Worth, TX  54.2 Acres    $1,500        $750      $701      9.00%     01/03
--------------------
</TABLE>
(1)  Single note, with all properties as collateral.
(2)  Variable interest rate.
(3)  Single note, with all properties as collateral.
(4)  Also secured by 1,846,000 shares of TCI common stock.

ARI has margin arrangements with various financial institutions and brokerage
firms which provide for borrowing up to 50% of the market value of ARI's
marketable equity securities.  The borrowings under such margin arrangements are
secured by equity securities of IORI and TCI and ARI's trading portfolio and
bear interest rates ranging from 7.0% to 11.0%.  Margin borrowing totaled $12.3
million at June 30, 2001.

Management expects that it will be necessary for ARI to sell $102.0 million,
$34.1 million and $1.2 million of its land holdings during each of the next
three years to satisfy the debt on such land as it matures.  If ARI is unable to
sell at least the minimum amount of land  to satisfy the debt obligations on
such land as it matures, or, if it was not able to extend such debt, ARI would
either sell other of its assets to pay such debt or return the property to the
lender.

Management reviews the carrying values of ARI's properties and mortgage notes
receivables 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.  In those
instances  where impairment is found to exist, a provision for loss is recorded
by a charge against earnings.  ARI's mortgage note receivable review includes an
evaluation of the collateral property securing such note.  The property review
generally includes selective property inspections, a review of the property's
current rents compared to market rents, a review of the property's expenses, a
review of maintenance requirements, a review of the property's cash flow,
discussions with the manager of the property and a review of properties in the
surrounding area.

Commitments and Contingencies
-----------------------------

In March 1999, ARI reached an agreement with the Class A unitholders of Valley
Ranch, L.P. to acquire their eight million Class A units for $1.00 per unit. In
1999, three million units were purchased. Additionally, one million units were
purchased in January 2000 and two million units were purchased in May 2001.  ARI
has committed to purchase the remaining two million units in May 2002.

                                       22
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
------- -----------------------------------------------------------
        AND RESULTS OF OPERATIONS (Continued)
        -------------------------

Results of Operations
---------------------

For the six months ended June 30, 2001, ARI reported net income of $9.7 million,
compared to the net loss of $7.7 million for the six months ended June 30, 2000.
The primary factors contributing to ARI's net income are discussed in the
following paragraphs.

Pizza parlor sales and cost of sales were $8.7 million and $7.1 million,
respectively, in the three months ended June 30, 2001 and $16.6 million and
$13.6 million for the six months ended June 30, 2001 approximating the $8.4
million and $6.9 million, respectively, for the three months ended June 30, 2000
and $16.3 million and $13.3 million for the six months ended June 30, 2000.

Rents decreased to $32.8 million and $66.0 million in the three and six months
ended June 30, 2001, from $35.4 million and $70.5 million in 2000.  Rents from
commercial properties increased to $16.7 million for the six months ended June
30, 2001, from $16.5 million in 2000, rent from hotels increased to $17.7
million in the six months ended June 30, 2001, from $16.5 million in 2000 and
rent from apartments decreased to $31.2 million in the six months ended June 30,
2001, from $36.3 million in 2000. The increase in hotel property rents was
primarily attributable to the opening of the Hotel Sofia in 2001 and the
decrease in apartment rent was due to the sale of nine apartments in 2000.
Rental income is expected to decrease significantly in the remainder of 2001 as
a result of the income producing properties sold in 2000 and 2001.

Property operations expense increased to $25.6 million and $49.1 million in the
three and six months ended June 30, 2001, from $22.7 million and $46.7 million
in 2000.  Property operations expense for commercial properties of $10.0 million
in the six months ended June 30, 2001, approximated the $9.9 million in 2000.
For hotels, property operations expense increased to $15.9 million in the six
months ended June 30, 2001, from $11.5 million in 2000.  For land, property
operations expense decreased to $4.5 million in the six months ended June 30,
2001 from $4.9 million in 2000.  For apartments, property operations expense
decreased to $18.5 million in the six months ended June 30, 2001, from $20.4
million in 2000.  The increase in hotel property operations expense was
primarily due to the opening of the Hotel Sofia in 2001.  The decrease for land
was primarily due to the 13 land parcels sold in 2000.  The decrease in property
operations expense for apartments was due to the sale of nine apartments in
2000.  Property operations expense is expected to decrease significantly in the
remainder of 2001 as a result of the properties sold in 2000 and 2001.

Interest income from notes receivable increased to $776,000 and decreased to
$1.2 million in the three and six months ended June 30, 2001 from $772,000 and
$3.0 million in 2000.  The six month decrease is due to the collection of
mortgage receivables and their related interest at maturity in 2000 and 2001.

Other income increased to $44,000 and $77,000 in the three and six months ended
June 30, 2001 from losses of $288,000 and $187,000 in the

                                       23
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
------- -----------------------------------------------------------
        AND RESULTS OF OPERATIONS (Continued)
        -------------------------


Results of Operations (Continued)
---------------------

three and six months ended June 30, 2000.  ARI recognized an unrealized decrease
in market value of its trading portfolio securities of $13,000 in the six months
ended June 30, 2001 compared to $127,000 in 2000.  See NOTE 6. "MARKETABLE
EQUITY SECURITIES - TRADING PORTFOLIO."

Interest expense decreased to $19.1 million and $37.2 million in the three and
six months ended June 30, 2001 from $20.4 million and $40.6 million in 2000. The
decrease was attributable to the sale of nine apartments and 13 parcels of land
in 2000.  In the remainder of 2001, interest expense is expected to continue to
decrease due to the properties sold in 2000 and 2001.

Depreciation expense of $4.6 million and $8.7 million in the three and six
months ended June 30, 2001, approximated the $4.5 million and $8.9 million in
2000.

General and administrative expenses decreased to $1.6 million and $4.5 million
in the three and six months ended June 30, 2001, from $4.7 million and $8.8
million in 2000.  The decrease is primarily attributable to reduced consulting
and partnership fees, and reduced cost reimbursements paid to the advisor.

Advisory fees increased to $2.3 million and $3.5 million in the three and six
months ended June 30, 2001 from $1.3 million and $2.6 million in  2000.  The
increase is due to the addition of the National Realty, L.P. assets to the
advisory fee basis.

Net income fee to affiliate was $1.8 million in the three and six months ended
June 30, 2001.  The income fee payable to ARI's advisor is 10% of the net income
for the year, in excess of a 10% return on shareholders' equity.

Incentive fee to affiliate was $4.3 million and $5.8 million in the three and
six months ended June 30, 2001.  The incentive fee payable to ARI's advisor is
10% of the excess of net capital gains over net capital losses realized from
sales of assets.  Incentive fees are expected to increase as ARI selectively
sells properties.

Minority interest decreased to $(95,000) and $1.5 million in the three and six
months ended June 30, 2001, from $17.9 million and $27.3 million in 2000.  The
decrease is attributable to the acquisition of National Realty, L.P. by ARI in
August 2000.

Equity in income of investees increased to $5.7 million and $5.7 million in the
three and six months ended June 30, 2001, from $94,000 and $296,000 in 2000. The
increase in equity income was attributable to the  loss associated with the sale
of TCI and IORI stock in 2000 and gains from property sales by TCI in 2001.

                                       24
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
------- -----------------------------------------------------------
        AND RESULTS OF OPERATIONS (Continued)
        -------------------------


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 no taxable income or provision for income taxes in the six months ended
June 30, 2001 or 2000.  A deferred tax liability equal to the deferred tax asset
has been provided due to the uncertainty of the future utilization of the
deferred tax asset.


Environmental Matters
---------------------

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

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


Inflation
---------

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

                                       25
<PAGE>

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


At June 30, 2001, ARI's exposure to a change in interest rates on its debt is as
follows:

<TABLE>
<CAPTION>

                                                                       Weighted            Effect of 1%
                                                                        Average             Increase In
                                                    Balance          Interest Rate          Base Rates
                                                ---------------  ---------------------  -------------------
                                                           (Amounts in thousands, except per share)
<S>                                             <C>             <C>                     <C>
Notes payable:
Variable rate.................................         $136,902                 11.54%              $1,369

Total decrease in ARI's annual
net income....................................                                                      $1,369
                                                                                                    ======

Per share.....................................                                                      $  .14
                                                                                                    ======
</TABLE>

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

                          PART II.  OTHER INFORMATION


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------- ---------------------------------------------------

The annual meeting was held on July 9, 2001, at which meeting stockholders were
asked to consider and vote upon the election of Directors.  At the meeting,
stockholders elected the following individuals as Directors:

<TABLE>
<CAPTION>
                                                                     Shares Voting
                                                       -----------------------------------------
                                                                                  Withheld
                      Director                                 For                Authority
-----------------------------------------------------  --------------------  -------------------
<S>                                                     <C>                  <C>
Karl L. Blaha                                                    10,537,155               51,617
Collene C. Currie                                                10,538,563               50,209
Richard D. Morgan                                                10,538,129               50,643
Joseph Mizrachi                                                  10,538,607               50,165
</TABLE>


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------

(a)  Exhibits:

     None.


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

     None.

                                       26
<PAGE>

                                 SIGNATURE PAGE



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



                                    AMERICAN REALTY INVESTORS, INC.



Date:    August 13, 2001         By:  /s/ Karl L. Blaha
     -------------------------      -----------------------------------
                                    Karl L. Blaha
                                    President



Date:    August 13, 2001         By:  /s/ Louis J. Corna
     --------------------------     -----------------------------------
                                    Louis J. Corna
                                    Executive Vice President and
                                    Chief Financial Officer
                                    (Principal Financial Officer)

                                       27