----

**FORM        10-Q**

**UNITED        STATES**

**SECURITIES        AND EXCHANGE COMMISSION**

**WASHINGTON,        D.C. 20549**

**  QUARTERLY        REPORT UNDER SECTION 13 OR 15(d) OF THE **

**SECURITIES        EXCHANGE ACT OF 1934 **

**FOR        THE QUARTER ENDED MARCH 31, 2006 **

**Or**

**  TRANSITION        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE **

**SECURITIES        EXCHANGE ACT OF 1934**

**FOR        THE TRANSITION PERIOD FROM     TO**

**Commission        File Number 001-15663**

**AMERICAN        REALTY INVESTORS, INC.**

**(Exact        Name of Registrant as Specified in Its Charter) **

| **Nevada**                                                                                                               |                                                                                         | **75-2847135**                                                                |
|--------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|
| **(State                  or Other Jurisdiction of****Incorporation                  or Organization)**                  |                                                                                         | **(I.R.S.                  Employer****Identification                  No.)** |
|                                                                                                                     |                                                                                         |                                                                          |
| **1800                  Valley View Lane, Suite 300****Dallas,                  Texas 75234**                            |
|                                                                                                                     | **(Address                  of principal executive offices)****(Zip                  Code)** |                                                                          |
|                                                                                                                     |                                                                                         |                                                                          |
|                                                                                                                     | **(469)                  522-4200**                                                          |                                                                          |
|                                                                                                                     | **(Registrant’s                  telephone number, including area code)**              |                                                                          |
|                                                                                                                     |                                                                                         |                                                                          |
| ___________________________________________________________________________________________                              |
| **(Former                  name, former address and former fiscal year, if changed since last                  report)** |

**Large        accelerated filer  ̈  Accelerated        filer  ̈   Non-accelerated        filer x**

**APPLICABLE        ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE**

**PRECEDING        FIVE YEARS:**

**APPLICABLE        ONLY TO CORPORATE ISSUERS: **

| **Common                  Stock, $.01 par value** | **10,895,972**                                       |
|---------------------------------------------------|------------------------------------------------------|
| **(Class)**                                       | **(Outstanding                  at March 31, 2006)** |

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**AMERICAN        REALTY INVESTORS, INC.**

**FORM        10-Q**

**TABLE        OF CONTENTS**

| **PART                  I:** **FINANCIAL                  INFORMATION**                                                                                | **PAGE** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                                                        |     |
| Item                  1. Financial                  Statements                                                                                         |     |
| Consolidated                  Balance Sheets at March 31, 2006 (unaudited) and December 31,                  2005                                           | 3        |
| Consolidated                  Statements of Operations for the three months ended March 31, 2006                  and                  2005 (unaudited)     | 5        |
| Consolidated                  Statement of Shareholders’ Equity for the three months ended March 31,                  2006 (unaudited)                | 7        |
| Consolidated                  Statements of Cash Flows for the three months ended March 31, 2006                  and                  2005 (unaudited)     | 8        |
| Notes                  to Consolidated Financial Statements                                                                                                 | 10       |
| Item                  2. Management’s                  Discussion and Analysis of Financial Condition and Results of                  Operations | 21       |
| Item                  3. Quantitative                  and Qualitative Disclosures About Market Risk                                                   | 27       |
| Item                  4. Controls                  and Procedures                                                                                      | 27       |
|                                                                                                                                                        |     |
|                                                                                                                                                        |     |
| **PART                  II.** **OTHER                  INFORMATION**                                                                                   |     |
|                                                                                                                                                        |     |
| Item                  2. Unregistered                  Sales of Equity Securities and Use of Proceeds                                                  | 28       |
| Item                  6. Exhibits                                                                                                                      | 29       |
| SIGNATURE                  PAGES                                                                                                                            | 30       |

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**AMERICAN      REALTY INVESTORS, INC.**

**PART      I. FINANCIAL INFORMATION**

**ITEM      1. FINANCIAL STATEMENTS**

**AMERICAN      REALTY INVESTORS, INC. **

**CONSOLIDATED      BALANCE SHEETS**

|                                                                                                                            |   | **March                31,****2006**      |      | **December                31,****2005** |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|-----------|-----------------------------------------|--------|
|                                                                                                                            |   | **(dollars                in thousands)** |      |
|                                                                                                                            |   | **(unaudited)**                           |      |                                    |   |
| **Assets**                                                                                                                      |   |                                      |      |
| Real                estate held for investment                                                                                  |   | $                                         | 1,091,293 |                                    | $      | 1,025,661 |   |
| Less—accumulated                depreciation                                                                              |   |                                      | (159,593  | )                                       |   | (153,597 | ) |
|                                                                                                                            |   |                                      | 931,700   |                                    |   | 872,064 |   |
|                                                                                                                            |   |                                      |      |                                    |   |   |   |
| Real                estate held for sale, net of depreciation                                                                   |   |                                      | 169,123   |                                    |   | 172,303 |   |
| Real                estate subject to sales contract                                                                            |   |                                      | 68,326    |                                    |   | 68,738 |   |
|                                                                                                                            |   |                                      |      |                                    |   |   |   |
| Notes                and interest receivable                                                                                    |   |                                      |      |                                    |   |   |   |
| Performing                ($44,805 in 2006 and $44,500 in 2005 from affiliates)                                                 |   |                                      | 61,347    |                                    |   | 70,894 |   |
| Non-performing                                                                                                                  |   |                                      | 11,546    |                                    |   | 11,546 |   |
|                                                                                                                            |   |                                      | 72,893    |                                    |   | 82,440 |   |
| Less—allowance                for estimated losses                                                                        |   |                                      | (1,003    | )                                       |   | (1,000 | ) |
|                                                                                                                            |   |                                      | 71,890    |                                    |   | 81,440 |   |
|                                                                                                                            |   |                                      |      |                                    |   |   |   |
| Restaurant                equipment                                                                                             |   |                                      | 13,981    |                                    |   | 13,911 |   |
| Less—accumulated                depreciation                                                                              |   |                                      | (7,832    | )                                       |   | (7,528 | ) |
|                                                                                                                            |   |                                      | 6,149     |                                    |   | 6,383 |   |
|                                                                                                                            |   |                                      |      |                                    |   |   |   |
| Marketable                securities, at market value                                                                           |   |                                      | 7,936     |                                    |   | 7,446 |   |
| Cash                and cash equivalents                                                                                        |   |                                      | 8,731     |                                    |   | 13,904 |   |
| Investments                in equity investees                                                                                  |   |                                      | 13,660    |                                    |   | 13,521 |   |
| Goodwill                                                                                                                        |   |                                      | 11,858    |                                    |   | 11,858 |   |
| Other                intangibles, net of accumulated amortization ($616 in 2006 and $926                in                2005) |   |                                      | 1,435     |                                    |   | 1,449 |   |
| Other                assets (including $32,535 in 2006 and $30,441 in 2005 due from                affiliate)                   |   |                                      | 104,898   |                                    |   | 96,689 |   |
|                                                                                                                            |   | $                                         | 1,395,706 |                                    | $      | 1,345,795 |   |

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**AMERICAN      REALTY INVESTORS, INC.**

**CONSOLIDATED      BALANCE SHEETS - Continued**

|                                                                                                                                                                                                                                                                |   | **March                31,****2006**      |      | **December                31,****2005** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|-----------|-----------------------------------------|--------|
|                                                                                                                                                                                                                                                                |   | **(dollars                in thousands)** |      |
|                                                                                                                                                                                                                                                                |   | **(unaudited)**                           |      |                                    |   |
| **Liabilities                and Stockholders’ Equity**                                                                                                                                                                                                       |   |                                      |      |                                    |   |
| Liabilities:                                                                                                                                                                                                                                                        |   |                                      |      |                                    |   |
| Notes                payable ($44,845 in 2006 and $45,530 in 2005 to                affiliates)                                                                                                                                                                     |   | $                                         | 853,040   |                                    | $      | 810,118 |   |
| Interest                payable ($1,046 in 2006 and $682 in 2005 to affiliates                                                                                                                                                                                      |   |                                      | 8,750     |                                    |   | 7,826 |   |
| Liabilities                related to assets held for sale                                                                                                                                                                                                          |   |                                      | 153,124   |                                    |   | 144,555 |   |
| Liabilities                subject to sales contract                                                                                                                                                                                                                |   |                                      | 58,781    |                                    |   | 59,323 |   |
| Stock-secured                notes payable                                                                                                                                                                                                                          |   |                                      | 22,549    |                                    |   | 22,549 |   |
| Accounts                payable and other liabilities ($238 in 2006 and $4,667 in 2005 to                affiliates)                                                                                                                                                |   |                                      | 88,675    |                                    |   | 93,842 |   |
|                                                                                                                                                                                                                                                                |   |                                      | 1,184,919 |                                    |   | 1,138,213 |   |
|                                                                                                                                                                                                                                                                |   |                                      |      |                                    |   |   |   |
| Commitments                and contingencies                                                                                                                                                                                                                        |   |                                      |      |                                    |   |   |   |
|                                                                                                                                                                                                                                                                |   |                                      |      |                                    |   |   |   |
| Minority                interest                                                                                                                                                                                                                               |   |                                      | 70,782    |                                    |   | 59,185 |   |
|                                                                                                                                                                                                                                                                |   |                                      |      |                                    |   |   |   |
|                                                                                                                                                                                                                                                                |   |                                      |      |                                    |   |   |   |
| Stockholders’                equity:                                                                                                                                                                                                                          |   |                                      |      |                                    |   |   |   |
| Preferred                Stock, $2.00 par value, authorized 50,000,000 shares, issued and                outstanding                                                                                                                                                |   |                                      |      |                                    |   |   |   |
| Series                A Cumulative Convertible Preferred Stock, 3,390,913 shares in 2006                and                2005 (liquidation preference                $33,909), including 900,000 shares in 2006 and 2005 held by                subsidiaries |   |                                      | 4,982     |                                    |   | 4,982 |   |
| Common                Stock, $.01 par value, authorized 100,000,000 shares; issued 11,592,272                shares in                2006 and 2005                                                                                                                 |   |                                      | 114  |                                    |   | 114 |   |
| Treasury                stock, at cost, 1,443,272 shares in 2006 and 2005                                                                                                                                                                                           |   |                                      | (15,146   | )                                       |   | (15,146 | ) |
| Additional                paid-in capital                                                                                                                                                                                                                           |   |                                      | 93,389    |                                    |   | 93,389 |   |
| Retained                earnings                                                                                                                                                                                                                               |   |                                      | 56,116    |                                    |   | 64,805 |   |
| Accumulated                other comprehensive income (loss)                                                                                                                                                                                                        |   |                                      | 550       |                                    |   | 253 |   |
|                                                                                                                                                                                                                                                                |   |                                      | 140,005   |                                    |   | 148,397 |   |
|                                                                                                                                                                                                                                                                |   | $                                         | 1,395,706 |                                    | $      | 1,345,795 |   |

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**AMERICAN      REALTY INVESTORS, INC.**

**CONSOLIDATED      STATEMENTS OF      OPERATIONS**

**(unaudited)**

|                                                                                                                                            |   | **For                    the Three Months****Ended                    March 31,** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|---------|
|                                                                                                                                            |   | **2006**                                                                          |    | **2005** |   |
|                                                                                                                                            |   | **(dollars                    in thousands)**                                     |    |
| Property                    revenue:                                                                                                            |   |                                                                              |    |   |   |
| Rental                    and other property revenues ($259 in 2006 and $182 in 2005 from                    affiliates)                        |   | $                                                                                 | 45,867  |   | $ | 37,758 |   |
| Restaurant                    sales                                                                                                             |   |                                                                              | 9,349   |   |   | 8,620 |   |
| Total                    operating revenues                                                                                                     |   |                                                                              | 55,216  |   |   | 46,378 |   |
|                                                                                                                                            |   |                                                                              |    |   |   |   |   |
| Expenses:                                                                                                                                       |   |                                                                              |    |   |   |   |   |
| Property                    operating expenses ($1,923 in 2006 and $1,644 in 2005 to                    affiliates)                             |   |                                                                              | 29,670  |   |   | 26,464 |   |
| Restaurant                    cost of sales                                                                                                     |   |                                                                              | 6,915   |   |   | 6,754 |   |
| Depreciation                    and amortization                                                                                           |   |                                                                              | 6,726   |   |   | 5,572 |   |
| General                    and administrative ($567 in 2006 and $899 in 2005 to                    affiliates)                                  |   |                                                                              | 3,892   |   |   | 2,736 |   |
| Advisory                    fee to affiliate                                                                                                    |   |                                                                              | 3,081   |   |   | 2,906 |   |
| Total                    operating expenses                                                                                                     |   |                                                                              | 50,284  |   |   | 44,432 |   |
|                                                                                                                                            |   |                                                                              |    |   |   |   |   |
| Operating                    income (loss)                                                                                                      |   |                                                                              | 4,932   |   |   | 1,946 |   |
|                                                                                                                                            |   |                                                                              |    |   |   |   |   |
| Other                    income (expense):                                                                                                      |   |                                                                              |    |   |   |   |   |
| Interest                    income from notes receivable ($657 in 2006 and $859 in 2005 from                    affiliates)                     |   |                                                                              | 1,146   |   |   | 1,590 |   |
| Gain                    on foreign currency transaction                                                                                         |   |                                                                              | 2       |   |   | — |   |
| Other                    income ($953 in 2006 from affiliate)                                                                                   |   |                                                                              | 1,702   |   |   | 106 |   |
| Mortgage                    and loan interest ($669 in 2006 and $501 in 2005 to                    affiliates)                                  |   |                                                                              | (18,704 | ) |   | (15,174 | ) |
| Net                    income fee to affiliate                                                                                                  |   |                                                                              | — |   |   | (1,477 | ) |
| Total                    other income (expense)                                                                                                 |   |                                                                              | (15,854 | ) |   | (14,955 | ) |
|                                                                                                                                            |   |                                                                              |    |   |   |   |   |
| Loss                    before gain on land sales, minority interest, and equity in earnings                    of                    investees |   |                                                                              | (10,922 | ) |   | (13,009 | ) |
|                                                                                                                                            |   |                                                                              |    |   |   |   |   |
| Gain                    on land sales                                                                                                           |   |                                                                              | 2,740   |   |   | 24,178 |   |
| Minority                    interest                                                                                                            |   |                                                                              | 830     |   |   | (921 | ) |
| Equity                    in income (loss) of investees                                                                                    |   |                                                                              | 175     |   |   | 60 |   |
|                                                                                                                                            |   |                                                                              |    |   |   |   |   |
| Income                    (loss) from continuing operations                                                                                     |   |                                                                              | (7,177  | ) |   | 10,308 |   |
|                                                                                                                                            |   |                                                                              |    |   |   |   |   |
| Income                    (loss) from discontinued operations                                                                                   |   |                                                                              | (898    | ) |   | 10,370 |   |
|                                                                                                                                            |   |                                                                              |    |   |   |   |   |
| Net                    income (loss)                                                                                                       |   |                                                                              | (8,075  | ) |   | 20,678 |   |
| Preferred                    dividend requirement                                                                                               |   |                                                                              | (614    | ) |   | (650 | ) |
| Net                    income (loss) applicable to Common shares                                                                                |   | $                                                                                 | (8,689  | ) | $ | 20,028 |   |

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**AMERICAN      REALTY INVESTORS, INC.**

**CONSOLIDATED      STATEMENTS OF OPERATIONS - Continued**

**(unaudited)**

|                                                                                               |   | **For                the Three Months****Ended                March 31,** |       |
|----------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|------------|
|                                                                                               |   | **2006**                                                                  |       | **2005** |   |
|                                                                                               |   | **(dollars                in thousands)**                                 |       |
| Basic                earnings per share:                                                           |   |                                                                      |       |   |   |
| Income                (loss) from continuing operations                                            |   | $                                                                         | (0.77      | ) | $ | 0.96 |   |
| Income                (loss) from discontinued operations                                          |   |                                                                      | (0.09      | ) |   | 1.03 |   |
| Net                income (loss) applicable to Common shares                                       |   | $                                                                         | (0.86      | ) | $ | 1.98 |   |
|                                                                                               |   |                                                                      |       |   |   |   |   |
| Diluted                earnings per share:                                                         |   |                                                                      |       |   |   |   |   |
| Income                (loss) from continuing operations                                            |   | $                                                                         | (0.77      | ) | $ | 0.75 |   |
| Income                (loss) from discontinued operations                                          |   |                                                                      | (0.09      | ) |   | 0.81 |   |
| Net                income (loss) applicable to Common shares                                       |   | $                                                                         | (0.86      | ) | $ | 1.56 |   |
|                                                                                               |   |                                                                      |       |   |   |   |   |
| Weighted                average Common shares used in computing earnings per                share: |   |                                                                      |       |   |   |   |   |
| Basic                                                                                              |   |                                                                      | 10,149,000 |   |   | 10,149,000 |   |
| Diluted                                                                                            |   |                                                                      | 13,106,924 |   |   | 12,907,309 |   |

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**AMERICAN      REALTY INVESTORS, INC.**

**CONSOLIDATED      STATEMENTS OF STOCKHOLDERS’      EQUITY**

**For      the Three Months Ended March 31, 2006**

**(dollars      in thousands)**

**(unaudited)**

|                                                                                                                      |   |  **Series                  A****Preferred****Stock** |    | **Common****Stock** |   | **Treasury****Stock** |   | **Additional****Paid-in****Capital** |    | **Retained****Earnings** |   | **Accumulated****Other****Comprehensive****Income/(Loss)** |   | **Stockholders’****Equity** |    |
|---------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|---------|---------------------|--------|-----------------------|--------|--------------------------------------|---------|--------------------------|--------|------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                                      |   |                                                      |    |                |   |                  |   |                                 |    |                     |   |                                                       |   |                              |    |
| Balance,                  January 1, 2006                                                                            |   | $                                                         | 4,982   |                | $      | 114                   |   | $                                    | (15,146 | )                        | $      | 93,389                                                     |   | $                                 | 64,805  |   | $ | 253 |   | $ | 148,397 |   |
|                                                                                                                      |   |                                                      |    |                |   |                  |   |                                 |    |                     |   |                                                       |   |                              |    |   |   |   |   |   |   |   |
| Comprehensive                  income                                                                                     |   |                                                      |    |                |   |                  |   |                                 |    |                     |   |                                                       |   |                              |    |   |   |   |   |   |   |   |
| Unrealized                  gain on foreign currency                  translation                                         |   |                                                      | — |                |   | —               |   |                                 | — |                     |   | —                                                    |   |                              | — |   |   | (193 | ) |   | (193 | ) |
| Unrealized                  gain on marketable                  securities                                                |   |                                                      | — |                |   | —               |   |                                 | — |                     |   | —                                                    |   |                              | — |   |   | 490 |   |   | 490 |   |
| Net                  income                                                                                          |   |                                                      | — |                |   | —               |   |                                 | — |                     |   | —                                                    |   |                              | (8,075  | ) |   | — |   |   | (8,075 | ) |
|                                                                                                                      |   |                                                      |    |                |   |                  |   |                                 |    |                     |   |                                                       |   |                              |    |   |   |   |   |   |   |   |
| Repurchase                  of Preferred Stock                                                                       |   |                                                      | — |                |   | —               |   |                                 | — |                     |   | —                                                    |   |                              | — |   |   | — |   |   | — |   |
|                                                                                                                      |   |                                                      |    |                |   |                  |   |                                 |    |                     |   |                                                       |   |                              |    |   |   |   |   |   |   |   |
| Preferred                  dividends                                                                                      |   |                                                      |    |                |   |                  |   |                                 |    |                     |   |                                                       |   |                              |    |   |   |   |   |   |   |   |
| Series                  A Cumulative Convertible                  Preferred Stock                  ($.25 per share)  |   |                                                      | — |                |   | —               |   |                                 | — |                     |   | 3⁄4                                                     |   |                              | (614    | ) |   | — |   |   | (614 | ) |
|                                                                                                                      |   |                                                      |    |                |   |                  |   |                                 |    |                     |   |                                                       |   |                              |    |   |   |   |   |   |   |   |
| Balance,                  March 31, 2006                                                                             |   | $                                                         | 4,982   |                | $      | 114                   |   | $                                    | (15,146 | )                        | $      | 93,389                                                     |   | $                                 | 56,116  |   | $ | 550 |   | $ | 140,005 |   |

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**AMERICAN        REALTY INVESTORS, INC.**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**(unaudited)**

|                                                                                                           |   | **For                  the Three Months****Ended                  March 31** |    |
|----------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|---------|
|                                                                                                           |   | **2006**                                                                     |    | **2005** |   |
|                                                                                                           |   | **(dollars                  in thousands)**                                  |    |
| **Cash                  Flows From Operating Activities:**                                                     |   |                                                                         |    |   |   |
| Income                  (loss) from continuing operations                                                      |   | $                                                                            | (7,177  | ) | $ | 10,308 |   |
| Adjustments                  to reconcile net income to net cash used in operating                  activities |   |                                                                         |    |   |   |   |   |
| Gain                  on sale of land and real estate                                                          |   |                                                                         | (2,740  | ) |   | (24,178 | ) |
| Depreciation                  and amortization                                                                 |   |                                                                         | 6,726   |   |   | 5,572 |   |
| Amortization                  of deferred borrowing costs                                                      |   |                                                                         | 1,209   |   |   | 2,072 |   |
| Equity                  in (income) loss of investees                                                          |   |                                                                         | (175    | ) |   | (60 | ) |
| Gain                  on foreign currency transaction                                                          |   |                                                                         | (2      | ) |   | 3⁄4 |   |
| (Increase)                  decrease in accrued interest receivable                                            |   |                                                                         | (427    | ) |   | (336 | ) |
| (Increase)                  decrease in other assets                                                           |   |                                                                         | (6,587  | ) |   | 4,496 |   |
| Increase                  (decrease) in accrued interest payable                                               |   |                                                                         | (70     | ) |   | (888 | ) |
| Increase                  (decrease) in minority interest                                                      |   |                                                                         | (36     | ) |   | (261 | ) |
| Increase                  (decrease) in other liabilities                                                 |   |                                                                         | 5,292   |   |   | (2,362 | ) |
| Net                  cash used in operating activities                                                         |   |                                                                         | (3,987  | ) |   | (5,637 | ) |
|                                                                                                           |   |                                                                         |    |   |   |   |   |
| **Cash                  Flows From Investing Activities:**                                                     |   |                                                                         |    |   |   |   |   |
| Collections                  on notes receivable                                                               |   |                                                                         | 8,716   |   |   | 1,433 |   |
| Proceeds                  from sale of notes receivable                                                        |   |                                                                         | 3⁄4  |   |   | 27,242 |   |
| Funding                  of notes receivable                                                                   |   |                                                                         | (2,670  | ) |   | 3⁄4 |   |
| Acquisition                  of real estate                                                                    |   |                                                                         | (49,239 | ) |   | (7,806 | ) |
| Investment                  in real estate entities                                                            |   |                                                                         | (1,568  | ) |   | 3⁄4 |   |
| Real                  estate improvement                                                                       |   |                                                                         | (4,655  | ) |   | 3⁄4 |   |
| Restaurant                  equipment purchased                                                                |   |                                                                         | (69     | ) |   | (65 | ) |
| Proceeds                  from sale of real estate                                                             |   |                                                                         | 6,747   |   |   | 26,225 |   |
| Notes                  receivable funded                                                                       |   |                                                                         | 3⁄4  |   |   | (647 | ) |
| Earnest                  money/escrow deposits                                                                 |   |                                                                         | (660    | ) |   | (671 | ) |
| Real                  estate improvements                                                                      |   |                                                                         | 3⁄4  |   |   | (16,350 | ) |
| Distribution                  from equity investees                                                            |   |                                                                         | 3⁄4  |   |   | 406 |   |
| Net                  cash provided by (used in) investing activities                                           |   |                                                                         | (43,398 | ) |   | 29,767 |   |
|                                                                                                           |   |                                                                         |    |   |   |   |   |
| **Cash                  Flows From Financing Activities:**                                                     |   |                                                                         |    |   |   |   |   |
| Proceeds                  from notes payable                                                              |   |                                                                         | 55,842  |   |   | 38,688 |   |
| Payments                  on notes payable                                                                     |   |                                                                         | (13,356 | ) |   | (43,072 | ) |
| Deferred                  borrowing costs                                                                      |   |                                                                         | (2,568  | ) |   | (1,212 | ) |
| Net                  advances from (payments to) affiliates                                                    |   |                                                                         | 3,482   |   |   | (13,288 | ) |
| Margin                  borrowings (payments), net                                                             |   |                                                                         | 3⁄4  |   |   | (38 | ) |
| Preferred                  dividends paid                                                                      |   |                                                                         | (483    | ) |   | (230 | ) |
| Net                  cash (used in) provided by financing activities                                           |   |                                                                         | 42,917  |   |   | (19,152 | ) |
|                                                                                                           |   |                                                                         |    |   |   |   |   |
| **Discontinued                  Operations**                                                                   |   |                                                                         |    |   |   |   |   |
| Cash                  used in operating activities                                                             |   |                                                                         | (705    | ) |   | 3⁄4 |   |
| Cash                  provided by investing activities                                                    |   |                                                                         | 3⁄4  |   |   | 3⁄4 |   |
| Net                  cash provided (used) by discontinued operations                                           |   |                                                                         | (705    | ) |   | 3⁄4 |   |
|                                                                                                           |   |                                                                         |    |   |   |   |   |
| Net                  increase (decrease) in cash and cash equivalents                                          |   |                                                                         | (5,173  | ) |   | 17,291 |   |
|                                                                                                           |   |                                                                         |    |   |   |   |   |
| Cash                  and cash equivalents, beginning of period                                                |   |                                                                         | 13,904  |   |   | 22,401 |   |
| Cash                  and cash equivalents, end of period                                                 |   | $                                                                            | 8,731   |   | $ | 39,692 |   |

----

**AMERICAN      REALTY INVESTORS, INC. **

**CONSOLIDATED      STATEMENTS OF CASH FLOWS - Continued**

**(unaudited)**

|                                                                               |   | **For                the Three Months****Ended                March 31,** |   |
|------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|
|                                                                               |   | **2006**                                                                  |   | **2005** |   |
|                                                                               |   | **(dollars                in thousands)**                                 |   |
| **Supplemental                Disclosures of Cash Flow Information:**              |   |                                                                      |   |   |   |
| Cash                paid for interest                                              |   | $                                                                         | 18,301 |   | $ | 17,068 |   |
|                                                                               |   |                                                                      |   |   |   |   |   |
| **Schedule                of Non-Cash Investing and Financing Activities:**        |   |                                                                      |   |   |   |   |   |
| Notes                payable assumed from buyer upon sale of real estate           |   | $                                                                         | 3⁄4 |   | $ | 14,422 |   |
| Increase                in minority interest related to acquisition of real estate |   |                                                                      | 14,835 |   |   | 3⁄4 |   |
| Notes                receivable from sale of real estate                           |   |                                                                      | 3⁄4 |   |   | 27,242 |   |
| Acquisition                of real estate to satisfy note receivable               |   |                                                                      | 3⁄4 |   |   | 4,714 |   |
| Note                payable paid by affiliate                                      |   |                                                                      | 3⁄4 |   |   | 700 |   |
| Unrealized                foreign currency translation gain (loss)                 |   |                                                                      | 3⁄4 |   |   | 706 |   |
| Unrealized                gain (loss) on marketable securities                     |   |                                                                      | 3⁄4 |   |   | 669 |   |
|                                                                               |   |                                                                      |   |   |   |   |   |

----

** **

**AMERICAN              REALTY INVESTORS, INC.**

**NOTES              TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE      1. BASIS OF PRESENTATION**

*Stock-based      employee compensation.*

**NOTE      2. REAL ESTATE**

| **Property**                            | **Location**                      | **Sq.                Ft./Acres** | **Purchase****Price** |   | **Net                Cash****Paid** | **Debt****Incurred** | **Interest****Rate** | **Maturity****Date** |
|-----------------------------------------|-----------------------------------|----------------------------------|-----------------------|--------|-------------------------------------|----------------------|----------------------|----------------------|
| ***First                Quarter***      |                              |                             |                  |   |                                |                 |                 |                 |   |   |   |   |
| **Land**                                |                              |                             |                  |   |                                |                 |                 |                 |   |   |   |   |
| Circle                C Ranch           | Austin,                TX         | 1,092                Acres       | $21,000               |   | $                 —      |                 | $21,000              |                 | 8.75 | %(1) | 03/08 |   |
| Pioneer                Crossing         | Austin,                TX         | 38.542                Acres      | 614                   | (2)    | 614                                 |                 | 1,515                |                 | 8.75 | (1) | 06/08 |   |
| Southwood                1394           | Tallahassee,                FL    | 14.52                Acres       | 1,150                 |   | 477                                 |                 | 748                  |                 | 8.50 | (1) | 02/08 |   |
| Valley                Ranch 20          | Farmers                Branch, TX | 20                Acres          | 4,673                 |   | 1,892                               |                 | 3,038                |                 | 8.50 | (1) | 02/08 |   |
| Woodmont                Fairway Office  | Dallas,                TX         | 5.866                Acres       | 3,833                 |   | 1,014                               |                 | 3,000                |                 | 8.25 | (1) | 01/07 |   |
| Woodmont                Merit Drive     | Dallas,                TX         | 9.28                Acres        | 4,560                 |   | 1,868                               |                 | 2,964                |                 | 8.00 |   | 03/07 |   |
|                                    |                              |                             |                  |   |                                |                 |                 |                 |   |   |   |   |
| **Apartments**                          |                              |                             |                  |   |                                |                 |                 |                 |   |   |   |   |
| Anderson                Estates Apts    | Oxford,                MS         | 48                Units          | 1,144                 | (3)    | 148                                 |                 | 996                  |                 | 9.50 | (1) | 12/20 |   |
| David                Jordan Phase II    | Greenwood,                MS      | 32                Units          | 743                   | (3)    | 98                                  |                 | 645                  |                 | 8.50 | (1) | 04/19 |   |
| David                Jordan Phase III   | Greenwood,                MS      | 40                Units          | 812                   | (3)    | 122                                 |                 | 690                  |                 | 8.75 | (1) | 07/22 |   |
| Leflore                Estates / Curtis |                              |                             |                  |   |                                |                 |                 |                 |   |   |   |   |
| Moore                Apartments         | Greenwood,                MS      | 104                Units         | 2,114                 | (3)    | 337                                 |                 | 1,777                |                 | 7.00 |   | 02/22 |   |
| Monticello                III Estates   | Monticello,                AR     | 32                Units          | 644                   | (3)    | 96                                  |                 | 548                  |                 | 7.00 |   | 01/22 |   |
| Riverwalk                Phase I        | Greenwood,                MS      | 32                Units          | 455                   | (3)    | 99                                  |                 | 356                  |                 | 8.50 |   | 02/19 |   |
| Riverwalk                Phase II       | Greenwood,                MS      | 72                Units          | 1,584                 | (3)    | 226                                 |                 | 1,358                |                 | 8.25 | (1) | 02/19 |   |

----

**AMERICAN            REALTY INVESTORS, INC.**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS -            CONTINUED**

| **Property**                         | **Location**                     | **Units                /****Sq.                Ft./Acres** | **Purchase****Price** | **Net                Cash****Paid/****(Received)** | **Debt****Incurred** | **Interest****Rate**     | **Maturity****Date** |
|--------------------------------------|----------------------------------|------------------------------------------------------------|-----------------------|----------------------------------------------------|----------------------|--------------------------|----------------------|
| ***First                Quarter***   |                             |                                                       |                  |                                               |                 |                     |                 |   |   |   |   |
| **Land**                             |                             |                                                       |                  |                                               |                 |                     |                 |   |   |   |   |
| Katrina(1)                           | Palm                Desert, CA   | 23.0                Acres                                  | $4,184                | $                —                           |                 | $                — |                 | — | % | — |   |
| Keenan                Bridge(2)      | Farmers Branch, TX     | 7.5                Acres                                   | 510                   | 14                                                 |                 | —                  |                 | — |   | — |   |
| Mandahl                Bay           | US                Virgin Islands | 50.8                Acres                                  | 7,000                 | 4,101                                              |                 | 3,500                    |                 | 7.00 |   | 07/05 |   |
| Mandahl                Bay (Gilmore) | US                Virgin Islands | 1.0                Acres                                   | 96                    | 104                                                |                 | —                  |                 | — |   | — |   |
| Mandahl                Bay (Chung)   | US                Virgin Islands | .7                Acres                                    | 95                    | 101                                                |                 | —                  |                 | 3⁄4 |   | — |   |

|   **Property**            | **Location**                      | **Units/Acres/****Sq.                Ft.** | **Sales****Price** | **Net                Cash****Received/****(Paid)** | **Debt****Discharged** | **Gain****on                Sale** |   |
|-------------------------------------|-----------------------------------|--------------------------------------------|--------------------|----------------------------------------------------|------------------------|------------------------------------|--------|
| ***First                Quarter***  |                              |                                       |               |                                               |                   |                               |   |   |   |
| **Land**                            |                              |                                       |               |                                               |                   |                               |   |   |   |
| Hollywood                Casino     | Farmers                Branch, TX | 10.5                Acres                  | $3,225             | $1,207                                             |                   | $—                           |   | $1,831 |   |
| Vineyards                II         | Grapevine,                TX      | 1.5                Acres                   | 1,272              | 429                                                |                   | 745                                |   | 578 |   |
|                                |                              |                                       |               |                                               |                   |                               |   |   |   |
| ***Second                Quarter*** |                              |                                       |               |                                               |                   |                               |   |   |   |
| **Land**                            |                              |                                       |               |                                               |                   |                               |   |   |   |
| Elm                Fork             | Carrollton,                TX     | 27.6                Acres                  | 3,500              | (827                                               | )                      | 2,800                              |   | 1,596 |   |
| Nashville                           | Nashville,                TN      | 16.4                Acres                  | 2,512              | —                                            |                   | 2,416                              |   | 1,700 |   |
| Nashville                           | Nashville,                TN      | 2.4                Acres                   | 462                | —                                            |                   | 429                                |   | 323 |   |

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

|   **Property**              | **Location**                   | **Units/Acres/****Sq.                Ft.** | **Sales****Price** | **Net                Cash****Received/****(Paid)** | **Debt****Discharged** | **Gain****on                Sale** |   |
|---------------------------------------|--------------------------------|--------------------------------------------|--------------------|----------------------------------------------------|------------------------|------------------------------------|--------|
| ***First                Quarter***    |                           |                                       |               |                                               |                   |                               |   |   |   |
| **Apartments**                        |                           |                                       |               |                                               |                   |                               |   |   |   |
| Longwood                              | Long                Beach, MS  | 200                Units                   | $6,456             | $ 9                                           |                   | $6,253                             | (1)    | $56 |   |
|                                  |                           |                                       |               |                                               |                   |                               |   |   |   |
| **Land**                              |                           |                                       |               |                                               |                   |                               |   |   |   |
| Granbury                Station  | Ft.                Worth, TX   | 15.7                Acres                  | 1,003              | 265                                                |                   | 738                                | (1)    | 10 |   |
| Katrina                          | Palm                Desert, CA | 9.9                Acres                   | 2,616              | 574                                                |                   | —                            |   | 1,323 |   |
| Katrina                          | Palm                Desert, CA | 13.6                Acres                  | 3,703              | 591                                                |                   | —                            |   | 1,706 |   |
| Katrina                          | Palm                Desert, CA | 5.5                Acres                   | 1,325              | 1,281                                              |                   | —                            |   | 619 |   |
| Katrina                          | Palm                Desert, CA | 6.5                Acres                   | 1,695              | 340                                                |                   | —                            |   | 818 |   |
| Katrina                          | Palm                Desert, CA | 7.4                Acres                   | 2,028              | 455                                                |                   | —                            |   | 1,072 |   |
| Katrina                          | Palm                Desert, CA | 81.2                Acres                  | 19,878             | (814                                               | )                      | 5,100                              |   | 9,387 |   |
| Katrina                          | Palm                Desert, CA | 24.8                Acres                  | 6,402              | 1,027                                              |                   | —                            |   | 2,947 |   |
| Katy                             | Katy,                TX        | 130.6                Acres                 | 12,400             | 4,981                                              |                   | 6,601                              |   | 5,630 |   |
| Nashville                             | Nashville,                TN   | 1.2                Acres                   | 304                | 236                                                |                   | —                            |   | 226 |   |
| Vista                Ridge            | Lewisville,                TX  | 4.4                Acres                   | 950                | (92                                                | )                      | 914                                |   | 440 |   |

----

**AMERICAN                  REALTY INVESTORS, INC.**

**NOTES                  TO CONSOLIDATED FINANCIAL STATEMENTS -                  CONTINUED**

|   **Property**                 | **Location**               | **Units/Acres/****Sq.                Ft.** | **Sales****Price** | **Net                Cash****Received/****(Paid)** | **Debt****Discharged** | **Gain****on                Sale** |   |
|------------------------------------------|----------------------------|--------------------------------------------|--------------------|----------------------------------------------------|------------------------|------------------------------------|--------|
| **Office                Buildings**      |                       |                                       |               |                                               |                   |                               |   |   |   |
| Institute                Place      | Chicago,                IL | 144,915                Sq. Ft.             | $14,460            | $4,843                                             |                   | $7,792                             | (1)    | $10,603 |   |
|                                     |                       |                                       |               |                                               |                   |                               |   |   |   |
| **Industrial                Warehouses** |                       |                                       |               |                                               |                   |                               |   |   |   |
| 5700                Tulane          | Atlanta,                GA | 67,850                Sq. Ft.              | 816                | 738                                                |                   | —                            |   | 329 |   |

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

| **Property**                          | **Location**                      | **Units**                | **Amount****Expended** | **Additional****Amount****to                Expend** | **Construction****Loan****Funding** |
|---------------------------------------|-----------------------------------|--------------------------|------------------------|------------------------------------------------------|-------------------------------------|
| Laguna                Vista           | Farmers                Branch, TX | 206                Units | $8,662                 | $12,444                                              | $17,741                             |
| Legends                of El Paso     | El                Paso, TX        | 240                Units | 5,793                  | 12,290                                               | 16,040                              |
| Mission                Oaks           | San                Antonio, TX    | 228                Units | 13,458                 | 4,011                                                | 15,636                              |
| Park                at Maumelle  | Maumelle,                AR       | 240                Units | 12,021                 | 6,678                                                | 16,829                              |
| Park                at Metro Center   | Nashville,                TN      | 144                Units | 3,512                  | 9,103                                                | 11,141                              |

**NOTE      3. NOTES AND INTEREST RECEIVABLE**

----

**AMERICAN            REALTY INVESTORS, INC.**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS -            CONTINUED**

----

**AMERICAN            REALTY INVESTORS, INC.**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS -            CONTINUED**

*Related      Parties.*

**NOTE      4. INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES**

| **Investee**                          |   | **Percentage                  of ARI’s****Ownership** |   | **Carrying                  Value of****Investment** |   | **Market                  Value****of                  Investment** |   |
|---------------------------------------|--------|-------------------------------------------------------------|--------|------------------------------------------------------|--------|---------------------------------------------------------------------|--------|
| IORI                                  |   |                                                        | 24.88  | %                                                    | $      | 6,155                                                               |   | $ | 7,520 |   |
| Garden                  Centura, L.P. |   |                                                        | 5.0    | %                                                    |   | 6,048                                                               |   |   | 3⁄4 |   |
| Other                                 |   |                                                        |   |                                                 |   | 351                                                                 |   | $ | 7,520 |   |
|                                  |   |                                                        |   |                                                 | $      | 12,554                                                              |   |   |   |   |

----

**AMERICAN            REALTY INVESTORS, INC.**

**NOTES            TO FINANCIAL STATEMENTS - CONTINUED**

|                                                     |   | **2006** |    |
|----------------------------------------------------------|--------|----------|---------|
| Revenues                                                 |   | $        | 5,775   |   |
| Equity                in loss of partnership             |   |     | — |   |
| Property                operating expenses               |   |     | (2,205  | ) |
| Depreciation                                             |   |     | (873    | ) |
| Interest                                                 |   |     | (1,506  | ) |
| Income                before gain on sale of real estate |   |     | 1,191   |   |
| Gain                on sale of real estate               |   |     | — |   |
| Net                income                                |   |     | 1,191   |   |

**NOTE      5. MARKETABLE EQUITY SECURITIES**

**NOTE      6. NOTES PAYABLE**

| **Property**                          | **Location**                 | **Sq.                Ft./Rooms/****Units/Acres** | **Debt****Incurred** | **Debt****Discharged** | **Net                Cash****Received** |    | **Interest****Rate** | **Maturity****Date** |
|---------------------------------------|------------------------------|--------------------------------------------------|----------------------|------------------------|-----------------------------------------|---------|----------------------|----------------------|
| ***First                Quarter***    |                         |                                             |                 |                   |                                    |    |                 |                 |   |   |
| **Apartments**                        |                         |                                             |                 |                   |                                    |    |                 |                 |   |   |
| Hunters                Glen      | Midland,                TX   | 212                Units                         | $2,475               |                   | $1,804                                  | $421    |                 | 7.23                 | %(1) | 02/09 |
|                                  |                         |                                             |                 |                   |                                    |    |                 |                 |   |   |
| **Land**                              |                         |                                             |                 |                   |                                    |    |                 |                 |   |   |
| Nashville                        | Nashville,                TN | 100.9                Acres                       | 2,500                |                   | 3⁄4                                  | 2,500   | (2)                  | 12.50                |   | 05/06 |
| Palmer                Lane       | Austin,                TX    | 367.4                Acres                       | 14,000               |                   | 14,300                                  | (893    | )                    | 8.50                 | (1) | 08/07 |
| Pioneer                Crossing  | Austin,                TX    | 235.0                Acres                       | 11,750               | (3)                    | 4,000                                   | — |                 | 12.50                |   | 04/07 |
| West                End          | Dallas,                TX    | 5.3                Acres                         | 9,000                |                   | 2,000                                   | 6,079   |                 | 8.00                 | (1) | 03/07 |

----

**AMERICAN            REALTY INVESTORS, INC.**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS -            CONTINUED**

| **Property**                          | **Location**                     | **Sq.                Ft./Rooms/****Units/Acres** | **Debt****Incurred** | **Debt****Discharged** | **Net                Cash****Received** | **Interest****Rate** | **Maturity****Date** |
|---------------------------------------|----------------------------------|--------------------------------------------------|----------------------|------------------------|-----------------------------------------|----------------------|----------------------|
| ***First                Quarter***    |                             |                                             |                 |                   |                                    |                 |                 |   |
| **Land**                              |                             |                                             |                 |                   |                                    |                 |                 |   |
| Nashville                        | Nashville,                TN     | 109.6                Acres                       | $7,000               | $—               | $6,341                                  | 7.50                 |  %              | 02/07 |
|                                  |                             |                                             |                 |                   |                                    |                 |                 |   |
| **Shopping                Centers**   |                             |                                             |                 |                   |                                    |                 |                 |   |
| Bridgeview                Plaza  | LaCrosse,                WI      | 116,008                Sq. Ft.                   | 7,197                | 6,304                  | 649                                     | 7.25                 | (1)                  | 03/10 |
| Dunes                Plaza       | Michigan                City, IN | 223,869                Sq. Ft.                   | 3,750                | 2,685                  | 658                                     | 7.50                 | (1)                  | 01/10 |

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

**NOTE      7. STOCK-SECURED NOTES PAYABLE**

*Sunset      Management LLC.*

----

**AMERICAN            REALTY INVESTORS, INC.**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS -            CONTINUED**

*Other      Stock-secured notes payable.*

**NOTE      8. RELATED PARTY TRANSACTIONS**

|                                                          |   | **PRIME** |    |
|---------------------------------------------------------------|--------|-----------|---------|
| Balance,                December 31, 2005                     |   | $         | 29,702  |   |
| Cash                transfers to affiliates                   |   |      | 30,672  |   |
| Cash                transfers from affiliates                 |   |      | (36,680 | ) |
| Advances                through receipt of financing proceeds |   |      | 10,250  |   |
| Construction                fees payable to affiliate         |   |      | (527    | ) |
| Balance,                March 31, 2006                        |   | $         | 33,416  |   |

*Returns      on Metra Properties.*

----

**AMERICAN          REALTY INVESTORS, INC.**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS -          CONTINUED**

**NOTE      9. OPERATING SEGMENTS**

| **For                the Three Months Ended****March                31, 2006** |   | **Commercial****Properties** |    | **Apartments** |   | **Hotels** |   | **Land** |    | **Restaurants** |   | **Receivables/****Other** |   | **Total** |    |
|--------------------------------------------------------------------------------|--------|------------------------------|---------|----------------|--------|------------|--------|----------|---------|-----------------|--------|---------------------------|--------|-----------|---------|
| Operating                revenue                                               |   | $                            | 15,810  |           | $      | 21,845     |   | $        | 7,792   |            | $      | 165                       |   | $         | 9,349   |   | $ | 255 |   | $ | 55,216 |   |
| Operating                expenses                                              |   |                         | 8,880   |           |   | 13,496     |   |     | 6,588   |            |   | 832                       |   |      | 6,915   |   |   | (126 | ) |   | 36,585 |   |
| Depreciation                                                                   |   |                         | 3,013   |           |   | 2,520      |   |     | 851     |            |   | 7                         |   |      | 332     |   |   | 3 |   |   | 6,726 |   |
| Mortgage                and loan interest                                      |   |                         | 3,825   |           |   | 7,994      |   |     | 1,248   |            |   | 4,227                     |   |      | 327     |   |   | 1,083 |   |   | 18,704 |   |
| Interest                income                                                 |   |                         | — |           |   | —    |   |     | — |            |   | —                   |   |      | — |   |   | 1,146 |   |   | 1,146 |   |
| Gain                on land sales                                              |   |                         | — |           |   | —    |   |     | — |            |   | 2,740                     |   |      | — |   |   | — |   |   | 2,740 |   |
| Segment                operating income (loss)                                 |   | $                            | 92      |           | $      | (2,165     | )      | $        | (895    | )               | $      | (2,161                    | )      | $         | 1,775   |   | $ | 441 |   | $ | (2,913 | ) |
|                                                                           |   |                         |    |           |   |       |   |     |    |            |   |                      |   |      |    |   |   |   |   |   |   |   |
| Capital                expenditures                                            |   | $                            | 2,153   |           | $      | 1,746      |   | $        | 250     |            | $      | 345                       |   | $         | 69      |   | $ | — |   | $ | 4,563 |   |
| Assets                                                                         |   |                         | 222,597 |           |   | 536,707    |   |     | 76,364  |            |   | 333,481                   |   |      | 19,442  |   |   | 71,890 |   |   | 1,260,481 |   |

| **Property                Sales:**       |   |   |    |   |   |    |   |   |    |   |   |   |   |   |    |
|-----------------------------------------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|--------|--------|--------|---------|
| Sales                price                    |   | $      | — |   | $      | — |   | $      | — |   | $      | 5,111  |   | $      | — |   | $ | — |   | $ | 5,111 |   |
| Cost                of sale                   |   |   | — |   |   | — |   |   | — |   |   | 4,202  |   |   | — |   |   | — |   |   | 4,202 |   |
| Recognized                prior deferred gain |   |   | — |   |   | — |   |   | — |   |   | 1,831  |   |   | — |   |   | — |   |   | 1,831 |   |
| Gain                on sale                   |   | $      | — |   | $      | — |   | $      | — |   | $      | 2,740  |   | $      | — |   | $ | — |   | $ | 2,740 |   |

| **For                the Three Months Ended****March                31, 2005** |   | **Commercial****Properties** |    | **Apartments** |   | **Hotels** |   | **Land** |    | **Restaurants** |   | **Receivables/****Other** |   | **Total** |    |
|--------------------------------------------------------------------------------|--------|------------------------------|---------|----------------|--------|------------|--------|----------|---------|-----------------|--------|---------------------------|--------|-----------|---------|
| Operating                revenue                                               |   | $                            | 12,037  |           | $      | 18,194     |   | $        | 7,313   |            | $      | 198                       |   | $         | 8,620   |   | $ | 16 |   | $ | 46,378 |   |
| Operating                expenses                                              |   |                         | 6,904   |           |   | 11,220     |   |     | 6,446   |            |   | 1,899                     |   |      | 6,754   |   |   | (17 | ) |   | 33,206 |   |
| Depreciation                                                                   |   |                         | 2,542   |           |   | 2,016      |   |     | 696     |            |   | —                   |   |      | 302     |   |   | 16 |   |   | 5,572 |   |
| Mortgage                and loan interest                                      |   |                         | 2,918   |           |   | 6,408      |   |     | 1,546   |            |   | 2,875                     |   |      | 348     |   |   | 1,095 |   |   | 15,190 |   |
| Interest                income                                                 |   |                         | — |           |   | —    |   |     | — |            |   | —                   |   |      | — |   |   | 1,590 |   |   | 1,590 |   |
| Gain                on land sales                                              |   |                         | — |           |   | —    |   |     | — |            |   | 24,178                    |   |      | — |   |   | — |   |   | 24,178 |   |
| Segment                operating income (loss)                                 |   | $                            | (327    | )              | $      | (1,450     | )      | $        | (1,375  | )               | $      | 19,602                    |   | $         | 1,216   |   | $ | 508 |   | $ | 18,174 |   |
|                                                                           |   |                         |    |           |   |       |   |     |    |            |   |                      |   |      |    |   |   |   |   |   |   |   |
| Capital                expenditures                                            |   | $                            | 2,270   |           | $      | 13,774     |   | $        | 123     |            | $      | 183                       |   | $         | 65      |   | $ | — |   | $ | 16,415 |   |
| Assets                                                                         |   |                         | 183,453 |           |   | 488,578    |   |     | 83,564  |            |   | 215,640                   |   |      | 20,351  |   |   | 68,876 |   |   | 1,060,462 |   |

| **Property                Sales:**       |   |   |    |   |   |   |   |   |    |   |   |    |   |   |    |
|-----------------------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|---------|--------|--------|---------|--------|--------|---------|
| Sales                price                    |   | $      | 15,276  |   | $      | 6,207  |   | $      | — |   | $      | 52,305  |   | $      | — |   | $ | — |   | $ | 73,788 |   |
| Cost                of sale                   |   |   | 4,345   |   |   | 6,151  |   |   | — |   |   | 28,127  |   |   | — |   |   | — |   |   | 38,623 |   |
| Deferred                current gain          |   |   | — |   |   | 3⁄4 |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |
| Recognized                prior deferred gain |   |   | 3⁄4  |   |   | 3⁄4 |   |   | 3⁄4  |   |   | 3⁄4  |   |   | 3⁄4  |   |   | 3⁄4 |   |   | 3⁄4 |   |
| Gain                on sale                   |   | $      | 10,931  |   | $      | 56     |   | $      | — |   | $      | 24,178  |   | $      | — |   | $ | — |   | $ | 35,165 |   |

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**AMERICAN          REALTY INVESTORS, INC.**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS -          CONTINUED**

|                                                        |   | **For                the Three Months****Ended                March 31,** |    |
|-------------------------------------------------------------|--------|---------------------------------------------------------------------------|---------|
|                                                        |   | **2006**                                                                  |    | **2005** |   |
| Segment                operating income (loss)              |   | $                                                                         | (2,913  | ) | $ | 18,174 |   |
| Other                non-segment items of income/(expense): |   |                                                                      |    |   |   |   |   |
| General                and administrative                   |   |                                                                      | (3,892  | ) |   | (2,729 | ) |
| Advisory                fee                                 |   |                                                                      | (3,081  | ) |   | (2,906 | ) |
| Gain/(loss)                on foreign currency transaction  |   |                                                                      | 2       |   |   | — |   |
| Other                income (expense)                       |   |                                                                      | 1,702   |   |   | 106 |   |
| Net                income fee                               |   |                                                                      | — |   |   | (1,477 | ) |
| Incentive                fee                                |   |                                                                      | — |   |   | — |   |
| Litigation                settlement                        |   |                                                                      | — |   |   | — |   |
| Equity                in income (loss) of investees         |   |                                                                      | 175     |   |   | 60 |   |
| Minority                interest                            |   |                                                                      | 830     |   |   | (921 | ) |
| Income                (loss) from continuing operations     |   | $                                                                         | (7,177  | ) | $ | 10,307 |   |

**NOTE      10. DISCONTINUED OPERATIONS**

|                                                                     |   | **For                the Three Months****Ended                March 31,** |    |
|--------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|---------|
|                                                                     |   | **2006**                                                                  |    | **2005** |   |
| Revenue:                                                                 |   |                                                                      |    |   |   |
| Rental                                                                   |   | $                                                                         | 2,545   |   | $ | 6,257 |   |
| Property                operations                                       |   |                                                                      | 1,990   |   |   | 4,569 |   |
|                                                                     |   |                                                                      | 555     |   |   | 1,688 |   |
|                                                                     |   |                                                                      |    |   |   |   |   |
| Expenses:                                                                |   |                                                                      |    |   |   |   |   |
| Interest                                                                 |   |                                                                      | 1,261   |   |   | 2,016 |   |
| Depreciation                                                             |   |                                                                      | 192     |   |   | 289 |   |
|                                                                     |   |                                                                      | 1,453   |   |   | 2,305 |   |
|                                                                     |   |                                                                      |    |   |   |   |   |
| Income                (loss) from discontinued operations                |   |                                                                      | (898    | ) |   | (617 | ) |
|                                                                     |   |                                                                      |    |   |   |   |   |
| Gain                on sale of real estate                               |   |                                                                      | — |   |   | 10,987 |   |
| Write-down                of assets held-for-sale                        |   |                                                                      | — |   |   | — |   |
| Equity                in gain on sale of real estate by equity investees |   |                                                                      | — |   |   | — |   |
|                                                                     |   |                                                                      |    |   |   |   |   |
| Income                from discontinued operations                       |   | $                                                                         | (898    | ) | $ | 10,370 |   |

**NOTE      11. COMMITMENTS AND CONTINGENCIES**

*Liquidity.      *
* *

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**AMERICAN            REALTY INVESTORS, INC.**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS -            CONTINUED**

*Partnership      Obligations*

*Commitments.      *

*Litigation.      *

**NOTE      12. SUBSEQUENT EVENTS**

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

***WARNING      CONCERNING FORWARD LOOKING STATEMENTS***

***Overview***

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***Critical      Accounting Policies***

***Real      Estate Held for Investment***

***Real      Estate Held-for-Sale***

***Investments      in Equity Investees***

***Recognition      of Rental Income***

***Revenue      Recognition on the Sale of Real Estate***

----

***Non-performing      Notes Receivable***

***Interest      Recognition on Notes Receivable***

***Allowance      for Estimated Losses***

***Fair      Value of Financial Instruments***

***Liquidity      and Capital Resources***

----

***Related      Party Transactions***

***Commitments      and Contingencies***

***Results      of Operations***

|       |   | **For                the Three Months****Ended                March 31,** |   |
|------------|--------|---------------------------------------------------------------------------|--------|
|       |   | **2006**                                                                  |   | **2005** |   |
| Commercial |   | $                                                                         | 15,810 |   | $ | 12,037 |   |
| Apartments |   |                                                                      | 21,845 |   |   | 18,194 |   |
| Hotels     |   |                                                                      | 7,792  |   |   | 7,313 |   |
| Land       |   |                                                                      | 165    |   |   | 198 |   |
| Other      |   |                                                                      | 9,604  |   |   | 8,636 |   |
|       |   | $                                                                         | 55,216 |   | $ | 46,378 |   |

----

|       |   | **For                the Three Months****Ended                March 31,** |   |
|------------|--------|---------------------------------------------------------------------------|--------|
|       |   | **2006**                                                                  |   | **2005** |   |
| Commercial |   | $                                                                         | 8,800  |   | $ | 6,904 |   |
| Apartments |   |                                                                      | 13,496 |   |   | 11,220 |   |
| Hotels     |   |                                                                      | 6,588  |   |   | 6,446 |   |
| Land       |   |                                                                      | 832    |   |   | 1,899 |   |
| Other      |   |                                                                      | 6,789  |   |   | 6,737 |   |
|       |   | $                                                                         | 36,585 |   | $ | 33,206 |   |

|        |   | **For                the Three Months****Ended                March 31,** |   |
|-------------|--------|---------------------------------------------------------------------------|--------|
|        |   | **2006**                                                                  |   | **2005** |   |
| Commercial  |   | $                                                                         | 3,013  |   | $ | 2,542 |   |
| Apartments  |   |                                                                      | 2,520  |   |   | 2,016 |   |
| Hotels      |   |                                                                      | 851    |   |   | 696 |   |
| Restaurants |   |                                                                      | 332    |   |   | 302 |   |
| Other       |   |                                                                      | 10     |   |   | 16 |   |
|        |   | $                                                                         | 6,726  |   | $ | 5,572 |   |

----

|        |   | **For                the Three Months****Ended                March 31,** |   |
|-------------|--------|---------------------------------------------------------------------------|--------|
|        |   | **2006**                                                                  |   | **2005** |   |
| Commercial  |   | $                                                                         | 3,825  |   | $ | 2,918 |   |
| Apartments  |   |                                                                      | 7,994  |   |   | 6,408 |   |
| Hotels      |   |                                                                      | 1,248  |   |   | 1,546 |   |
| Land        |   |                                                                      | 4,227  |   |   | 2,875 |   |
| Restaurants |   |                                                                      | 327    |   |   | 348 |   |
|  Other |   |                                                                      | 1,083  |   |   | 1,095 |   |
|        |   | $                                                                         | 18,704 |   | $ | 15,190 |   |

|                                                        |   | **For                  the Three Months****Ended                  March 31,** |    |
|-------------------------------------------------------------|--------|-------------------------------------------------------------------------------|---------|
|                                                        |   | **2006**                                                                      |    | **2005** |   |
| Revenue:                                                    |   |                                                                          |    |   |   |
| Rental                                                      |   | $                                                                             | 2,545   |   | $ | 6,258 |   |
| Property                  operations                        |   |                                                                          | 1,990   |   |   | 4,569 |   |
|                                                        |   |                                                                          | 555     |   |   | 1,689 |   |
| Expenses:                                                   |   |                                                                          |    |   |   |   |   |
| Interest                                                    |   |                                                                          | 1,261   |   |   | 2,016 |   |
| Depreciation                                                |   |                                                                          | 192     |   |   | 289 |   |
|                                                        |   |                                                                          | 1,453   |   |   | 2,305 |   |
|                                                        |   |                                                                          |    |   |   |   |   |
| Income                  (loss) from discontinued operations |   |                                                                          | (898    | ) |   | (616 | ) |
|                                                        |   |                                                                          |    |   |   |   |   |
| Gain                  on sale of real estate                |   |                                                                          | — |   |   | 10,987 |   |
| Write-down                  of assets held-for-sale         |   |                                                                          | — |   |   | — |   |
|                                                        |   |                                                                          |    |   |   |   |   |
| Income                  from discontinued operations        |   | $                                                                             | (898    | ) | $ | 10,371 |   |

***Tax      Matters***

----

***Environmental      Matters***

***Inflation***

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

|                                                           |   | **Balance** |    | **Weighted****Average****Interest                Rate** |   | **Effect                of 1%****Increase                In****Base                Rates** |   |
|----------------------------------------------------------------|--------|-------------|---------|---------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|
| Notes                payable:                                  |   |        |    |                                                    |   |                                                                                       |   |
| Variable                rate                                   |   | $           | 219,120 |                                                    |   | 8.07                                                                                       | %      | $ | 2,192 |   |
| Total                decrease in ARI’s annual net income |   |        |    |                                                    |   |                                                                                       |   | $ | 2,192 |   |
| Per                share                                       |   |        |    |                                                    |   |                                                                                       |   | $ | 0.22 |   |

**ITEM 4.      CONTROLS AND PROCEDURES** 

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**PART      II. OTHER INFORMATION**

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

| **Period**                   | **Total                Number of****Shares Purchased** | **Average                Price****Paid                per Share** | **Total                Number of****Shares                Purchased****as                Part of Publicly****Announced                Program** | **Maximum                Number of****Shares                that May****Yet                be Purchased****Under                the Program****(1)** |
|------------------------------|--------------------------------------------------------|-------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| January                2006  | –                                                | $–                                                          | –                                                                                                                                         | 129,493                                                                                                                                              |
| February                2006 | –                                                | –                                                           | –                                                                                                                                         | 129,493                                                                                                                                              |
| March                2006    | –                                                |                        – | –                                                                                                                                         | 129,493                                                                                                                                              |
| Total                        | –                                                | $–                                                          | –                                                                                                                                         |                                                                                                                                                 |

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**ITEM 6.      EXHIBITS**

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

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**SIGNATURE      PAGE**

|   |  AMERICAN                REALTY INVESTORS, INC. |
|--------|------------------------------------------------------|
|   |                                                 |   |   |
| Date:  | May                15, 2006                          | By: | /s/                Steven A. Abney     |
|   |                                                 |   | Steven                A. Abney |
|   |                                                 |   | Executive                Vice President and Chief Financial Officer |
|   |                                                 |   | (Principal                Financial and Accounting Officer and |
|   |                                                 |   | Acting                Principal Executive Officer) |
|   |                                                 |   |   |

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**AMERICAN      REALTY INVESTORS, INC.**

**EXHIBITS      TO **

**QUARTERLY      REPORT ON FORM 10-Q **

**For      the Quarter Ended March 31, 2006 **

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

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