<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549


                                   FORM 10-Q


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


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


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


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


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


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



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

                     APPLICABLE ONLY TO CORPORATE ISSUERS:


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



Common Stock, $.01 par value                       11,375,127
----------------------------          ---------------------------------
          (Class)                     (Outstanding at October 31, 2001)

                                       1
<PAGE>

                        PART I.  FINANCIAL INFORMATION


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

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

                        AMERICAN REALTY INVESTORS, INC.
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                             September 30,  December 31,
                                                                 2001          2000
                                                           --------------- -------------
                                                               (dollars in thousands,
                     Assets                                      except per share)
                     ------
<S>                                                        <C>             <C>
Real estate held for investment..........................   $   506,680     $   559,461
Less - accumulated depreciation..........................      <130,567>       <148,690>
                                                            -----------     -----------
                                                                376,113         410,771

Real estate held for sale................................       228,476         242,973

Notes and interest receivable
   Performing ($20,019 in 2001 and $9,684 in 2000 from
      affiliates)........................................        23,914          13,346
   Nonperforming ($6,768 in 2001 and $1,540 in 2000
      from affiliates)...................................         7,885           3,062
                                                            -----------     -----------
                                                                 31,799          16,408

Less--allowance for estimated losses.....................        <2,577>         <2,577>
                                                            -----------     -----------
                                                                 29,222          13,831

Pizza parlor equipment...................................        11,207          10,191
Less - accumulated depreciation..........................        <3,823>         <3,164>
                                                            -----------     -----------
                                                                  7,384           7,027

Leasehold interest - oil and gas properties..............         4,719              --
Less - accumulated depletion.............................            <1>             --
                                                            -----------     -----------
                                                                  4,718              --

Oilfield equipment.......................................           361              --
Less - accumulated depreciation..........................           <17>             --
                                                            -----------     -----------
                                                                    344              --

Marketable equity securities, at market value............           108             153
Cash and cash equivalents................................         5,014           4,177
Investments in equity investees..........................        78,046          44,777
Intangibles, net of accumulated amortization ($2,566
   in 2001 and $2,233 in 2000)...........................        15,883          16,075
Other assets.............................................        35,070          47,231
                                                            -----------     -----------
                                                            $   780,378     $   787,015
                                                            ===========     ===========
</TABLE>

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

                                       2
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
                     CONSOLIDATED BALANCE SHEETS - Continued


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

Liabilities
Notes and interest payable...............................    $582,139      $616,331
Margin borrowings........................................      28,703        13,485
Accounts payable and other liabilities ($13,251 in
 2001 and $3,030 in 2000 to affiliate)...................      44,513        41,221
                                                           ----------     ---------
                                                              655,355       671,037

Minority interest........................................      37,634        42,576

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

Stockholders' equity

Preferred Stock, $2.00 par value, authorized
 50,000,000 shares, issued and outstanding
 Series A, 2,724,910 shares in 2001 and 2,721,332
   2000 (liquidation preference $27,249).................       4,850         4,843
 Series E, 50,000 shares in 2001 and 2000
   (liquidation preference $500).........................         100           100
Common Stock, $.01 par value; authorized 100,000,000
 shares, issued 11,830,127 shares in 2001 and
 11,829,217 in 2000......................................         118           118
Paid-in capital..........................................     112,195       112,301
Accumulated (deficit)....................................     (33,827)      (43,943)
Treasury stock at par, 1,637,000 shares in 2001 and
 1,718,749 shares in 2000................................         (16)          (17)
                                                           ----------     ---------

                                                               83,420        73,402
                                                           ----------     ---------

                                                             $780,378      $787,015
                                                           ==========     =========
</TABLE>

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

                                       3
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                 For the Three Months     For the Nine Months
                                                    Ended September       Ended September 30,
                                                ----------------------   ----------------------
                                                  2001         2000         2001       2000
                                                ----------   ---------   ----------  ----------
                                                   (dollars in thousands, except per share)
<S>                                             <C>          <C>          <C>        <C>
Property revenue
  Rents.......................................  $  32,712    $  34,708    $  98,748  $  105,211
  Property operations expenses................     22,152       23,776       71,246      70,451
                                                ---------    ---------    ---------  ----------
    Operating income..........................     10,560       10,932       27,502      34,760

Land operations
  Sales.......................................      8,229       89,285       41,806     108,238
  Cost of sales...............................      4,682       65,674       33,546      81,116
                                                ---------    ---------    ---------  ----------
    Gain on land sales........................      3,547       23,611        8,260      27,122

Pizza parlor operations
  Sales.......................................      8,723        8,124       25,282      24,388
  Cost of sales...............................      7,164        6,798       20,715      20,138
                                                ---------    ---------    ---------  ----------
    Gross margin..............................      1,559        1,326        4,567       4,250

Oil and gas operations
  Sales.......................................         97           --           97          --
  Operating expenses..........................        186           --          186          --
                                                ---------    ---------    ---------  ----------
    Gross margin..............................        (89)          --          (89)         --

Income from operations........................     15,577       35,869       40,240      66,132

Other income
  Interest income.............................        837          283        1,997       3,295
  Equity in income of investees...............      3,452        2,577        9,157       2,873
  Gain on sale of real estate.................     12,334        3,474       54,600      51,706
  Other.......................................        (19)         606           58         419
                                                ---------    ---------    ---------  ----------
                                                   16,604        6,940       65,812      58,293
Other expenses
  Interest....................................     19,061       19,580       56,242      60,153
  Depreciation, depletion and
    amortization..............................      4,490        4,001       13,169      12,909
  General and administrative..................      4,610        2,873        9,083      11,705
  Advisory fee to affiliate...................      1,437        1,522        4,971       4,146
  Net income fee to affiliate.................     (1,128)          --          638          --
  Incentive fee to affiliate..................      1,642           --        7,477          --
  Minority interest...........................      1,003        4,953        2,483      32,219
                                                ---------    ---------    ---------  ----------
                                                   31,115       32,929       94,063     121,132
                                                ---------    ---------    ---------  ----------

Income before income taxes....................      1,066        9,880       11,989       3,293
Provision for income taxes....................         --       (1,652)          --      (1,652)
                                                ---------    ---------    ---------  ----------

Net income....................................      1,066        8,228       11,989       1,641
Preferred dividend requirement................       (620)        (590)      (1,868)     (1,661)
                                                ---------    ---------    ---------  ----------
Net income (loss) applicable to
    Common shares.............................  $     446    $   7,638    $  10,121  $      (20)
                                                =========    =========    =========  ==========
</TABLE>

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

                                       4
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                          For the Three Months       For the Nine Months
                                                           Ended September 30,        Ended September 30,
                                                        ------------------------    -----------------------
                                                            2001         2000          2001         2000
                                                        ------------  ----------    -----------  ----------
                                                              (dollars in thousands, except per share)
<S>                                                     <C>          <C>            <C>          <C>
Earnings per share
 Net income....................................         $       .04  $       .76    $      1.00  $        --
                                                        ===========  ===========    ===========  ===========
Weighted average Common shares used
 in computing earnings per share...............          10,193,217   10,013,087     10,141,840   10,496,364
                                                        ===========  ===========    ===========  ===========
</TABLE>

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

                                       5
<PAGE>

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


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

Preferred dividends
  Series A Preferred Stock ($.75 per
     share)...........................            --         --       --          --           --     ( 1,846)       (1,846)
  Series E Preferred Stock ($.45 per
     share)...........................            --         --       --          --           --         (22)          (22)


Common Stock dividends (pre-merger)...            --         --       --          --           --          (5)           (5)

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

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

Series A Preferred Stock issued.......             7         --       --          --           28          --            35

Net income............................            --         --       --          --           --      11,989        11,989
                                           ---------  ---------   ------    --------    ---------  ----------    ----------

Balance, September 30, 2001...........     $   4,850  $     100   $  118         (16)   $ 112,195     (33,827)   $   83,420
                                           =========  =========   ======    ========    =========  ==========    ==========
</TABLE>

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

                                       6
<PAGE>

                    AMERICAN REALTY INVESTORS, INC.
                   CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                            For the Nine Months
                                                                            Ended September 30,
                                                                         ------------------------
                                                                             2001         2000
                                                                         -----------   ----------
                                                                           (dollars in thousands)
<S>                                                                      <C>           <C>
Cash Flows From Operating Activities
   Rents collected...................................................    $   98,787    $  105,131
   Pizza parlor sales collected......................................        25,075        24,422
   Interest collected................................................           397         4,553
   Distributions received from equity investees'
    operating cash flow..............................................            53         1,869
   Payments for property operations..................................       (79,693)      (81,625)
   Payments for pizza parlor operations..............................       (20,804)      (20,030)
   Payments for oil and gas operations...............................          (175)           --
   Interest paid.....................................................       (45,691)      (55,855)
   Advisory fee paid to affiliate....................................        (4,971)       (4,146)
   Incentive fees paid to affiliate..................................        (1,646)           --
   Distributions to minority interest holders........................        (2,697)       (6,159)
   General and administrative expenses paid..........................        (9,079)      (11,705)
   Other.............................................................         1,239        10,110
                                                                         ----------    ----------

      Net cash (used in) operating activities........................       (39,205)      (33,435)

Cash Flows From Investing Activities
   Collections on notes receivable...................................         4,929        39,930
   Pizza parlor equipment purchased..................................        (1,066)       (1,120)
   Proceeds from sale of real estate.................................       102,415       125,218
   Purchase of marketable equity securities..........................            --        (5,307)
   Proceeds from sale of marketable equity securities................            --         5,170
   Notes receivable funded...........................................       (13,959)      (17,260)
   Earnest money/escrow deposits.....................................          (696)       (5,424)
   Investment in real estate entities................................       (36,975)        3,828
   Acquisition of real estate........................................            --       (19,015)
   Construction and development......................................        (3,771)       (9,415)
   Real estate improvements..........................................        (9,518)       (8,587)
   Acquisition of leasehold interests................................          (350)           --
   Purchase of oil field equipment...................................          (361)           --
                                                                         ----------    ----------

     Net cash provided by investing activities...........................    40,648       108,018
</TABLE>

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

                                       7
<PAGE>

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

<TABLE>
<CAPTION>
                                                                          For the Nine Months
                                                                          Ended September 30,
                                                                      ----------------------------
                                                                           2001           2000
                                                                      ------------    ------------
                                                                         (dollars in thousands)
<S>                                                                   <C>             <C>
Cash Flows from Financing Activities
  Proceeds from notes payable......................................   $    136,832    $   136,321
  Payments on notes payable........................................       (144,314)      (152,871)
  Deferred borrowing costs.........................................         (7,633)        (6,690)
  Net (payments) to/advances from affiliates.......................          1,028        (34,208)
  Issuance of Series E Preferred Stock.............................             --            500
  Margin borrowings, net...........................................         15,073        (10,953)
  Preferred dividends paid.........................................         (1,454)        (1,661)
  Repurchase of Common Stock.......................................           (133)          (746)
  Common dividends paid............................................             (5)            --
                                                                      ------------     ----------

        Net cash (used in) financing activities....................           (606)       (70,308)

        Net increase in cash and cash equivalents..................            837          4,275

Cash and cash equivalents, beginning of period.....................          4,177          2,479
                                                                      ------------     ----------

Cash and cash equivalents, end of period...........................   $      5,014     $    6,754
                                                                      ============     ==========


Reconciliation of net income to net cash (used in)
  operating activities
  Net income.......................................................   $     11,989     $    1,641
  Adjustments to reconcile net income to net cash
     (used in) operating activities
     Depreciation, depletion and amortization......................         13,169         12,909
     Gain on sale of real estate...................................        (62,860)       (78,828)
     Distributions from equity investees' operating
        cash flow..................................................             53          1,869
     Increase (decrease) in minority interest......................           (214)        26,060
     Equity in (income) of investees...............................         (9,157)        (2,873)
     (Increase) decrease in accrued interest receivable                     (1,600)         1,258
     Decrease in other assets......................................         11,294         17,666
     Increase/(decrease) in accrued interest payable...............             28         (3,723)
     (Decrease) in accounts payable and other liabilities                   (1,907)        (9,414)
                                                                      ------------     ----------

        Net cash (used in) operating activities....................   $    (39,205)    $  (33,435)
                                                                      ============     ==========
</TABLE>

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

                                       8
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                 For the Nine Months
                                                                                 Ended September 30,
                                                                              --------------------------
                                                                                  2001           2000
                                                                              ----------    ------------
                                                                                (dollars in thousands)
<S>                                                                           <C>           <C>
Schedule of noncash investing and financing activities

   Notes payable from acquisition of real estate..........................    $    2,549      $   6,262

   Notes payable assumed by buyer on sale of properties...................        30,263         32,460

   Notes receivable from sale of real estate..............................         4,329          2,790

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

   Common Stock issued in exchange for NRLP units.........................            --         25,817

   Issuance of Series A Preferred Stock...................................            35          1,213

   Issuance of Series F Preferred Stock...................................         3,969             --

   Purchase accounting writedown..........................................            --        (35,846)
</TABLE>

                                       9
<PAGE>

                        AMERICAN REALTY INVESTORS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

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

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

In September 1999, in conjunction with the sale of two apartments, $2.1 million
in purchase money financing was provided, secured by limited partnership
interests in two limited partnerships owned by the buyer. The financing bore
interest at 16.0% per annum, required monthly payments of interest only at 6.0%,
beginning in February 2000 and a $200,000 principal paydown in December 1999,
which was not received, and matured in August 2000. ARI had the option to obtain
the buyer's general and limited partnership interests in the collateral
partnerships in full satisfaction of the financing. In March 2000, ARI agreed to
forbear foreclosing on the collateral securing the note, and released one of the
partnership interests, in exchange for payment of $250,000 and executed deeds of
trusts on certain properties owned by the borrower. In March 2000, the borrower
made a $1.1 million payment, upon receipt of which ARI returned the deeds of
trust and terminated the option agreement. The borrower executed a replacement
promissory note for the remaining note balance of $1.0 million, which is
unsecured, non-interest bearing and matures in April 2003. In April 2000, ARI
funded a $100,000 loan to the borrower. The loan is secured by five second lien
deeds of trust, is non-interest bearing and matured in September 2001. At
November 2001, extension terms are being negotiated.

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

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

                                       10
<PAGE>

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


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

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

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

In March 2001, ARI sold a 20.0 acre tract of its Katrina land parcel for $2.8
million, receiving $700,000 in cash and providing purchase money financing of
the remaining $2.1 million of the sales price. The loan bears interest at 12.0%
per annum and matured in July 2001. All principal and interest were due at
maturity. At November 2001, extension terms are being negotiated.

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

Related Party. In March 2001, ARI funded $13.6 million of a $15.0 million
unsecured line of credit to One Realco Corporation ("One Realco") which owns
approximately 14.7% of the outstanding shares of ARI's Common Stock. The line of
credit bears interest at 12.0% per annum. All principal and interest are due at
maturity in February 2002. The line of credit is guaranteed by Basic Capital
Management, Inc, ("BCM"), ARI's advisor.

In October 1999, ARI funded a $4.7 million loan to Realty Advisors, Inc., an
affiliate. The loan is secured by all of the outstanding shares of common stock
of American Reserve Life Insurance Company. The loan bears interest at 10.25%
per annum and matured in November 2001. In January 2000, $100,000 in principal
was collected. All remaining principal and accrued interest were due at
maturity. A three year extension has been agreed upon, pending a change in
collateral.

                                       11
<PAGE>

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


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

In December 2000, an unsecured loan with a principal balance of $1.6 million to
Warwick of Summit, Inc. ("Warwick") matured. All principal and interest were due
at maturity. At September 2001, the loan, and $390,000 of accrued interest,
remained unpaid. At November 2001, settlement terms are being negotiated.
Richard D. Morgan, a Warwick shareholder, served as a director of ARI until
October 2001.

In December 2000, a loan with a principal balance of $1.6 million to Bordeaux
Investments Two, L.L.C. ("Bordeaux"), matured. The loan is secured by (1) a 100%
interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma;
(2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of
undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of
the Bordeaux members. At September 2001, the loan, and $436,000 of accrued
interest, remained unpaid. At November 2001, settlement terms are being
negotiated. Richard D. Morgan, a Bordeaux member, served as a director of ARI
until October 2001.

In March 2000, a loan with a principal balance of $2.4 million to Lordstown,
L.P., matured. The loan is secured by a second lien on land in Ohio and Florida,
by 100% of the general and limited partner interest in Partners Capital, Ltd.,
the limited partner of Lordstown, L.P., and a profits interest in subsequent
land sales. At September 2001, the loan, and $687,000 of accrued interest,
remained unpaid. At November 2001, settlement terms are being negotiated. A
corporation controlled by Richard D. Morgan is the general partner of Lordstown,
L.P. Mr. Morgan served as a director of ARI until October 2001.


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

In 2001, ARI sold the following properties:

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

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

Land
Frisco Bridges     Collin County, TX     27.8 Acres     4,500       4,130          --             25
Katrina            Palm Desert, CA       20.0 Acres     2,831        (124)        596             -- /(2)/
Las Colinas        Las Colinas, TX        1.7 Acres       825         233         400            539
Plano Parkway      Plano, TX             11.3 Acres     1,445         312         950             --
Scoggins           Tarrant County, TX   232.8 Acres     2,913         892       1,800            181
Scout              Tarrant County, TX   408.0 Acres     5,087       1,586       3,200          2,969
Tree Farm          Dallas County, TX     10.4 Acres     2,888         (87)      2,644             75

Second Quarter
Apartments
Kimberly Woods     Tucson, AZ             279 Units     8,450       1,667       6,191(1)       6,052
Place One          Tulsa, OK              407 Units    12,935       3,310       7,539          8,623
</TABLE>

                                       12
<PAGE>

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


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

<TABLE>
<CAPTION>
                                         Units/       Sales     Net Cash      Debt      Gain (Loss)
    Property            Location      Sq.Ft./Acres    Price     Received   Discharged     on Sale
-----------------    ---------------  -------------  --------  ---------- ------------ -----------
<S>                  <C>              <C>            <C>       <C>         <C>          <C>
Shadowood            Addison, TX          184 Units   $ 7,125      $1,980   $   4,320     $ 4,644
Glenwood             Addison, TX          168 Units     6,650       3,166       2,549        (560)
Bent Tree            Addison, TX          292 Units    12,050       2,480       8,867       7,081

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

Third Quarter
Apartments
Club Mar             Sarasota, FL         248 Units     8,500       1,905       6,199/(1)/  2,328
Covered Bridge       Gainesville, FL      176 Units     7,900       2,463       4,339       5,982
Crossing at Church   Tampa, FL             52 Units     1,880         750         948         623
Ashford              Tampa, FL             56 Units     2,145         593       1,182        (985)
Chalet I             Topeka, KS           162 Units     5,650       1,288       4,108/(1)/  3,952
Chalet II            Topeka, KS            72 Units     2,100         485       1,550/(1)/    434

Land
Elm Fork             Denton County, TX   10.0 Acres     1,002         (30)        958         284
Katrina              Palm Desert, CA      6.1 Acres     1,196       1,108          --         570
Chase Oaks           Plano, TX           22.3 Acres     2,874         663       2,027         870
Nashville            Nashville, TN        2.0 Acres        26          (1)         24         (82)
Nashville            Nashville, TN        1.2 Acres         8          --           4        (959)
Rasor                Plano, TX            6.6 Acres       350         267          --          34
Katrina              Palm Desert, CA      2.2 Acres       800         (24)        737         514
Chase Oaks           Plano, TX            4.9 Acres     1,973       1,832          --       1,416

Fourth Quarter
Apartments
Nora Pines           Indianapolis, IN     254 Units     9,850       2,548       5,574       6,631

Land
Katrina              Palm Desert, CA      1.4 Acres       284          (9)        253         117
</TABLE>
_______________________

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

In 2000, ARI sold the following properties:

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

Shopping Center
Katella Plaza        Orange, CA        62,290 Sq.Ft.    1,814         283    1,188            194

Land
Duchense             Duchense, UT         420 Acres        43          42       --             16
Frisco Bridges       Collin County, TX  15.00 Acres     2,675         706    2,000            297
Frisco Bridges       Collin County, TX  19.74 Acres     2,971          --       --/(2)/        --
Mason/Goodrich       Houston, TX          1.1 Acres       129          --      116             70
</TABLE>

                                       13
<PAGE>

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


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

<TABLE>
<CAPTION>
                                            Units/        Sales     Net Cash      Debt      Gain/(Loss)
    Property               Location      Sq.Ft./Acres     Price     Received   Discharged     on Sale
--------------------   ----------------  -------------  ---------  ----------  -----------  -----------
<S>                    <C>               <C>            <C>        <C>         <C>          <C>
Mason/Goodrich         Houston, TX          12.8 Acres    $ 2,536      $   --   $   1,803       $ 1,783
Nashville              Nashville, TN         2.6 Acres        405          --         345           225
Rasor                  Plano, TX           43.01 Acres      1,850          --       1,604            58

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

Office Building
Marina Playa           Santa Clara, CA   124,205 Sq.Ft.    25,750       7,737       7,766        17,285

Land
Rasor                  Plano, TX             5.4 Acres        915          --         915           705
Salmon River           Salmon River, ID      3.0 Acres         45          44          --            38
Valley Ranch           Irving, TX           22.4 Acres      1,455          --       1,375          (585)
Parkfield              Denver, CO            2.6 Acres        615          (1)        584           512
Frisco Bridges         Collin County, TX    24.3 Acres      4,194        (435)      4,000           259
Vista Business Park    Travis County, TX     5.4 Acres        620          14         577           173
McKinney Corners II    Collin County, TX    14.6 Acres        500        (599)      1,050           (40)

Third Quarter
Apartments
Fair Oaks              Euless, TX            208 Units      6,850         609       5,711         3,474

Land
Mason/Goodrich         Houston, TX           6.8 Acres      1,198         114         991           807
McKinney Corners
 I,II,III,IV,V         Collin County, TX    82.0 Acres      9,150         613       8,123         1,638
Parkfield              Denver, CO          326.8 Acres     13,164       7,969       3,279         3,768
Rasor                  Plano, TX            41.1 Acres      3,779       3,587          --         1,902
Pantex                 Collin County, TX   182.5 Acres      8,160          --       4,546/(1)/      959
Rowlett Creek          Collin County, TX    80.4 Acres      2,262         919       1,173           462
Vann Cattle            Collin County, TX   126.6 Acres      3,564       1,872       1,471         1,257
Mastenbrook            Collin County, TX   157.9 Acres      4,445       1,890       2,275           747
Wakefield              Collin County, TX    70.3 Acres      1,981       1,239         612           478
Nashville              Nashville, TN         3.0 Acres        523          19         450           310
Keller                 Tarrant County, TX  749.1 Acres     10,000       3,892       4,500         3,373
Frisco Bridges         Collin County, TX   127.4 Acres     27,500       7,411      18,570         6,954
Mason/Goodrich         Houston, TX          20.5 Acres      3,560         497       1,308           956
</TABLE>

___________________

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

In 2001, ARI purchased the following properties:

<TABLE>
<CAPTION>
                                   Units/     Purchase  Net Cash      Debt       Interest   Maturity
  Property        Location      Sq.Ft./Acres    Price     Paid      Incurred       Rate       Date
-------------- ---------------  ------------  --------  ---------  -----------  ----------  --------
<S>            <C>              <C>           <C>       <C>        <C>          <C>         <C>
Second Quarter
Apartments
Glenwood       Addison, TX        168 Units    $6,246       -/(1)/  $  2,549/(2)/   9.25%     10/04
</TABLE>

                                       14
<PAGE>

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


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

(1)    8.88 acres of Hollywood Casino land and 10.5 acres of Vista Ridge land
       given as consideration.  Exchanged with a related party.
(2)    Assumed debt of seller.  Exchanged with a related party.

In 2000, ARI purchased the following properties:

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

Second Quarter
Land
Sladek                  Travis County, TX      63.3 Acres       712       316     427/(1)/     10.0      05/04

Third Quarter
Hotel
Grand Hotel Sofia (3)   Sofia, Bulgaria         145 Rooms    17,975    17,975      --            --         --
</TABLE>
_____________

(1)   Seller financing.
(2)   Exchanged for 19.74 acres of Frisco Bridges land.
(3)   Related Party. ARI purchased 100% of the outstanding stock of World Trade
      Company, Ltd., owner of an 80% interest in the hotel, from One Realco
      Corporation, an affiliate, for $18.0 million in cash.

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

In May 2001, ARI purchased the leasehold interests in 37 oil and gas mineral
development properties, which include 131 drilled wells. The total proved
reserves are 6.5 million barrels of oil and 3.3 billion cubic feet of natural
gas. The total purchase price was $4.7 million, plus a 40% profit participation.
The Operator's Interest was purchased for $375,000, with $25,000 cash paid at
closing. ARI gave a note payable for the remaining $350,000. The note bears no
interest, and matures in May 2002. Monthly principal payments of $25,000 are
required. The Working Interests were purchased for $4.3 million, with $125,000
cash paid at closing. ARI gave a note payable for $250,000. The note bears no
interest, and matures in November 2001. One-half of the principal was paid in
August 2001. The remaining $4.0 million was paid by issuing 3,968.75 shares of
ARI Series F Preferred Stock, which is redeemable quarterly in an amount equal
to 20% of net cash flow from the oil and gas operations. The stock has a
liquidation value of $1,000 per share, and pays no dividends. Through September
2001, sales have totaled $97,000, total operating expenses are $186,000, and
oilfield equipment purchases have been $361,000.

                                       15
<PAGE>

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


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

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

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

ARI's investment in real estate entities at September 30, 2001 was as follows:

<TABLE>
<CAPTION>
                 Percentage           Carrying           Equivalent
                  of ARI's            Value of            Investee           Market Value
                Ownership at       Investment at       Book Value at       of Investment at
Investee     September 30, 2001  September 30, 2001  September 30, 2001    September 30, 2001
-----------  ------------------  ------------------  ------------------    ------------------
<S>          <C>                 <C>                 <C>                   <C>
IORI                28.49%           $    6,872          $    10,109          $    5,329
TCI                 49.99%               68,837              108,777              53,275
                                     ----------                               ----------
                                         75,709                               $   58,604
                                                                              ==========

Other                                     2,337
                                     ----------
                                     $   78,046
                                     ==========
</TABLE>

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

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

     Revenues...................................................    $115,641
     Equity in income of partnerships...........................      (2,886)
     Property operating expenses................................      83,562
     Depreciation...............................................      16,578
     Interest expense...........................................      35,949
                                                                    --------
     (Loss) before gains on sale of real estate.................     (23,334)

     Gain on sale of real estate................................      46,485
                                                                    --------
     Net income.................................................    $ 23,151
                                                                    ========

                                       16
<PAGE>

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


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

ARI's share of equity investees' loss before gains on the sale of real estate
was $8.8 million for the nine months ended September 30, 2001, and its share of
equity investees' gains on sale of real estate was $18.0 million for the nine
months ended September 30, 2001.

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

In June 2000, ARI sold 1.6 million shares of TCI stock, resulting in a $7.7
million loss, and 54,000 shares of IORI stock, resulting in a $246,000 loss.
These losses are included in equity income (loss) of investees on the Statement
of Operations.

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

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

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

Since 1994, ARI has been purchasing equity securities of entities other than
those of IORI and TCI to diversify and increase the liquidity of its margin
accounts. In the first nine months of 2001, ARI did not purchase or sell any
such securities. These equity securities are considered a trading portfolio and
are carried at market value. At September 30, 2001, ARI recognized an unrealized
decrease in the market value of its trading portfolio securities of $43,000.
Unrealized and realized gains and losses on trading portfolio securities are
included in other income in the accompanying Consolidated Statements of
Operations.

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

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

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


                                       17
<PAGE>

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


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

<TABLE>
<CAPTION>
                                                 Acres/Rooms/      Debt           Debt       Net Cash    Interest     Maturity
Property                    Location                Sq.Ft.       Incurred      Discharged    Received      Rate         Date
--------------------  --------------------   -----------------  -----------    ----------    --------   ----------    --------
<S>                   <C>                       <C>             <C>            <C>           <C>        <C>           <C>
Second Quarter
Land
Hollywood Casino      Farmers Branch, TX        51.7 Acres        2,500 /(1)/          --       1,916        9.00        04/03
Valwood               Dallas County, TX         19.4 Acres           --/(1)/           --          --          --           --
Katrina               Palm Desert, CA          300.5 Acres       22,000            15,584       4,417       12.50 /(2)/  10/02
Jeffries Ranch        Oceanside, CA             82.4 Acres        5,250/(3)/          750       3,944       14.50        06/02
Willow Springs        Riverside, CA          1,485.7 Acres           --/(3)/           --          --          --           --

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

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

Third Quarter
Apartments
Woodlake              Carrollton, TX             256 Units           --/(5)/           --          --          --           --
Sun Hollow            El Paso, TX                216 Units           --/(5)/           --          --          --           --
Waters Edge III       Gulfport, MS               238 Units           --/(5)/           --          --          --           --

Office Building
Centura Tower         Farmers Branch, TX     410,910 Sq.Ft.      28,739            28,384        (526)      10.50        07/02
Rosedale Towers       Minneapolis, MN         84,798 Sq.Ft.       7,500/(5)/           --       7,500        5.00        07/02

Land
Marine Creek          Fort Worth, TX            54.2 Acres        1,500               750         701        9.00        01/03
Mercer Crossing       Carrollton, TX            31.3 Acres        2,937             1,986          16       13.00        03/03
Chase Oaks            Plano, TX                  6.9 Acres        1,633             1,000         425       13.00        03/03
Vista Ridge LI        Lewisville, TX            90.3 Acres        9,085             9,119        (101)      13.00        03/03
Vista Ridge MF        Lewisville, TX            23.0 Acres        1,345             1,000         228       13.00        03/03
</TABLE>

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

(1)  Single note, with all properties as collateral.
(2)  Variable interest rate.
(3)  Single note, with all properties as collateral.
(4)  Also secured by 1,846,000 shares of TCI common stock.
(5)  Single note, with all properties as collateral.

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

<TABLE>
<CAPTION>
                                         Acres/       Debt       Debt     Net Cash  Interest   Maturity
   Property            Location       Units/Sq.Ft.  Incurred  Discharged  Received    Rate       Date
----------------  ------------------  ------------  --------  ----------  --------  ---------  --------
<S>               <C>                 <C>           <C>       <C>         <C>       <C>        <C>
First Quarter
Land
Centura, Clark
 and Woolley      Farmers Branch, TX   10.1 Acres   $  7,150  $       --   $ 6,960     14.00%     03/03
Frisco Bridges    Collin County, TX   127.4 Acres     18,000      11,900     6,190     13.00      03/01
Frisco Bridges    Collin County, TX    62.8 Acres      7,800       4,985     2,432     14.00      03/02
Nashville         Nashville, TN       144.8 Acres     10,000       2,034     7,039     15.50      07/00
</TABLE>

                                       18
<PAGE>

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


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

<TABLE>
<CAPTION>
                                             Acres/          Debt         Debt     Net Cash  Interest   Maturity
   Property               Location        Units/Sq.Ft.     Incurred    Discharged  Received    Rate       Date
-------------------  ------------------  --------------  ------------  ----------  --------  ---------  --------
<S>                  <C>                 <C>             <C>           <C>         <C>       <C>        <C>
Second Quarter
Apartments
Rockborough          Denver, CO               345 Units         2,222  $       --   $ 1,942      8.37%     11/10
Confederate Point    Jacksonville, FL         206 Units         7,440       5,879     1,039      8.12      05/07
Whispering Pines     Topeka, KS               320 Units         7,530       6,829       302      8.12      05/07
Chateau Bayou        Ocean Springs, MS        122 Units         1,007          --       988      8.36      05/10
Waters Edge          Gulfport, MS             238 Units         7,532       3,993     3,447      8.08      05/07

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

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

Fourth Quarter
Land
Tree Farm            Dallas, TX              10.4 Acres         8,000/(1)/     --     7,750     14.00      10/01
Thompson             Farmers Branch, TX       4.0 Acres              /(1)/
Tomlin               Farmers Branch, TX       9.0 Acres              /(1)/
Lacy Longhorn        Farmers Branch, TX      17.1 Acres              /(1)/
Keller               Fort Worth, TX          30.1 Acres              /(1)/
McKinney Corners     McKinney, TX            11.0 Acres              /(1)/
</TABLE>

_________________

(1)  Single note, with all properties as collateral.

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

ARI has margin arrangements with various brokerage firms which provide for
borrowing of up to 50% of the market value of marketable equity securities. The
borrowings under such margin arrangements are secured by equity securities of
IORI, TCI and ARI's trading portfolio and bear interest rates ranging from 6.0%
to 24.0%. Margin borrowings totaled $28.7 million at September 30, 2001.

In April 2000, ARI obtained a security loan in the amount of $5.0 million with a
financial institution. ARI received net cash of $4.6 million after various
closing costs. The loan bears interest at 1% over the prime rate (currently 6.0%
per annum), requires monthly payments of principal and interest and matures
September 2002. The loan is secured by 1,050,000 shares of ARI Common Stock held
by BCM, ARI's advisor.

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

In September 2001, ARI obtained a security loan in the amount of $20.0 million
from a financial institution. ARI received net cash of $16.1

                                       19
<PAGE>

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


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

million after the payment of various closing costs and $3.4 million repayment of
principal and accrued interest on an existing loan with the same lender. Of the
total loan amount, $19.5 million bears interest at 24% per annum, while the
remaining $500,000 bears interest at 20% per annum. The loan requires monthly
payments of interest only and matures in September 2002. The loan is secured by
2,602,608 shares of TCI common stock held by ARI and 920,507 shares of TCI
common stock held by BCM, ARI's advisor.

In October 2001, ARI obtained a security loan in the amount of $1.0 million from
a financial institution. ARI received net cash of $1.0 million after payment of
various closing costs. The loan bears interest at 1% over the prime rate
(currently 6.0% per annum), requires monthly payments of interest only and
matures in October 2003. The loan is callable upon 60 days prior notice, and is
secured by 200,000 shares of ARI Common Stock held by BCM, ARI's advisor.

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

Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
ARI had a loss for federal income tax purposes in the three and nine months
ended September 30, 2001; therefore, it recorded no provision for income taxes.
For the nine months ended September 30, 2000, a provision for income taxes in
the amount of $1.7 million was recorded.

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

Significant differences among the accounting policies of the operating segments
as compared to the Consolidated Financial Statements principally involve the
calculation and allocation of administrative expenses. Management evaluates the
performance of each of the operating segments and allocates resources to them
based on their net operating income and cash flow. Items of income that are not
reflected in the segments are equity in income of investees and other income
which totaled $3.4 million and $9.2 million for the three and nine months ended
September 30, 2001 and $3.2 million and $3.3 million for the three and nine
months ended September 30, 2000. Expenses that are not reflected in the segments
are general and administrative expenses, minority interest, incentive fees,
advisory fees and net income fees which totaled $7.6 million and $24.7 million
for the three and nine months ended September 30, 2001 and $9.3 million and
$48.1 million for the three and nine months ended September 30, 2000. Excluded
from operating segment assets are assets of $119.9 million in 2001 and $92.1
million in 2000, which are not identifiable with an operating segment. There are
no intersegment revenues and expenses and ARI conducted all of its business
within the United States, with the exception of Hotel Sofia (Bulgaria).

                                       20
<PAGE>

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


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

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

<TABLE>
<CAPTION>
                                                          Inter-
 Three Months Ended     Commercial               U.s.    National             Pizza   Oil &   Receivables/
 September 30, 2001     Properties  Apartments  Hotels    Hotels     Land    Parlors   Gas       Other       Total
---------------------   ----------  ----------  -------  --------  --------  -------  ------  ------------  --------
<S>                     <C>         <C>         <C>      <C>       <C>       <C>      <C>     <C>           <C>
Operating revenue....     $  8,866    $ 13,580  $ 8,750   $ 1,283  $     40  $ 8,723  $   97     $     193  $ 41,532
Interest income......           --          --       --        --        --       --      --           837       837
Operating expenses...        4,951       9,308    4,283     1,396     2,206    7,164     186             8    29,502
                          --------    --------  -------   -------  --------  -------  ------     ---------  --------
                          $  3,915    $  4,272  $ 4,467   $  (113) $ (2,166) $ 1,559  $  (89)    $   1,022  $ 12,867
                          ========    ========  =======   =======  ========  =======  ======     =========  ========

Depreciation.........     $  1,842    $  1,101  $   629   $   554  $     --  $   345  $   18     $       1     4,490
Interest.............        3,834       3,466    1,102       325     7,940      932      --         1,462    19,061
Capital
  expenditures.......        5,700          --      116        --     1,006      303      --            --     7,125
Assets...............      166,811     115,326   68,024    25,952   228,476   21,626   5,062        29,222   660,499

<CAPTION>
Property Sales:                      Apartments                      Land                                     Total
                                     ----------                    --------                                 --------
<S>                                  <C>                           <C>                                     <C>
Sales price..........                 $ 28,175                     $  8,229                                 $ 36,404
Cost of sale.........                   15,841                        4,682                                   20,523
                                      --------                     --------                                ---------
Gain on sale.........                 $ 12,334                     $  3,547                                 $ 15,881
                                      ========                     ========                                 ========
</TABLE>

<TABLE>
<CAPTION>
                                                         Inter-
 Nine Months Ended    Commercial                U.s.    National              Pizza   Oil &   Receivables/
 September 30, 2001   Properties  Apartments   Hotels    Hotels     Land     Parlors   Gas       Other        Total
--------------------  ----------  ----------  --------  --------  ---------  -------  ------  ------------  ---------
<S>                   <C>         <C>         <C>       <C>       <C>        <C>      <C>     <C>           <C>
Operating revenue...    $ 25,599    $ 44,822   $24,688   $ 3,009   $    145  $25,282  $   97     $   485     $124,127
Interest income.....          --          --        --        --         --       --      --       1,997        1,997
Operating expenses..      14,981      27,827    18,781     2,821      6,750   20,715     186          86       92,147
                        --------    --------   -------   -------   --------  -------  ------     -------     --------
                        $ 10,618    $ 16,995   $ 5,907   $   188   $ (6,605) $ 4,567  $  (89)    $ 2,396     $ 33,977
                        ========    ========   =======   =======   ========  =======  ======     =======     ========

Depreciation........    $  5,428    $  3,644   $ 1,938   $ 1,204   $     --  $   931  $   18     $     6     $ 13,169
Interest............      12,412      14,086     3,375       519     21,308      741      --       3,801       56,242
Capital
  expenditures......      10,511          20       436     1,000      1,322    1,066     361          --       14,716
Assets..............     166,811     115,326    68,024    25,952    228,476   21,626   5,062      29,222      660,499

<CAPTION>
                       Commercial
Property Sales:        Properties   Apartments                       Land                                      Total
                       ----------   ---------                     --------                                  ---------
<S>                    <C>         <C>                            <C>                                       <C>
Sales price.........    $  7,350    $ 94,065                       $ 41,806                                  $143,221
Cost of sale........       5,058      41,757                         33,546                                    80,361
                        --------    --------                       --------                                  --------
Gain on sale........    $  2,292    $ 52,308                       $  8,260                                  $ 62,860
                        ========    ========                       ========                                  ========
</TABLE>

<TABLE>
<CAPTION>
  Three Months Ended    Commercial                                  Pizza   Receivables/
  September 30, 2000    Properties  Apartments  Hotels     Land    Parlors     Other       Total
----------------------  ----------  ----------  -------  --------  -------  ------------  --------
<S>                     <C>         <C>         <C>      <C>       <C>      <C>           <C>
Operating revenue.....   $   7,353    $ 16,694  $ 9,033  $  1,628  $ 8,124  $        --   $ 42,832
Interest income.......          --          --       --        --       --          283        283
Operating expenses....       4,899      10,354    6,298     2,225    6,798           --     30,574
                         ---------    --------  -------  --------  -------  -----------   --------
                         $   2,454    $  6,340  $ 2,735  $   (597) $ 1,326  $       283   $ 12,541
                         =========    ========  =======  ========  =======  ===========   ========

Depreciation..........   $   1,733    $  1,303  $   703  $     --  $   262  $        --   $  4,001
Interest..............       4,605       4,899    1,252     6,740      285        1,799     19,580
Capital expenditures..       2,875       1,339      178       516      959           --      5,867
Assets................     171,490     148,560   87,966   253,562   22,108       13,824    697,510

<CAPTION>
Property Sales:                     Apartments             Land                            Total
                                    ----------           --------                         --------
<S>                                 <C>                  <C>                              <C>
Sales price...........                $  6,850           $ 89,285                         $ 96,135
Cost of sale..........                   3,376             65,674                           69,050
                                      --------           --------                         --------
Gain on sale..........                $  3,474           $ 23,611                         $ 27,085
                                      ========           ========                         ========
</TABLE>

                                       21
<PAGE>

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


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

<TABLE>
<CAPTION>

  Nine Months Ended     Commercial                                    Pizza    Receivables/
  September 30, 2000    Properties  Apartments   Hotels     Land     Parlors      Other        Total
----------------------- ----------  ----------  --------  ---------  --------  ------------  ---------
<S>                     <C>         <C>         <C>       <C>        <C>       <C>           <C>
Operating revenue......   $ 23,831    $ 53,003   $25,501   $  2,876   $24,388    $       --   $129,599
Interest income........         --          --        --         --        --         3,295      3,295
Operating expenses.....     14,838      30,743    17,758      7,112    20,138            --     90,589
                          --------    --------   -------   --------   -------    ----------   --------
                          $  8,993    $ 22,260   $ 7,743   $ (4,236)  $ 4,250    $    3,295   $ 42,305
                          ========    ========   =======   ========   =======    ==========   ========

Depreciation...........   $  5,234    $  4,752   $ 1,941   $     --   $   982    $       --   $ 12,909
Interest...............     12,869      15,716     3,704     20,917       854         6,093     60,153
Capital expenditures...      4,404      10,827       495      2,276     1,120            --     19,122
Assets.................    171,490     148,560    87,966    253,562    22,108        13,824    697,510

<CAPTION>
                         Commercial
Property Sales:          Properties  Apartments             Land                               Total
                         ----------  ----------           ---------                          ---------
<S>                      <C>         <C>                  <C>                                <C>
Sales price............   $ 27,564    $ 57,000             $108,238                           $192,802
Cost of sale...........     10,085      22,773               81,116                            113,974
                          --------    --------             --------                           --------
Gain on sale...........   $ 17,479    $ 34,227             $ 27,122                           $ 78,828
                          ========    ========             ========                           ========
</TABLE>


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

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

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

In April 2001, ARI reached an agreement with the Class A unitholders of ART
Palm, L.P., to acquire 7,236,250 of their Class A units in December 2001, for
$5.8 million.

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

                                       22
<PAGE>

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

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

ARI's predecessor was organized in 1961 to provide investors with a
professionally managed, diversified portfolio of equity real estate and mortgage
loan investments selected to provide opportunities for capital appreciation as
well as current income. In 2001, ARI's asset portfolio was expanded by the
purchase of leasehold interests in 37 oil and gas mineral development
properties. See NOTE 4. "OIL AND GAS OPERATIONS." All of the oil and gas
operations are in East Texas.

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

General. Cash and cash equivalents at September 30, 2001, totaled $5.0 million,
compared with $4.2 million at December 31, 2000. Although ARI anticipates that
during the remainder of 2001 it will generate excess cash flow from property
operations, as discussed below, such excess cash is not sufficient to discharge
all of ARI's debt obligations as they mature. ARI will therefore continue to
rely on externally generated funds, including aggressive land sales, selected
sales of income producing properties, borrowings against its investments in
various real estate entities, refinancing of properties and, to the extent
necessary, borrowings to meet its debt service obligations, pay taxes, interest
and other non-property related expenses.

At December 31, 2000, notes payable totaling $193.4 million had either scheduled
maturities or required principal reduction payments during 2000. During the
first nine months of 2001, ARI either extended, refinanced, paid down, paid off
or received commitments from lenders to extend or refinance $123.3 million of
the debt scheduled to mature in 2001.

Net cash used in operating activities increased to a use of $39.2 million in the
nine months ended September 30, 2001, from a use of $33.4 million in the nine
months ended September 30, 2000. Fluctuations in the components of cash flow
from operations are discussed in the following paragraphs.

Net cash from property operations (rents collected less payments for property
operations) decreased to $19.1 million in the nine months ended September 30,
2001, from $23.5 million in 2000. The decrease is primarily attributable to the
sale of nine apartments in 2000 and 13 apartments in 2001. ARI expects a
decrease in cash flow from property operations during the remainder of 2001.
Such decrease is expected to result from the continued selective sale of income
producing properties.

Net cash from pizza operations (sales less cost of sales) of $4.3 million in the
nine months ended September 30, 2001, approximated the $4.4 million in 2000.

Net cash used in oil and gas operations (sales collected less payments for lease
operating expenses) was $175,000 in the nine months ended September 30, 2001.
Operations began in June 2001.

                                       23
<PAGE>

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

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

Interest collected decreased to $397,000 in the nine months ended September 30,
2001, from $4.6 million in 2000. The decrease was attributable to the collection
of $36.0 million of mortgage notes receivable in 2000 and $4.9 million in 2001.

Interest paid decreased to $45.7 million in the nine months ended September 30,
2001, from $55.9 million in 2000. The decrease was attributable to the sale of
all or portions of 24 land parcels and nine apartments in 2000, and all or
portions of 13 land parcels, one commercial property and 13 apartments in 2001,
resulting in the payoff, paydown or assumption by the purchaser of mortgage
debt.

Advisory fees paid increased to $5.0 million in the nine months ended September
30, 2001, from the $4.1 million in 2000. The increase is attributable to the
inclusion of National Realty, L.P. assets in the basis for the advisory fees,
after August 2000.

Incentive fees paid were $1.6 million in the nine months ended September 30,
2001. The fees, earned in 2000, are 10% of the excess of net capital gains over
net capital losses realized from sales of assets.

General and administrative expenses paid decreased to $9.1 million in the nine
months ended September 30, 2001, from $11.7 million in 2000. The decrease is
primarily attributable to reduced consulting and partnership fees, and reduced
cost reimbursements paid to the advisor.

ARI's cash flow from its investments in IORI and TCI is dependent on the ability
of each of the entities to make distributions. In the fourth quarter of 2000,
IORI and TCI suspended distributions. Accordingly, ARI received no current
distributions in the nine months ended September 30, 2001, compared to $1.9
million in the nine months of 2000. However, in May 2001, ARI received $53,000
in accumulated dividends on shares of Continental Mortgage and Equity Trust that
should have been exchanged for TCI Common Stock in 1999.

Other cash from operating activities was $1.2 million in the nine months ended
September 30, 2001 compared to $10.1 million in 2000. The change was primarily
attributable to a greater decrease in property prepaids, miscellaneous property
receivables and property escrows in 2000 than in 2001.

In 2001, ARI sold the following properties:

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

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

                                       24
<PAGE>

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

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

<TABLE>
<CAPTION>
                                             Units/      Sales   Net Cash      Debt      Gain (Loss)
Property                   Location       Sq.Ft./acres   Price   Received   Discharged     On Sale
--------------------  ------------------  ------------  -------  --------  ------------  -----------
<S>                   <C>                 <C>           <C>      <C>       <C>           <C>
Land
Frisco Bridges        Collin County, TX    27.8 Acres   $ 4,500  $  4,130  $         --   $       25
Katrina               Palm Desert, CA      20.0 Acres     2,831      (124)          596           --/(2)/
Las Colinas           Las Colinas, TX       1.7 Acres       825       233           400          539
Plano Parkway         Plano, TX            11.3 Acres     1,445       312           950           --
Scoggins              Tarrant County, TX  232.8 Acres     2,913       892         1,800          181
Scout                 Tarrant County, TX  408.0 Acres     5,087     1,586         3,200        2,969
Tree Farm             Dallas County, TX    10.4 Acres     2,888       (87)        2,644           75

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

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

Third Quarter
Apartments
Club Mar              Sarasota, FL          248 Units     8,500     1,905         6,199/(1)/   2,328
Covered Bridge        Gainesville, FL       176 Units     7,900     2,463         4,339        5,982
Crossing at Church    Tampa, FL              52 Units     1,880       750           948          623
Ashford               Tampa, FL              56 Units     2,145       593         1,182         (985)
Chalet I              Topeka, KS            162 Units     5,650     1,288         4,108/(1)/   3,952
Chalet II             Topeka, KS             72 Units     2,100       485         1,550/(1)/     434

Land
Elm Fork              Denton County, TX    10.0 Acres     1,002       (30)          958          284
Katrina               Palm Desert, CA       6.1 Acres     1,196     1,108            --          570
Chase Oaks            Plano, TX            22.3 Acres     2,874       663         2,027          870
Nashville             Nashville, TN         2.0 Acres        26        (1)           24          (82)
Nashville             Nashville, TN         1.2 Acres         8        --             4          (59)
Rasor                 Plano, TX             6.6 Acres       350       267            --           34
Katrina               Palm Desert, CA       2.2 Acres       800       (24)          737          514
Chase Oaks            Plano, TX             4.9 Acres     1,973     1,832            --        1,416

Fourth Quarter
Apartments
Nora Pines            Indianapolis, IN      254 Units     9,850     2,548         5,574        6,631

Land
Katrina               Palm Desert, CA       1.4 Acres       284        (9)          253          117
</TABLE>

_____________________

(1)  Debt assumed by purchaser.

(2)  Gain deferred until ARI-provided financing is collected.

                                       25
<PAGE>

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

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

In 2001, ARI purchased the following properties:

<TABLE>
<CAPTION>
                                  Units/     Purchase   Net Cash        Debt       Interest   Maturity
Property           Location    Sq.ft./acres   Price       Paid        Incurred       Rate       Date
----------------  -----------  ------------  --------  -----------   ------------  ---------  --------
<S>               <C>          <C>           <C>       <C>           <C>           <C>        <C>
Second Quarter
Apartments
Glenwood           Addison, TX  168 Units     $ 6,246    $   --/(1)/ $  2,549/(2)/      9.25%   10/04
</TABLE>

_____________

(1)  8.88 acres of Hollywood Casino land and 10.5 acres of Vista Ridge land
     given as consideration. Exchanged with a related party.
(2)  Assumed debt of seller.  Exchanged with a related party.

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

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

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

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

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

Third Quarter
Apartments
Woodlake              Carrollton, TX          256 Units               --/(5)/        --         --          --            --
Sun Hollow            El Paso, TX             216 Units               --/(5)/        --         --          --            --
Waters Edge III       Gulfport, MS            238 Units               --/(5)/        --         --          --            --

Office Building
Centura Tower         Farmers Branch, TX      410,910 Sq.Ft.      28,739         28,384       (526)      10.50         07/02
Rosedale Towers       Minneapolis, MN         84,798 Sq.Ft.        7,500/(5)/        --      7,500        5.00         07/02

Land
Marine Creek          Fort Worth, TX          54.2 Acres           1,500            750        701        9.00         01/03
Mercer Crossing       Carrollton, TX          31.3 Acres           2,937          1,986         16       13.00         03/03
Chase Oaks            Plano, TX               6.9 Acres            1,633          1,000        425       13.00         03/03
Vista Ridge LI        Lewisville, TX          90.3 Acres           9,085          9,119       (101)      13.00         03/03
Vista Ridge MF        Lewisville, TX          23.0 Acres           1,345          1,000        228       13.00         03/03
</TABLE>
___________________

                                       26
<PAGE>

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

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

(1)  Single note, with all properties as collateral.
(2)  Variable interest rate.
(3)  Single note, with all properties as collateral.
(4)  Also secured by 1,846,000 shares of TCI common stock.
(5)  Single note, with all properties as collateral.

ARI has margin arrangements with various financial institutions and brokerage
firms which provide for borrowing up to 50% of the market value of ARI's
marketable equity securities. The borrowings under such margin arrangements are
secured by equity securities of IORI and TCI and ARI's trading portfolio and
bear interest rates ranging from 6.0% to 24.0%. Margin borrowing totaled $28.7
million at September 30, 2001.

Management expects that it will be necessary for ARI to sell $219.1 million,
$51.7 million and $6.4 million of its land holdings during each of the next
three years to satisfy the debt on such land as it matures. If ARI is unable to
sell at least the minimum amount of land to satisfy the debt obligations on such
land as it matures, or, if it was not able to extend such debt, ARI would either
sell other assets to pay such debt or return the property to the lender.

Management reviews the carrying values of ARI's properties and mortgage note
receivables at least annually and whenever events or a change in circumstances
indicate that impairment may exist. Impairment is considered to exist if, in the
case of a property, the future cash flow from the property (undiscounted and
without interest) is less than the carrying amount of the property. For notes
receivable impairment is considered to exist if it is probable that all amounts
due under the terms of the note will not be collected. In those instances where
impairment is found to exist, a provision for loss is recorded by a charge
against earnings. ARI's mortgage note receivable review includes an evaluation
of the collateral property securing such note. The property review generally
includes selective property inspections, a review of the property's current
rents compared to market rents, a review of the property's expenses, a review of
maintenance requirements, a review of the property's cash flow, discussions with
the manager of the property and a review of properties in the surrounding area.

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

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

In April 2001, ARI reached an agreement with the Class A unitholders of ART
Palm, L.P., to acquire 7,236,250 of their Class A units in December 2001 for
$5.9 million.

                                       27
<PAGE>

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

Recent Accounting Pronouncements
--------------------------------

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the
fair value of a liability for an asset retirement obligation to be recognized in
the period which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived assets. SFAS No. 143 is effective for the
fiscal year beginning after June 15, 2002. We believe the adoption of this
statement will have no material impact on our financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long Lived Assets." SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively.

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

For the nine months ended September 30, 2001, ARI reported net income of $12.0
million, compared to net income of $1.6 million for the nine months ended
September 30, 2000. The primary factors contributing to ARI's net income are
discussed in the following paragraphs.

Rents decreased to $32.7 million and $98.7 million in the three and nine months
ended September 30, 2001, from $34.7 million and $105.2  million in 2000.  Rents
from commercial properties increased to $25.6  million for the nine months ended
September 30, 2001, from $23.8 million in 2000, rent from hotels increased to
$27.7 million in the nine months ended September 30, 2001, from $25.5 million in
2000 and rent from apartments decreased to $44.8 million in the nine months
ended September 30, 2001, from $53.0 million in 2000.  The increase in
commercial property rents was primarily attributable to higher occupancy in
buildings completed in late 1999 and early 2000.  The increase in hotel rent was
primarily due to the opening of Hotel Sofia in 2001.  The decrease in apartment
rent was due to the sale of nine apartments in 2000 and 13 apartments in 2001.
Rental income is expected to decrease significantly in the remainder of 2001 as
a result of the income producing properties sold in 2001 and 2000.

Property operations expense decreased to $22.2 million in the three months ended
September 30, 2001, from $23.8 million in 2000, and increased to $71.2 million
in the nine months ended September 30, 2001, from $70.5 million in 2000.
Property operations expense for commercial properties increased to $15.0 million
in the nine months ended September 30, 2001, from $14.8 million in 2000. For
hotels, property operations expense increased to $21.6 million in the nine
months ended September 30, 2001, from $17.8 million in 2000. For land, property
operations expense decreased to $6.8 million in the nine months ended September
30,

                                       28
<PAGE>

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

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

2001 from $7.1 million in 2000. For apartments, property operations expense
decreased to $27.8 million in the nine months ended September 30, 2001, from
$30.7 million in 2000. The increase in hotel property operations expense was
primarily due to the opening of Hotel Sofia in 2001. The decrease in land
operating expenses was primarily due to the 13 land parcels sold in 2000. The
decrease in property operations expense for apartments was due to the sale of
nine apartments in 2000 and 13 apartments in 2001. Property operations expense
is expected to decrease significantly in the remainder of 2001 as a result of
the properties sold in 2000 and 2001.

Pizza parlor sales and cost of sales were $8.7 million and $7.2 million,
respectively, in the three months ended September 30, 2001 and $25.3 million and
$20.7 million for the nine months ended September 30, 2001 compared to $8.1
million and $6.8 million, respectively, for the three months ended September 30,
2000 and $24.4 million and $20.1 million for the nine months ended September 30,
2000. The increased sales were primarily attributable to the effects of a more
aggressive marketing and advertising strategy.

Interest income from notes receivable increased to $837,000 in the three months
ended September 30, 2001 from $283,000 in 2000, and decreased to $2.0 million in
the nine months ended September 30, 2001, from $3.3 million in 2000.  The three
month increase is due to new loans funded in 2001.  The nine month decrease is
due to the collection of mortgage notes receivable and related interest at
maturity in 2000 and 2001.

Oil and gas sales were $97,000 in the three and nine months ended September 30,
2001, representing start-up production from six wells. Oil and gas operating
expenses were $186,000 in the three and nine months ended September 30, 2001.
Operating expenses include lifting costs and repairs and maintenance.

Other income decreased to a loss of $19,000 and income of $58,000 in the three
and nine months ended September 30, 2001, from $606,000 and $419,000 in 2000.
ARI recognized an unrealized decrease in market value of its trading portfolio
securities of $43,000 in the nine months ended September 30, 2001 compared to
$267,000 in 2000.  See NOTE 6. "MARKETABLE EQUITY SECURITIES - TRADING
PORTFOLIO."

Interest expense decreased to $19.1 million and $56.2 million in the three and
nine months ended September 30, 2001, from $19.6 million and $60.2 million in
2000. The decrease was attributable to the sale of 13 apartments, one commercial
property and 19 parcels of land in 2001 and nine apartments, four commercial
properties and 36 parcels of land in 2000. In the remainder of 2001, interest
expense is expected to continue to decrease due to the properties sold in 2000
and 2001.

Depreciation, depletion and amortization expense increased to $4.5 million and
$13.2 million in the three and nine months ended September 30, 2001, from the
$4.0 million and $12.9 million in 2000. This increase was due to the Hotel Sofia
opening in 2001.

                                       29
<PAGE>

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

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

General and administrative expenses increased to $4.6 million and decreased to
$9.1 million in the three and nine months ended September 30, 2001, from $2.9
million and $11.7 million in 2000. The three month increase is primarily due to
increases in legal and audit fees while the nine month decrease is primarily due
to reduced consulting and partnership fees, and reduced cost reimbursements paid
to the advisor.

Advisory fees of $1.4 million for the three months ended September 30, 2001
approximated the $1.5 million for the same period in 2000 and increased to $5.0
million for the nine months ended September 30, 2001 from $4.1 million in 2000.
The increase is due to the addition of the National Realty, L.P. assets to the
advisory fees basis, after August 2000.

Net income fee to affiliate was $<1.1> million and $638,000 in the three and
nine months ended September 30, 2001. The income fee payable to ARI's advisor is
10% of the net income for the year, in excess of a 10% return on shareholders'
equity.

Incentive fee to affiliate was $1.6 million and $7.5 million in the three and
nine months ended September 30, 2001. The incentive fee payable to ARI's advisor
is 10% of the excess of net capital gains over net capital losses realized from
sales of assets. Incentive fees are expected to increase as ARI selectively
sells properties.

Minority interest decreased to $1.0 million and $2.5 million in the three and
nine months ended September 30, 2001, from $5.0 million and $32.2 million in
2000. The decrease is attributable to the acquisition of National Realty, L.P.
by ARI in August 2000.

Equity in income of investees increased to $3.5 million and $9.2 million in the
three and nine months ended September 30, 2001, from $2.6 million and $2.9
million in 2000. The increase in equity income was attributable to the loss
associated with the sale of TCI and IORI stock in 2000 and gains from property
sales by TCI in 2001.

Tax Matters
-----------

Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
ARI had a loss for federal income tax purposes in the three and nine months
ended September 30, 2001; therefore, it recorded no provision for income taxes.
For the nine months ended September 30, 2000, a provision for income taxes in
the amount of $1.7 million was recorded.

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

Under various federal, state and local environmental laws, ordinances and
regulations, ARI may be potentially liable for removal or

                                       30
<PAGE>

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

Environmental Matters (Continued)
---------------------

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

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

Inflation
---------

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

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

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


                                                 Weighted      Effect of 1%
                                                  Average       Increase In
                                   BALANCE     Interest Rate    Base Rates
                                  ----------  ---------------  -------------
                                   (Amounts in thousands, except per share)
Notes payable:
 Variable rate..................    $135,845           12.00%    $    1,358

Total decrease in ARI's annual
                                                                 ==========
 net income.....................                                 $    1,358
                                                                 ==========

Per share.......................                                 $      .13
                                                                 ==========

                   _________________________________________


                          PART II.  OTHER INFORMATION


ITEM 5.   OTHER INFORMATION
---------------------------

On October 23, 2001, ARI, Transcontinental Realty Investors, Inc. ("TCI"), and
Income Opportunity Realty Investors, Inc. ("IORI") jointly announced a
preliminary agreement with the plaintiff's legal counsel of the derivative
action entitled Olive et al. V. National Income Realty

                                       31
<PAGE>

ITEM 5.   OTHER INFORMATION (Continued)
---------------------------

Trust, et al. for complete settlement of all disputes in the lawsuit. Under the
proposal, ARI would acquire all of the outstanding shares of IORI and TCI not
currently owned by ARI for a cash payment or shares of ARI preferred stock. ARI
will pay $17.50 cash per TCI share and $19.00 cash per IORI share for the stock
held by non-affiliated stockholders.

ARI would issue one share of Series G Preferred Stock with a liquidation value
of $20.00 per share for each share of TCI Common Stock for stockholders who
elect to receive ARI Preferred Stock in lieu of cash. ARI would issue one share
of Series H Preferred Stock with a liquidation value of $21.50 per share for
each share of IORI Common Stock for stockholders who elect to receive ARI
Preferred Stock in lieu of cash. The preferred shares will be convertible into
ARI Common Stock during a six month period commencing on the first anniversary
of the effective date of the transaction. Upon the acquisition of IORI and TCI
shares, TCI and IORI would become wholly-owned subsidiaries ARI. The transaction
is subject to the negotiation of a definitive merger agreement (not yet
accomplished), approval of the court (not yet scheduled) and a vote of the
shareholders of all three entities. ARI has the same advisor as TCI and IORI,
and TCI and IORI have the same board of directors.


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

(a)  Exhibits:

     None.


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

     None.

                                       32
<PAGE>

                                 SIGNATURE PAGE



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



                                    AMERICAN REALTY INVESTORS, INC.



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



Date:    November 13, 2001       By:  /s/ Brent Horak
     --------------------------     -----------------------------------
                                    Brent Horak
                                    Vice President and
                                    Chief Financial Officer
                                    (Principal Financial Officer)

                                       33