##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the quarterly period ended June 30, 2008

or



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

For the transition period from  to

Commission File Number 001-15663





AMERICAN REALTY INVESTORS, INC.

(Exact Name of Registrant as Specified in Its Charter)







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

1800 Valley View Lane, Suite 300

Dallas, Texas 75234

(Address of principal executive offices)

(Zip Code)

(469) 522-4200

(Registrants telephone number, including area code)



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





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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a Smaller reporting Company. See definition of large accelerated filer,
accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act:



|                                                                     |  |                              |  |                     
|-------------------------------------------------------------------- |  | ---------------------------- |  | --------------------
|Large accelerated filer   ̈                                           |  |                              |  | Accelerated filer   ̈
|                                                                     | 
|Non-accelerated filer  x (Do not check if smaller reporting company) |  | Smaller reporting company   ̈

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE

PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  ̈. No  ̈.

APPLICABLE ONLY TO CORPORATE ISSUERS:

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



|                             |  |                               
|---------------------------- |  | ------------------------------
|Common Stock, $.01 par value |  | 10,438,942                    
|(Class)                      |  | (Outstanding at July 31, 2008)









---

##### Table of Contents

AMERICAN REALTY INVESTORS, INC.

FORM 10-Q

TABLE OF CONTENTS



|           |  |                                                                                                             |  |     
|---------- |  | ----------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                             |  | PAGE
|PART I:    |  | FINANCIAL INFORMATION                                                                                       |  |     
|           |  |                                                                                                            
|Item 1.    |  | Financial Statements                                                                                        |  |     
|           |  |                                                                                                            
|           |  | Consolidated Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007                              |  | 3   
|           |  |                                                                                                            
|           |  | Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007 (unaudited) |  | 4   
|           |  |                                                                                                            
|           |  | Consolidated Statement of Shareholders Equity for the six months ended June 30, 2008 (unaudited)           |  | 5   
|           |  |                                                                                                            
|           |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (unaudited)           |  | 6   
|           |  |                                                                                                            
|           |  | Notes to Consolidated Financial Statements                                                                  |  | 8   
|           |  |                                                                                                            
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  | 21  
|           |  |                                                                                                            
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |  | 30  
|           |  |                                                                                                            
|Item 4T.   |  | Controls and Procedures                                                                                     |  | 30  
|           |  |                                                                                                            
|PART II.   |  | OTHER INFORMATION                                                                                           |  |     
|           |  |                                                                                                            
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                 |  | 32  
|           |  |                                                                                                            
|Item 6.    |  | Exhibits                                                                                                    |  | 33  
|           | 
|SIGNATURES |  | 34                                                                                                         



2



---

##### Table of Contents

PART I. FINANCIAL INFORMATION



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

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)



|                                                                                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                                                    |  | June 30,2008           |           |   | December 31,2007 |  
|                                                                                                                                                                                                                                    |  | (dollars in thousands) |          
|Assets                                                                                                                                                                                                                              |  |                        |           |   |                  |   |           |  
|Real estate held for investment                                                                                                                                                                                                     |  | $                      | 1,586,350 |   |                  | $ | 1,508,815 |  
|Less accumulated depreciation                                                                                                                                                                                                       |  |                        | (152,908  | ) |                  |   | (148,404  | )
|                                                                                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                                                                                    |  |                        | 1,433,442 |   |                  |   | 1,360,411 |  
|Real estate held for sale, net of depreciation                                                                                                                                                                                      |  |                        | 36,924    |   |                  |   | 61,128    |  
|Real estate subject to sales contracts                                                                                                                                                                                              |  |                        | 57,639    |   |                  |   | 64,320    |  
|Notes and interest receivable                                                                                                                                                                                                       |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                                                                                    |  |                       
|Performing (including $37,966 in 2008 and $16,485 in 2007 from affiliates and related parties)                                                                                                                                      |  |                        | 56,612    |   |                  |   | 69,977    |  
|Non-performing (including $11,417 in 2008 and $16,246 in 2007 from affiliates and related parties)                                                                                                                                  |  |                        | 17,951    |   |                  |   | 16,468    |  
|                                                                                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                                                                                    |  |                        | 74,563    |   |                  |   | 86,445    |  
|Less allowance for estimated losses                                                                                                                                                                                                 |  |                        | (9,478    | ) |                  |   | (2,978    | )
|                                                                                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                                                                                    |  |                        | 65,085    |   |                  |   | 83,467    |  
|Cash and cash equivalents                                                                                                                                                                                                           |  |                        | 47        |   |                  |   | 11,560    |  
|Restricted cash                                                                                                                                                                                                                     |  |                        | 1,276     |   |                  |   | 2,556     |  
|Marketable securities, at market value                                                                                                                                                                                              |  |                        | 1,405     |   |                  |   | 13,157    |  
|Investments in equity investees                                                                                                                                                                                                     |  |                        | 36,417    |   |                  |   | 23,867    |  
|Other assets (including $4,213 in 2008 and $54,439 in 2007 from affiliates and related parties)                                                                                                                                     |  |                        | 117,361   |   |                  |   | 157,388   |  
|                                                                                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                                                                                    |  | $                      | 1,749,596 |   |                  | $ | 1,777,854 |  
|                                                                                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|Liabilities and Shareholders Equity                                                                                                                                                                                                |  |                        |           |   |                  |   |           |  
|Liabilities:                                                                                                                                                                                                                        |  |                        |           |   |                  |   |           |  
|Notes and interest payable (including $8,892 in 2008 and $8,269 in 2007 from affiliates and related parties)                                                                                                                        |  | $                      | 1,221,729 |   |                  | $ | 1,221,987 |  
|Liabilities related to assets held-for-sale                                                                                                                                                                                         |  |                        | 34,995    |   |                  |   | 116,377   |  
|Liabilities subject to sales contracts                                                                                                                                                                                              |  |                        | 63,264    |   |                  |   | 62,513    |  
|Stock-secured notes payable                                                                                                                                                                                                         |  |                        | 13,643    |   |                  |   | 17,546    |  
|Accounts payable and other liabilities (including $1,717 in 2008 and $1,873 in 2007 from affiliates and related parties)                                                                                                            |  |                        | 90,813    |   |                  |   | 104,884   |  
|                                                                                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                                                                                    |  |                        | 1,424,444 |   |                  |   | 1,523,307 |  
|Commitments and contingencies                                                                                                                                                                                                       |  |                        |           |   |                  |   |           |  
|Minority interest                                                                                                                                                                                                                   |  |                        | 72,195    |   |                  |   | 62,161    |  
|Shareholders equity:                                                                                                                                                                                                               |  |                        |           |   |                  |   |           |  
|Preferred stock, $2.00 par value, authorized 15,000,000 shares, issued and outstanding Series A, 3,390,316 shares in 2008 and 2007
(liquidation preference $33,909), including 900,000 shares in 2008 and 2007 held by subsidiaries |  |                        | 4,979     |   |                  |   | 4,979     |  
|Common stock, $.01 par value, 100,000,000 shares authorized ; 11,592,272 and 11,592,272 shares issued and 10,438,942 and 10,462,742
outstanding shares at 2008 and 2007 respectively                                                |  |                        | 114       |   |                  |   | 114       |  
|Treasury stock at cost; 1,153,330 and 1,129,530 shares in 2008 and 2007, respectively                                                                                                                                               |  |                        | (12,978   | ) |                  |   | (12,664   | )
|Paid in capital                                                                                                                                                                                                                     |  |                        | 111,714   |   |                  |   | 100,277   |  
|Retained earnings                                                                                                                                                                                                                   |  |                        | 146,167   |   |                  |   | 99,452    |  
|Accumulated other comprehensive income (loss)                                                                                                                                                                                       |  |                        | 2,961     |   |                  |   | 228       |  
|                                                                                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                                                                                    |  |                        | 252,957   |   |                  |   | 192,386   |  
|                                                                                                                                                                                                                                    |  |                        |           |   |                  |   |           |  
|                                                                                                                                                                                                                                    |  | $                      | 1,749,596 |   |                  | $ | 1,777,854 |  
|                                                                                                                                                                                                                                    |  |                        |           |   |                  |   |           |  

The accompanying notes are an integral part of these consolidated financial statements.



3



---

##### Table of Contents

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ---------- | - | -------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                                                                                                |  | For the Three Months EndedJune 30, |            |   | For the Six Months EndedJune 30, |  
|                                                                                                                                                                                                |  | 2008                               |            |   | 2007                             |   |            | 2008 |  |   | 2007       |  
|                                                                                                                                                                                                |  | (dollars in thousands)             |            |   | (dollars in thousands)           |  
|Revenues:                                                                                                                                                                                       |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Rental and other property revenues (including $111 and $2 for the three months ended, $369 and $352 for the six months ended 2008 and 2007
respectively from affiliates and related parties)    |  | $                                  | 44,753     |   |                                  | $ | 43,446     |      |  | $ | 88,009     |   |  | $ | 84,452     |  
|                                                                                                                                                                                                |  |                                    |            |  
|Expenses:                                                                                                                                                                                       |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Property operating expenses (including $2,117 and $2,299 for the three months ended, $4,335 and $4,419 for the six months ended 2008 and 2007
respectively from affiliates and related parties) |  |                                    | 28,018     |   |                                  |   | 26,540     |      |  |   | 56,603     |   |  |   | 51,794     |  
|Depreciation and amortization                                                                                                                                                                   |  |                                    | 6,569      |   |                                  |   | 6,536      |      |  |   | 13,304     |   |  |   | 11,283     |  
|General and administrative (including $874 and $(420) for the three months ended, $1,985 and $1,761 for the six months ended 2008 and 2007
respectively from affiliates and related parties)    |  |                                    | 3,917      |   |                                  |   | 4,014      |      |  |   | 8,247      |   |  |   | 8,492      |  
|Advisory fee to affiliate                                                                                                                                                                       |  |                                    | 3,920      |   |                                  |   | 3,834      |      |  |   | 7,895      |   |  |   | 7,133      |  
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                                                                                                                                                        |  |                                    | 42,424     |   |                                  |   | 40,924     |      |  |   | 86,049     |   |  |   | 78,702     |  
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Operating income                                                                                                                                                                                |  |                                    | 2,329      |   |                                  |   | 2,522      |      |  |   | 1,960      |   |  |   | 5,750      |  
|                                                                                                                                                                                                |  |                                    |            |  
|Other income (expense):                                                                                                                                                                         |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Interest income (including $1,840 and $102 for the three months ended, $3,013 and $816 for the six months ended 2008 and 2007 respectively
from affiliates and related parties)                 |  |                                    | 1,619      |   |                                  |   | 1,477      |      |  |   | 3,719      |   |  |   | 3,031      |  
|Other income (including $81 and $1,599 for the three months ended, $958 and $2,767 for the six months ended 2008 and 2007 respectively from
affiliates and related parties)                     |  |                                    | 2,768      |   |                                  |   | 1,725      |      |  |   | 4,356      |   |  |   | 4,270      |  
|Mortgage and loan interest including $287 and $304 for the three months ended, $545 and $363 for the six months ended 2008 and 2007
respectively from affiliates and related parties)           |  |                                    | (21,818    | ) |                                  |   | (21,560    | )    |  |   | (43,993    | ) |  |   | (43,425    | )
|Net income fee to affiliate                                                                                                                                                                     |  |                                    | 0          |   |                                  |   | 0          |      |  |   | 0          |   |  |   | 705        |  
|Provision for allowance on notes receivable and impairment                                                                                                                                      |  |                                    | 0          |   |                                  |   | 0          |      |  |   | (12,000    | ) |  |   | 0          |  
|Litigation settlement                                                                                                                                                                           |  |                                    | 0          |   |                                  |   | 24         |      |  |   | 0          |   |  |   | 24         |  
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Total other income (expense)                                                                                                                                                                    |  |                                    | (17,431    | ) |                                  |   | (18,334    | )    |  |   | (47,918    | ) |  |   | (35,395    | )
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Loss before gain on land sales, minority interest, and equity in earnings (loss) of investees                                                                                                   |  |                                    | (15,102    | ) |                                  |   | (15,812    | )    |  |   | (45,958    | ) |  |   | (29,645    | )
|Gain on land sales                                                                                                                                                                              |  |                                    | 2,890      |   |                                  |   | 0          |      |  |   | 4,165      |   |  |   | 4,897      |  
|Minority interest                                                                                                                                                                               |  |                                    | 2,417      |   |                                  |   | (281       | )    |  |   | (9,460     | ) |  |   | (505       | )
|Net income to affiliate                                                                                                                                                                         |  |                                    | 0          |   |                                  |   | 0          |      |  |   | 0          |   |  |   | 0          |  
|Equity in income (loss) of investees                                                                                                                                                            |  |                                    | (555       | ) |                                  |   | 0          |      |  |   | 4,396      |   |  |   | 0          |  
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Loss from continuing operations before income tax benefit                                                                                                                                       |  |                                    | (10,350    | ) |                                  |   | (16,093    | )    |  |   | (46,857    | ) |  |   | (25,253    | )
|Income tax (benefit) expense                                                                                                                                                                    |  |                                    | (741       | ) |                                  |   | (2,222     | )    |  |   | 33,186     |   |  |   | (1,976     | )
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Net loss from continuing operations                                                                                                                                                             |  |                                    | (11,091    | ) |                                  |   | (18,315    | )    |  |   | (13,671    | ) |  |   | (27,229    | )
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from discontinued operations before income tax expense                                                                                                                            |  |                                    | (2,116     | ) |                                  |   | (6,347     | )    |  |   | 94,818     |   |  |   | (5,645     | )
|Income tax (benefit) expense                                                                                                                                                                    |  |                                    | 741        |   |                                  |   | 2,222      |      |  |   | (33,186    | ) |  |   | 1,976      |  
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) from discontinuing operations                                                                                                                                                 |  |                                    | (1,375     | ) |                                  |   | (4,125     | )    |  |   | 61,632     |   |  |   | (3,669     | )
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                                                                                                                                                               |  |                                    | (12,466    | ) |                                  |   | (22,440    | )    |  |   | 47,961     |   |  |   | (30,898    | )
|Preferred dividend requirement                                                                                                                                                                  |  |                                    | (623       | ) |                                  |   | (624       | )    |  |   | (1,246     | ) |  |   | (1,246     | )
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common shares                                                                                                                                                   |  | $                                  | (13,089    | ) |                                  | $ | (23,064    | )    |  | $ | 46,715     |   |  | $ | (32,144    | )
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Earnings per share - basic                                                                                                                                                                      |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from continuing operations                                                                                                                                                        |  | $                                  | (1.12      | ) |                                  | $ | (1.87      | )    |  | $ | (1.43      | ) |  | $ | (2.81      | )
|Discontinued operations                                                                                                                                                                         |  |                                    | (0.13      | ) |                                  |   | (0.41      | )    |  |   | 5.89       |   |  |   | (0.36      | )
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common shares                                                                                                                                                   |  | $                                  | (1.25      | ) |                                  | $ | (2.28      | )    |  | $ | 4.46       |   |  | $ | (3.17      | )
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Earnings per share - diluted                                                                                                                                                                    |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from continuing operations                                                                                                                                                        |  | $                                  | (1.12      | ) |                                  | $ | (1.87      | )    |  | $ | (1.43      | ) |  | $ | (2.81      | )
|Discontinued operations                                                                                                                                                                         |  |                                    | (0.13      | ) |                                  |   | (0.41      | )    |  |   | 5.89       |   |  |   | (0.36      | )
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common shares                                                                                                                                                   |  | $                                  | (1.25      | ) |                                  | $ | (2.28      | )    |  | $ | 4.46       |   |  | $ | (3.17      | )
|                                                                                                                                                                                                |  |                                    |            |   |                                  |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common share used in computing earnings per share                                                                                                                              |  |                                    | 10,443,041 |   |                                  |   | 10,141,525 |      |  |   | 10,447,041 |   |  |   | 10,141,525 |  
|Weighted average common share used in computing diluted earnings per share                                                                                                                      |  |                                    | 10,443,041 |   |                                  |   | 10,141,525 |      |  |   | 10,447,041 |   |  |   | 10,141,525 |  

The accompanying notes are an integral part of these consolidated financial statements.



4



---

##### Table of Contents

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

For the Six Months Ended June 30, 2008

(dollars in thousands)

(unaudited)



|                                                         |  |                        |       |                        |   |             |  |               |     |  |                |         |                  |  |   |                                            |  |   |                     |   |  |   |        |   |  |   |         |  
|-------------------------------------------------------- |  | ---------------------- | ----- | ---------------------- | - | ----------- |  | ------------- | --- |  | -------------- | ------- | ---------------- |  | - | ------------------------------------------ |  | - | ------------------- | - |  | - | ------ | - |  | - | ------- | -
|                                                         |  | Series APreferredStock |       | Series EPreferredStock |   | CommonStock |  | TreasuryStock |     |  | Paid inCapital |         | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |  |   | ShareholdersEquity |  
|Balance, December 31, 2007                               |  | $                      | 4,979 |                        | $ |            |  | $             | 114 |  | $              | (12,664 | )                |  | $ | 100,277                                    |  | $ | 99,452              |   |  | $ | 228    |   |  | $ | 192,386 |  
|Unrealized gain on foreign currency translation          |  |                        |      |                        |   |            |  |               |    |  |                |        |                  |  |   |                                           |  |   |                    |   |  |   | 9,685  |   |  |   | 9,685   |  
|Unrealized loss on marketable securities                 |  |                        |      |                        |   |            |  |               |    |  |                |        |                  |  |   |                                           |  |   |                    |   |  |   | (6,952 | ) |  |   | (6,952  | )
|Net income                                               |  |                        |      |                        |   |            |  |               |    |  |                |        |                  |  |   |                                           |  |   | 47,961              |   |  |   |       |   |  |   | 47,961  |  
|                                                         |  |                        |       |                        |   |             |  |              
|Acquisition of minority interest                         |  |                        |      |                        |   |            |  |               |    |  |                |        |                  |  |   | 11,437                                     |  |   |                    |   |  |   |       |   |  |   | 11,437  |  
|Repurchase of common stock                               |  |                        |      |                        |   |            |  |               |    |  |                | (314    | )                |  |   |                                           |  |   |                    |   |  |   |       |   |  |   | (314    | )
|Series A preferred stock cash dividend ($1.00 per share) |  |                        |      |                        |   |            |  |               |    |  |                |        |                  |  |   |                                           |  |   | (1,246              | ) |  |   |       |   |  |   | (1,246  | )
|                                                         |  |                        |       |                        |   |             |  |               |     |  |                |         |                  |  |   |                                            |  |   |                     |   |  |   |        |   |  |   |         |  
|Balance, June 30, 2008                                   |  | $                      | 4,979 |                        | $ |            |  | $             | 114 |  | $              | (12,978 | )                |  | $ | 111,714                                    |  | $ | 146,167             |   |  | $ | 2,961  |   |  | $ | 252,957 |  
|                                                         |  |                        |       |                        |   |             |  |               |     |  |                |         |                  |  |   |                                            |  |   |                     |   |  |   |        |   |  |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



5



---

##### Table of Contents

AMERICAN REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                                        |  |                                  |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                        |  | For the Six Months EndedJune 30, |         
|                                                                                                        |  | 2008                             |          |   | 2007 |  
|                                                                                                        |  | (dollars in thousands)           |         
|Cash Flow From Operating Activities:                                                                    |  |                                  |          |   |      |   |          |  
|Net income (loss) applicable to common shares                                                           |  | $                                | 46,715   |   |      | $ | (32,144  | )
|Adjustments to reconcile net loss applicable to common shares to net cash used in operating activities: |  |                                  |          |   |      |   |          |  
|Gain on sale of land                                                                                    |  |                                  | (4,165   | ) |      |   | (4,897   | )
|Depreciation and amortization                                                                           |  |                                  | 13,832   |   |      |   | 15,091   |  
|Provision for allowance of notes receivable and impairment                                              |  |                                  | 12,000   |   |      |   |         |  
|Amortization of deferred borrowing costs                                                                |  |                                  | 4,505    |   |      |   | 2,762    |  
|Equity in (income) loss of investees                                                                    |  |                                  | (4,396   | ) |      |   |         |  
|Gain (loss) on foreign currency transaction                                                             |  |                                  |         |   |      |   | 4        |  
|Gain on sale of income producing properties                                                             |  |                                  | (115,134 | ) |      |   | (1,991   | )
|(Increase) decrease in assets:                                                                          |  |                                  |          |   |      |   |          |  
|Accrued interest receivable                                                                             |  |                                  | 581      |   |      |   | 245      |  
|Other assets                                                                                            |  |                                  | 1,928    |   |      |   | (39,703  | )
|Prepaid expense                                                                                         |  |                                  | 80       |   |      |   | (2,575   | )
|Escrow                                                                                                  |  |                                  | (14,093  | ) |      |   | 1,472    |  
|Earnest money                                                                                           |  |                                  | (5,255   | ) |      |   | 5,310    |  
|Rent receivables                                                                                        |  |                                  | (6,913   | ) |      |   | (1,577   | )
|Increase (decrease) in liabilities:                                                                     |  |                                  |          |   |      |   |          |  
|Accrued interest payable                                                                                |  |                                  | (2,212   | ) |      |   | (202     | )
|Intercompany payable                                                                                    |  |                                  | 62,738   |   |      |   |         |  
|Other liabilities                                                                                       |  |                                  | (19,142  | ) |      |   | (11,748  | )
|                                                                                                        |  |                                  |          |   |      |   |          |  
|Net cash used in operating activities                                                                   |  |                                  | (28,931  | ) |      |   | (69,953  | )
|Cash Flow From Investing Activities:                                                                    |  |                                  |          |   |      |   |          |  
|Collections on notes receivables                                                                        |  |                                  | 6,783    |   |      |   | 13,489   |  
|Acquisition of land held for development                                                                |  |                                  | (15,214  | ) |      |   | (14,506  | )
|Proceeds from sales of income producing properties                                                      |  |                                  | 156,483  |   |      |   | 53,395   |  
|Real estate improvements                                                                                |  |                                  |         |   |      |   | (12,783  | )
|Proceeds from sale of land                                                                              |  |                                  | 12,197   |   |      |   | 4,531    |  
|Investment in unconsolidated real estate entities                                                       |  |                                  | (8,550   | ) |      |   | (5,069   | )
|Improvement of land held for development                                                                |  |                                  | (1,680   | ) |      |   | (2,869   | )
|Improvement of income producing properties                                                              |  |                                  | (4,713   | ) |      |   | (8,094   | )
|Acquisition of minority interest                                                                        |  |                                  |         |   |      |   | (1,351   | )
|Investment in marketable equity securities                                                              |  |                                  | 11,752   |   |      |   | (697     | )
|Distributions of equity investee                                                                        |  |                                  |         |   |      |   | (1,524   | )
|Acquisition of income producing properties                                                              |  |                                  | (63,227  | ) |      |   | (112,193 | )
|Construction and development of new properties                                                          |  |                                  | (66,860  | ) |      |   | (7,439   | )
|                                                                                                        |  |                                  |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                                                     |  |                                  | 26,971   |   |      |   | (95,110  | )
|Cash Flow From Financing Activities:                                                                    |  |                                  |          |   |      |   |          |  
|Proceeds from notes payable                                                                             |  |                                  | 157,162  |   |      |   | 289,962  |  
|Recurring amortization of principal on notes payable                                                    |  |                                  | (11,150  | ) |      |   | (6,632   | )
|Increase (decrease) in due from affiliates                                                              |  |                                  | (2,044   | ) |      |   | 17,840   |  
|Payments on maturing notes payable                                                                      |  |                                  | (154,171 | ) |      |   | (127,171 | )
|Deferred financing costs                                                                                |  |                                  | 3,587    |   |      |   | (11,848  | )
|Restricted cash                                                                                         |  |                                  | 1,280    |   |      |   | 1,832    |  
|Stock secured borrowings                                                                                |  |                                  | (3,903   | ) |      |   |         |  
|Purchase of treasury stock                                                                              |  |                                  | (314     | ) |      |   | (485     | )
|                                                                                                        |  |                                  |          |   |      |   |          |  
|Net cash provided by (used in) financing activities                                                     |  |                                  | (9,553   | ) |      |   | 163,498  |  
|                                                                                                        |  |                                  |          |   |      |   |          |  
|Net decrease in cash and cash equivalents                                                               |  |                                  | (11,513  | ) |      |   | (1,565   | )
|Cash and cash equivalents, beginning of period                                                          |  |                                  | 11,560   |   |      |   | 7,035    |  
|                                                                                                        |  |                                  |          |   |      |   |          |  
|Cash and cash equivalents, end of period                                                                |  | $                                | 47       |   |      | $ | 5,470    |  
|                                                                                                        |  |                                  |          |   |      |   |          |  

The accompanying notes are an integral part of these consolidated financial statements.



6



---

##### Table of Contents

AMERICAN REALTY INVESTORS, INC.

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

(unaudited)



|                                                        |  |                                  |        |   |      |   |        |  
|------------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | -
|                                                        |  | For the Six Months EndedJune 30, |       
|                                                        |  | 2008                             |        |   | 2007 |  
|                                                        |  | (dollars in thousands)           |       
|Supplemental Disclosures of Cash Flow Information:      |  |                                  |        |   |      |   |        |  
|Cash paid for interest                                  |  | $                                | 50,558 |   |      | $ | 50,335 |  
|Cash paid for taxes, net of refunds                     |  |                                  |       |   |      |   |       |  
|                                                        |  |                                 
|Schedule of noncash investing and financing activities: |  |                                  |        |   |      |   |        |  
|Unrealized foreign currency translation gain (loss)     |  | $                                | 9,685  |   |      | $ | (380   | )
|Unrealized gain (loss) on marketable securities         |  | $                                | (6,952 | ) |      | $ | 503    |  
|Notes receivable allowance                              |  | $                                | (1,500 | ) |      | $ |       |  
|Notes payable assumed by affiliate                      |  | $                                |       |   |      | $ | 22,111 |  

The accompanying notes are an integral part of these consolidated financial statements.



7



---

##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

American Realty
Investors, Inc. (ARI, We, The Company, Our or Us) is a Nevada corporation and invests in real estate through direct ownership, leases and partnerships.

The Company is headquartered in Dallas, Texas and its common stock trades on the New York Stock Exchange under the symbol ARL. ARI owns approximately 83.2%
of the outstanding shares of common stock of Transcontinental Realty Investors, Inc., (TCI) a Nevada corporation which has its common stock listed and traded on the New York Stock Exchange, Inc. under the symbol TCI. The
ownership of the TCI shares was achieved through a series of transactions, including a cash tender offer completed March 19, 2003, an exchange by certain ARI subsidiaries of securities with Basic Capital Management, Inc. (BCM) and a
sale of a participating interest in a line of credit receivable from One Realco Corporation (One Realco) to BCM, as well as certain open market purchases of TCI shares in December 2003. ARI has consolidated TCIs accounts and
operations since June 30, 2003. At June 30, 2008, TCI owned approximately 24.9% of the outstanding common stock of Income Opportunity Realty Investors, Inc., (IORI), a public company whose shares are listed and traded on the
American Stock Exchange.

Properties

The Company owns
or had interests in a total property portfolio of 94 and 110 income producing properties as of June 30, 2008 and December 31, 2007, respectively. The commercial properties aggregate approximately 5.8 million and 5.9 million net
rentable square feet as of June 30, 2008 and December 31, 2007, respectively. At June 30, 2008, the properties consisted of:



| |  |  | 36 commercial buildings, which consists of 23 office buildings, seven commercial warehouses, and six retail centers;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | five hotels;
| | - |  | ------------



| |  |  | 53 apartment communities; and
| | - |  | -----------------------------



| |  |  | 11,251 acres of developed and undeveloped land.
| | - |  | -----------------------------------------------

The
accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in
conjunction with the rules and regulations of the Securities Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. The results of operations for the
interim periods are not necessarily indicative of the results to be obtained for other interim periods or for the full fiscal



8



---

##### Table of Contents

year. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. These financial statements should be read in conjunction with the Companys financial statements and notes thereto contained in the Companys Annual Report on Form 10-K for its
fiscal year ended December 31, 2007.

Newly issued accounting standards.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. (SFAS No. 157). SFAS No. 157 defines fair value and establishes a framework for measuring fair
value, which includes a hierarchy based on the quality of inputs used to measure fair value. SFAS No. 157 also expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. SFAS
No. 157 requires the categorization of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active
markets for identical assets and liabilities and lowest priority to unobservable inputs. SFAS No. 157 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall
within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. The levels of the SFAS No. 157 fair value hierarchy
are described as follows:



| |  |  | Level 1Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market
that the Company has the ability to access.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for
substantially the full term of the asset or liability.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and
significant to the overall fair value measurement.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SFAS No. 157 became effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB deferred the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
The FASB also removed certain leasing transactions from the scope of SFAS No. 157. On January 1, 2008, the Company adopted SFAS No. 157. The Company currently does not have any non-financial assets or non-financial liabilities that
are required to be measured under SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement No. 115. (SFAS No. 159). SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial
instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS No. 159 became effective for fiscal years beginning after November 15, 2007. On January 1, 2008, the Company adopted SFAS No. 159 and has currently not elected to measure any financial instruments or other
items (not currently required to be measured at fair value) at fair value.

In December 2007, the FASB issued SFAS No. 141 (revised in 2007)
(SFAS 141R), Business Combinations.SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the business combinations. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business
combinations the Company engages in will be recorded and disclosed following existing accounting principles until January 1, 2009. The Company expects SFAS 141R will affect the Companys consolidated financial statements when effective,
but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquisitions, if any, the Company consummates after the effective date.

In December 2007, the FASB issued SFAS No. 141 (revised in 2007) (SFAS 141R), Business Combinations.SFAS 141R establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combinations. SFAS 141R is effective for financial statements
issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations the Company engages in will be recorded and disclosed following existing accounting principles until January 1, 2009. The Company expects
SFAS 141R will affect the Companys consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquisitions, if any, the Company consummates after the
effective date.



9



---

##### Table of Contents

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements. effective for financial statements issued for fiscal years beginning after December 15, 2008. SFAS No. 160 states that accounting and reporting for minority interests will be recharacterized as
noncontrolling interests and classified as a component of equity. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, and will impact the recording of minority interest. The
Company is currently evaluating the effects the adoption of SFAS No. 160 will have on its financial position and results of operations.

NOTE 2. REAL ESTATE ACTIVITY

For the six month period ended June 30, 2008, we sold 24 income producing properties for an aggregate
sales price of $168.3 million; we received $62.6 million in cash after paying off $94.4 million in existing debt and recorded a gain on sale of $112.2 million. We purchased six buildings at an aggregate cost of $62.4 million. The buildings were
financed with $17.4 million cash and $42.6 million in new debt, plus accrued closing costs. We sold 81.6 acres of land located in Texas for an aggregate sales price of $12.2 million. We received $2.3 million in cash and provided $2.2 million in
seller financing after paying off existing mortgages of $5.3 million and we recorded $4.2 million in gain on sales. We purchased 259.5 acres of land located in Texas for an aggregate purchase price of $16.0 million. The land was financed with $7.1
million in cash and $8.9 million in new debt.



|                                      |  |                      |           |              |   |                     |  |                  |       |                       |   |               |  |   |                   |  |                                         |          |   |               |   |                                  |  |   |         |   |  |   |           |  |   |        
|------------------------------------- |  | -------------------- | --------- | ------------ | - | ------------------- |  | ---------------- | ----- | --------------------- | - | ------------- |  | - | ----------------- |  | --------------------------------------- | -------- | - | ------------- | - | -------------------------------- |  | - | ------- | - |  | - | --------- |  | - | -------
|                                      |  | CostBeginningof Year |           | Acquisitions |   | CapitalImprovements |  | DevelopmentCosts |       | CompletedDevelopments |   | PropertySales |  |   | ImpairmentCharges |  | Reclassificationsand OtherAdjustments * |          |   | Cost6/30/2008 |   | AccumulatedDepreciation6/30/2008
|Apartments                            |  | $                    | 473,593   |              | $ | 21,647              |  | $                |      |                       | $ |              |  | $ |                  |  | $                                       |         |   |               | $ |                                 |  | $ | 16,496  |   |  | $ | 511,736   |  | $ | 51,715 
|Apartments under construction         |  |                      | 153,144   |              |   |                    |  |                  |      |                       |   | 49,206        |  |   |                  |  |                                         |         |   |               |   |                                 |  |   | (57,437 | ) |  |   | 144,913   |  |   |       
|Other developments in progress        |  |                      | 110,321   |              |   |                    |  |                  |      |                       |   | 17,654        |  |   |                  |  |                                         |         |   |               |   |                                 |  |   | 96,383  |   |  |   | 224,358   |  |   |       
|Commercial properties                 |  |                      | 357,283   |              |   | 41,580              |  |                  | 4,588 |                       |   |              |  |   |                  |  |                                         |         |   |               |   |                                 |  |   | 51,408  |   |  |   | 454,859   |  |   | 87,919 
|Hotels                                |  |                      | 72,156    |              |   |                    |  |                  | 125   |                       |   |              |  |   |                  |  |                                         |         |   |               |   |                                 |  |   | (31,552 | ) |  |   | 40,729    |  |   | 13,078 
|Land held for development             |  |                      | 193,914   |              |   | 15,214              |  |                  | 1,680 |                       |   |              |  |   |                  |  |                                         | (12,197  | ) |               |   |                                 |  |   | 11,144  |   |  |   | 209,755   |  |   | 196    
|                                      |  |                      |           |              |   |                     |  |                  |       |                       |   |               |  |   |                   |  |                                         |          |   |               |   |                                  |  |   |         |   |  |   |           |  |   |        
|Real estate held for investment       |  | $                    | 1,360,411 |              | $ | 78,441              |  | $                | 6,393 |                       | $ | 66,860        |  | $ |                  |  | $                                       | (12,197  | ) |               | $ |                                 |  | $ | 86,442  |   |  | $ | 1,586,350 |  | $ | 152,908
|                                      |  |                      |           |              |   |                     |  |                  |       |                       |   |               |  |   |                   |  |                                         |          |   |               |   |                                  |  |   |         |   |  |   |           |  |   |        
|Real estate held for sale             |  | $                    | 61,128    |              | $ |                    |  | $                |      |                       | $ |              |  | $ |                  |  | $                                       | (156,483 | ) |               | $ |                                 |  | $ | 138,095 |   |  | $ | 42,740    |  | $ | 5,816  
|                                      |  |                      |           |              |   |                     |  |                  |       |                       |   |               |  |   |                   |  |                                         |          |   |               |   |                                  |  |   |         |   |  |   |           |  |   |        
|Real estate subject to sales contract |  | $                    | 64,320    |              | $ |                    |  | $                |      |                       | $ |              |  | $ |                  |  | $                                       |         |   |               | $ |                                 |  | $ | 2,885   |   |  | $ | 67,205    |  | $ | 9,566  
|                                      |  |                      |           |              |   |                     |  |                  |       |                       |   |               |  |   |                   |  |                                         |          |   |               |   |                                  |  |   |         |   |  |   |           |  |   |        



|* | Change is due to reclassification of grouping for discontinued operations or construction.
|- | ------------------------------------------------------------------------------------------



10



---

##### Table of Contents

A summary of selected transactions is discussed below:

On January 15, 2008, we purchased 4.0 acres of land in Dallas, Texas known as Woodmont TCI XIV for $6.4 million. We financed the transaction with $1.9 million cash, a new mortgage of $4.1 million with a
commercial lender and accrued $400,000 in commissions payable. The mortgage is secured by the property, accrues interest at Prime plus 0.75%.

On
January 25, 2008, we sold 15 apartment complexes in a single transaction for an aggregate sales price of $98.3 million. We recorded a gain on sale of $72.1 million. We received cash of $28.4 million after paying off existing mortgages of $62.1
million, and $7.8 million in commissions and other closing costs.

The properties consisted of:



| |  |  | 4400 Apartments, a 92 unit complex located in Midland, Texas
| | - |  | ------------------------------------------------------------



| |  |  | Arbor Pointe, a 194 unit complex located in Odessa, Texas
| | - |  | ---------------------------------------------------------



| |  |  | Ashton Way, a 178 unit complex located in Midland, Texas
| | - |  | --------------------------------------------------------



| |  |  | Autumn Chase, a 94 unit complex located in Midland, Texas
| | - |  | ---------------------------------------------------------



| |  |  | Courtyard Apartments, a 133 unit complex located in Midland, Texas
| | - |  | ------------------------------------------------------------------



| |  |  | Coventry Point, a 120 unit complex located in Midland, Texas
| | - |  | ------------------------------------------------------------



| |  |  | Fairway, a 152 unit complex located in Longview, Texas
| | - |  | ------------------------------------------------------



| |  |  | Fountains at Waterford, a 172 unit complex located in Midland, Texas
| | - |  | --------------------------------------------------------------------



| |  |  | Hunters Glen, a 260 unit complex located in Midland, Texas
| | - |  | ----------------------------------------------------------



| |  |  | Southgate, a 180 unit complex located in Odessa, Texas
| | - |  | ------------------------------------------------------



| |  |  | Sunchase, a 300 unit complex located in Odessa, Texas
| | - |  | -----------------------------------------------------



| |  |  | Thornwood, a 109 unit complex located in Midland, Texas
| | - |  | -------------------------------------------------------



| |  |  | Westwood, a 79 unit complex located in Odessa, Texas
| | - |  | ----------------------------------------------------



| |  |  | Woodview, a 232 unit complex located in Odessa, Texas
| | - |  | -----------------------------------------------------



| |  |  | Sunset, a 240 unit complex located in Odessa, Texas
| | - |  | ---------------------------------------------------

On January 31, 2008, we sold the Lexington office building, a 75,000 square foot commercial building located in Colorado Springs, Colorado for $5.4 million, receiving cash of $1.6 million after paying off the existing mortgage of $3.5
million and $300,000 in closing costs. We recorded a $700,000 gain on sale.

On February 6, 2008, we sold the Fairway View Apartments, a 264 unit
complex located in El Paso, Texas for $10.3 million recording a gain on sale of $6.0 million. We received $4.8 million in cash after paying off the existing mortgage of $5.3 million and closing costs.

On February 14, 2008, we sold the Governors Square apartments, a 169 unit complex located in Tallahassee, Florida for $8.5 million, recording a gain on sale of $5.7
million. We received $4.7 million in cash after paying off the existing mortgage of $2.9 million and $900,000 in closing costs.

On February 14, 2008,
we sold 3 hotels located in Chicago, Illinois in a single transaction for $30.0 million recording a gain on sale of $18.4 million. We received cash of $9.8 million after paying off existing mortgages of $18.5 million and closing costs. The
properties consisted of:



| |  |  | City Suites Hotel, a 45 room hotel;
| | - |  | -----------------------------------



| |  |  | Majestic Hotel, a 55 room hotel; and
| | - |  | ------------------------------------



| |  |  | Willows Hotel, a 52 room hotel.
| | - |  | -------------------------------

On March 28,
2008, we sold all of our shares in S.P. Zoo (a Polish Corporation) for $11.8 million. The sale of the shares represented our 66.67% interest in the Radisson-SAS Hotel Akedemia, a 161 room hotel located in Wroclaw, Poland. We received cash of $11.8
million upon sale of our shares and recorded a gain on sale of $7.7 million.

On April 2, 2008, we acquired the Bridgewood Ranch apartments, a 106
unit complex located in Kaufman, Texas for $7.6 million. We financed the purchase with a new mortgage (secured by the property) of $5.1 million, cash of $1.3 million, and $800,000 in liabilities. The mortgage accrues interest at the higher of 6.75%
or Prime plus 0.25% and matures in January 2019.



11



---

##### Table of Contents

On April 16, 2008, we acquired the Quail Hollow apartments, a 200 unit complex located in Holland, Ohio for $14.1
million. We financed the purchase with a new mortgage (secured by the property) of $11.5 million, cash of $77,000, and $2.6 million in liabilities. The mortgage accrues interest at 7.00% and matures in October 2011.

On June 10, 2008, we sold 20.6 acres of undeveloped land located in Irving, Texas for $7.2 million, recording a $1.9 million gain on sale. We received $2.0 million
in cash and provided $2.2 million in seller financing, after paying down $2.9 million in existing debt, and incurring $100,000 in closing costs.

On
June 26, 2008, we purchased the Stanford Centre, a 274,684 square foot commercial building located in Dallas, Texas, including 3.1 acres of land, for $38.8 million. We financed the transaction with $11.5 million in cash and a $26.1 million
mortgage from a commercial bank. In addition, we incurred $1.1 million in accruals and credits at closing. The mortgage accrues interest at LIBOR plus 3.75%, and matures in July 2011.



12



---

##### Table of Contents

NOTE 3. NOTES AND INTEREST RECEIVABLE



|                                        |  |              |  |               |   |  |        |        |   |          |                                            
|--------------------------------------- |  | ------------ |  | ------------- | - |  | ------ | ------ | - | -------- | -------------------------------------------
|Borrower                                |  | MaturityDate |  | Interest Rate |   |  | Amount |        |   | Security
|Performing loans:                       |  |              |  |               |   |  |        |        |   |          |                                            
|400 St. Paul                            |  | 10/08        |  | 9.25          | % |  | $      | 3,612  |   |          | Office building, Dallas, TX                
|Basic Capital Management(1)             |  | 10/08        |  | 7.00          |   |  |        | 1,252  |   |          | Industrial building, Arlington, TX         
|Basic Capital Management(1)             |  | 10/08        |  | 7.00          |   |  |        | 1,523  |   |          | Retail building, Cary, NC                  
|Dallas Fund XVII LP                     |  | 10/08        |  | 9.00          |   |  |        | 4,969  |   |          | Assignment of partnership interests        
|Everest Heights Dallas Real Estate Inc. |  | 09/08        |  | 10.00         |   |  |        | 2,187  |   |          | 20 acres undeveloped land, Valley Ranch, TX
|Garden Centura LP                       |  | 09/08        |  | 7.00          |   |  |        | 4,866  |   |          | Excess cash flow from partnership          
|Miscellaneous non-related party notes   |  | Various      |  | Various       |   |  |        | 5,407  |   |          | Various security interests                 
|Miscellaneous related party notes(1)    |  | Various      |  | Various       |   |  |        | 6,720  |   |          | Various security interests                 
|Pioneer Austin Development              |  | 10/08        |  | 10.50         |   |  |        | 2,407  |   |          | 33 acres undeveloped land, Austin, TX      
|Realty Advisors(1)                      |  | 11/08        |  | 7.00          |   |  |        | 5,633  |   |          | 850 shares of ARI stock owned by BCM       
|Syntek Acquisition Corp(1)              |  | 08/08        |  | Prime + 1.00  | % |  |        | 3,354  |   |          | Unsecured                                  
|Thornwood Wrap Note, ICC Surfwood       |  | 07/08        |  | 6.50          |   |  |        | 1,638  |   |          | Unsecured                                  
|Unified Housing of Harvest Hill(1)      |  | 10/13        |  | 12.00         |   |  |        | 7,891  |   |          | Excess cash flow from partnership          
|Accrued interest                        |  |              |  |               |   |  |        | 5,153  |   |          |                                            
|                                        |  |              |  |               |   |  |        |        |   |          |                                            
|Total Performing                        |  |              |  |               |   |  | $      | 56,612 |   |          |                                            
|                                        |  |              |  |              
|Non-Performing loans:                   |  |              |  |               |   |  |        |        |   |          |                                            
|Blue Lake at Marine Creek(1)            |  | 12/13        |  | 12.00         | % |  | $      | 106    |   |          | Excess cash flow from partnership          
|HAF of Dallas LLC(1)                    |  | 08/11        |  | 12.00         |   |  |        | 435    |   |          | Excess cash flow from partnership          
|HFS of Humble LLC(1)                    |  | 12/17        |  | 12.00         |   |  |        | 2,220  |   |          | Excess cash flow from partnership          
|Leman Settlement Note                   |  | 06/08        |  | Prime + 1.00  | % |  |        | 1,500  |   |          | Unsecured                                  
|Tracy Suttles                           |  | 01/09        |  | 12.00         |   |  |        | 835    |   |          | Unsecured                                  
|UHF Burleson(1)                         |  | 08/13        |  | 12.00         |   |  |        | 785    |   |          | Excess cash flow from partnership          
|UHF Chase Oaks(1)                       |  | 12/08        |  | 12.00         |   |  |        | 398    |   |          | Excess cash flow from partnership          
|UHF Inwood(1)                           |  | 12/13        |  | 12.00         |   |  |        | 4,213  |   |          | Excess cash flow from partnership          
|UHF Kensington(1)                       |  | 03/14        |  | 12.00         |   |  |        | 4,300  |   |          | Excess cash flow from partnership          
|UHF McKinney(1)                         |  | 12/13        |  | 12.00         |   |  |        | 2,003  |   |          | Excess cash flow from partnership          
|UHF Parkside Advances(1)                |  | 12/13        |  | 12.00         |   |  |        | 272    |   |          | Excess cash flow from partnership          
|UHF Samsung I(1)                        |  | 12/08        |  | 12.00         |   |  |        | 584    |   |          | Excess cash flow from partnership          
|UHF Walnut Park Crossing(1)             |  | 12/08        |  | 12.00         |   |  |        | 300    |   |          | Excess cash flow from partnership          
|                                        |  |              |  |               |   |  |        |        |   |          |                                            
|Total Non-Performing                    |  |              |  |               |   |  |        | 17,951 |   |          |                                            
|Allowance for estimated losses          |  |              |  |               |   |  |        | (9,478 | ) |          |                                            
|                                        |  |              |  |               |   |  |        |        |   |          |                                            
|Total                                   |  |              |  |               |   |  | $      | 65,085 |   |          |                                            
|                                        |  |              |  |               |   |  |        |        |   |          |                                            



|(1) | Related party notes
|--- | -------------------



13



---

##### Table of Contents

NOTE 4. INVESTMENTS IN EQUITY INVESTEES

ARIs investment in real estate entities at June 30, 2008 was as follows:



|                          |  |                                             |        |   |                                           |   |      
|------------------------- |  | ------------------------------------------- | ------ | - | ----------------------------------------- | - | -----
|Investee                  |  | Carrying Value ofInvestment atJune 30, 2008 |        |   | Market Value ofInvestment atJune 30, 2008
|IORI                      |  | $                                           | 11,673 |   |                                           | $ | 4,667
|Garden Centura, L.P       |  |                                             | 2,003  |   |                                           |   |     
|Gruppa Florentina, LLC(1) |  |                                             | 5,051  |   |                                           |   |     
|LK-Four Hickory, LLC(1)   |  |                                             | 3,857  |   |                                           |   |     
|Other(1)                  |  |                                             | 20,833 |   |                                           |   |     
|Allowance for investment  |  |                                             | (7,000 | ) |                                           |   |      
|                          |  |                                             |        |   |                                           |   |      
|                          |  | $                                           | 36,417 |   |                                           |   |      
|                          |  |                                             |        |   |                                           |   |      



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

Set forth below are summarized results of operations of investments in equity investees for the six months ended June 30, 2008 and 2007:



|                                          |  |      |         |   |      |   |        |  
|----------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                          |  | 2008 |         |   | 2007 |  
|Restaurant sales                          |  | $    | 20,649  |   |      | $ | 3,204  |  
|Revenues                                  |  |      | 33,171  |   |      |   | 7,883  |  
|                                          |  |      |         |   |      |   |        |  
|                                          |  |      | 53,820  |   |      |   | 11,087 |  
|Cost of sales                             |  |      | (5,913  | ) |      |   | (878   | )
|Operating expenses                        |  |      | (43,189 | ) |      |   | (5,422 | )
|                                          |  |      |         |   |      |   |        |  
|                                          |  |      | (49,102 | ) |      |   | (6,300 | )
|                                          |  |      |         |   |      |   |        |  
|Income from operations                    |  |      | 4,718   |   |      |   | 4,787  |  
|Other income (expense):                   |  |      |         |   |      |   |        |  
|General and administrative                |  |      | (2,608  | ) |      |   | (473   | )
|Depreciation                              |  |      | (1,479  | ) |      |   | (1,760 | )
|Interest expense                          |  |      | (15,239 | ) |      |   | (5,226 | )
|Other income                              |  |      | 369     |   |      |   | 1,331  |  
|                                          |  |      |         |   |      |   |        |  
|Income (loss) before taxes                |  |      | (14,239 | ) |      |   | (1,341 | )
|Income tax                                |  |      | (547    | ) |      |   |       |  
|Income (loss) from discontined operations |  |      | 31,000  |   |      |   |       |  
|                                          |  |      |         |   |      |   |        |  
|Net Income (loss)                         |  | $    | 16,214  |   |      | $ | (1,341 | )
|                                          |  |      |         |   |      |   |        |  

NOTE 5. MARKETABLE EQUITY SECURITIES

Our fully consolidated subsidiary, TCI, owns approximately 9.24% of the common stock of Realty Korea CR-REIT Co., Ltd. No. 1 (CR REIT). In April, the CR REIT common stock was delisted from the Korean
Stock Exchange (KOSPI), in accordance with the corporate restructuring REIT regulation in Korea, and is in the process of liquidation. At that time we received a $4.8 million dividend payout for the partial liquidation of the CR REIT.



14



---

##### Table of Contents

NOTE 6. NOTES PAYABLE



|                                      |  |                         |              |   |                       |   |              |  |              |                                       |  |                |        |  |              |         |   |  |                  |          |   |  |   |         |   |  |   |          |   |  |   |          
|------------------------------------- |  | ----------------------- | ------------ | - | --------------------- | - | ------------ |  | ------------ | ------------------------------------- |  | -------------- | ------ |  | ------------ | ------- | - |  | ---------------- | -------- | - |  | - | ------- | - |  | - | -------- | - |  | - | ---------
|                                      |  | BalanceBeginningof Year |              |   | Additional Borrowings |   | Repayments   |  |              | Reclassificationsand OtherAdjustments |  |                |       
|                                      |  |                         | Acquisitions |   | Developments          |   | Refinancings |  | Amortization |                                       |  | Property Sales |        |  | Refinancings |         |   |  | Balance6/30/2008
|Apartments                            |  | $                       | 361,037      |   |                       | $ | 19,307       |  | $            |                                      |  | $              |       |  | $            | (3,386  | ) |  | $                |         |   |  | $ |        |   |  | $ | (13,130  | ) |  | $ | 363,828  
|Apartments under construction         |  |                         | 130,699      |   |                       |   |             |  |              | 44,966                                |  |                |       |  |              |        |   |  |                  |         |   |  |   |        |   |  |   |         |   |  |   | 175,665  
|Other developments in progress        |  |                         | 176,934      |   |                       |   |             |  |              | 16,202                                |  |                |       |  |              |        |   |  |                  |         |   |  |   | (5,314  | ) |  |   | (30,334  | ) |  |   | 157,488  
|Commercial properties                 |  |                         | 272,067      |   |                       |   | 26,076       |  |              |                                      |  |                | 4,000  |  |              | (1,787  | ) |  |                  |         |   |  |   | (4,777  | ) |  |   | (23,576  | ) |  |   | 272,003  
|Hotels                                |  |                         | 82,233       |   |                       |   |             |  |              |                                      |  |                |       |  |              | (370    | ) |  |                  |         |   |  |   |        |   |  |   | (46,060  | ) |  |   | 35,803   
|Land held for development             |  |                         | 206,491      |   |                       |   | 13,403       |  |              |                                      |  |                | 33,208 |  |              | (5,357  | ) |  |                  | (29,819  | ) |  |   |        |   |  |   | (37,217  | ) |  |   | 180,709  
|Corporate and other                   |  |                         | (13,403      | ) |                       |   |             |  |              |                                      |  |                |       |  |              | (22     | ) |  |                  |         |   |  |   |        |   |  |   | 41,518   |   |  |   | 28,093   
|Accrued interest                      |  |                         | 5,929        |   |                       |   |             |  |              |                                      |  |                |       |  |              |        |   |  |                  |         |   |  |   |        |   |  |   | 2,211    |   |  |   | 8,140    
|                                      |  |                         |              |   |                       |   |              |  |              |                                       |  |                |        |  |              |         |   |  |                  |          |   |  |   |         |   |  |   |          |   |  |   |          
|Real estate held for investment       |  | $                       | 1,221,987    |   |                       |   | 58,786       |  |              | 61,168                                |  |                | 37,208 |  |              | (10,922 | ) |  |                  | (29,819  | ) |  |   | (10,091 | ) |  |   | (106,588 | ) |  | $ | 1,221,729
|                                      |  |                         |              |   |                       |   |              |  |              |                                       |  |                |        |  |              |         |   |  |                  |          |   |  |   |         |   |  |   |          |   |  |   |          
|Real estate held for sale             |  | $                       | 116,377      |   |                       | $ |             |  | $            |                                      |  | $              |       |  | $            | (228    | ) |  | $                | (114,261 | ) |  | $ |        |   |  | $ | 33,107   |   |  | $ | 34,995   
|                                      |  |                         |              |   |                       |   |              |  |              |                                       |  |                |        |  |              |         |   |  |                  |          |   |  |   |         |   |  |   |          |   |  |   |          
|Real estate subject to sales contract |  | $                       | 62,513       |   |                       | $ |             |  | $            |                                      |  | $              |       |  | $            |        |   |  | $                |         |   |  | $ |        |   |  | $ | 751      |   |  | $ | 63,264   
|                                      |  |                         |              |   |                       |   |              |  |              |                                       |  |                |        |  |              |         |   |  |                  |          |   |  |   |         |   |  |   |          |   |  |   |          

With respect to the additional notes payable due to the acquisition of properties, the following summarizes the
activity for 2008:

Apartments

In connection with the
purchase of Woodmont TCI XIV land in Dallas, Texas on January 15, 2008, we financed the acquisition with a new mortgage loan of $4.1 million collateralized by the land property purchased. The note accrues interest at Prime plus 0.75%. The note
is payable in monthly installments of interest only with the balance due along with all unpaid and accrued interest due at maturity on July 25, 2009.

In connection with the purchase of Bridgewood apartments in Kaufman, Texas on April 2, 2008, we financed the acquisition with a new mortgage loan of $5.1 million collateralized by the apartment complex purchased. The note accrues
interest at Prime plus 0.25%. The note is payable in monthly installments of interest and principal through maturity on January 1, 2009, at which time all accrued unpaid interest and principal are due.

In connection with the purchase of Quail Hollow apartments in Holland, Ohio on April 16, 2008, we financed the acquisition with a new mortgage loan of $11.5 million
collateralized by the apartment complex purchased. The note accrues interest at 7.00%. The note is payable in monthly installments of interest and principal through maturity on October 25, 2009, at which time all accrued unpaid interest and
principal are due.

Commercial Properties

In
connection with the purchase of Stanford Centre office building in Dallas, Texas on June 27, 2008, we financed the acquisition with a new mortgage loan of $26.1 million, collateralized by the office building purchased. The note accrues interest
at LIBOR plus 3.75%. The note is payable in monthly installments of interest only with the balance due along with all unpaid and accrued interest due at maturity on July 1, 2011.



15



---

##### Table of Contents

NOTE 7. STOCK-SECURED NOTES PAYABLE

The Company has margin arrangements with various financial institutions and brokerage firms, which provide for borrowings of up to 50.0% of the market value of marketable equity securities. The Company also has other
notes payable secured by stock. The borrowings under such margin arrangements and notes are secured by the equity securities of IORI and TCI, and ARIs trading portfolio securities and bear interest rates ranging from 12.40% to 14.71% per
annum. Stock-secured notes payable and margin borrowings were $13.6 and $17.5 million at June 30, 2008 and December 31, 2007, respectively.

NOTE 8. RELATED PARTY TRANSACTIONS

The following table reconciles the beginning and ending balances of accounts receivable from and
(accounts payable) to affiliates as of June 30, 2008.



|                                   |  |   |          |  
|---------------------------------- |  | - | -------- | -
|Balance, December 31, 2007         |  | $ | 56,340   |  
|Cash transfers                     |  |   | 157,972  |  
|Cash repayments                    |  |   | (191,366 | )
|Advisory fees payable to Prime     |  |   | (9,078   | )
|Advances due to financing proceeds |  |   | (14,191  | )
|Payments through affiliates        |  |   | (4,104   | )
|                                   |  |   |          |  
|Balance, June 30, 2008             |  | $ | (4,427   | )
|                                   |  |   |          |  

At June 30, 2008, ARIs other assets include $369,321 due from affiliates for rent and interest. Also at
June 30, 2008, ARI owed $4.3 million to Regis Property Management for management fees and sales commissions.



16



---

##### Table of Contents

NOTE 9. OPERATING SEGMENTS

The Companys segments are based on the Companys method of internal reporting which classifies its operations by property type. The Companys segments are commercial, apartments, hotels and land. Significant differences
among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative and other expenses. Management evaluates the performance of each of the
operating segments and allocates resources to them based on their net operating income and cash flow.

Presented below are the Companys reportable
segments operating income for the three and six months ended June 30, 2008 and 2007, including segment assets and expenditures.



|                                |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  
|------------------------------- |  | -------------------- | ------- | - | ---------- | - | ------- | ------ |  | ---- | ------ |  | ----- | ------- | - | ----- | - | ------ | - |  | - | --------- | -
|                                |  | CommercialProperties |         |   | Apartments |   |         | Hotels |  | Land |        |  | Other |         |   | Total |  
|For three months ended 6/30/08  |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  
|Operating revenue               |  | $                    | 17,887  |   |            | $ | 20,880  |        |  | $    | 5,233  |  | $     | 750     |   |       | $ | 3      |   |  | $ | 44,753    |  
|Operating expenses              |  |                      | 10,615  |   |            |   | 13,144  |        |  |      | 3,303  |  |       | 1,013   |   |       |   | (57    | ) |  |   | 28,018    |  
|Depreciation and amortization   |  |                      | 2,962   |   |            |   | 3,335   |        |  |      | 269    |  |       | 2       |   |       |   | 1      |   |  |   | 6,569     |  
|Mortgage and loan interest      |  |                      | 4,916   |   |            |   | 7,668   |        |  |      | 883    |  |       | 4,270   |   |       |   | 4,081  |   |  |   | 21,818    |  
|Interest income                 |  |                      |        |   |            |   |        |        |  |      |       |  |       |        |   |       |   | 1,619  |   |  |   | 1,619     |  
|Gain on land sales              |  |                      |        |   |            |   |        |        |  |      |       |  |       | 2,890   |   |       |   |       |   |  |   | 2,890     |  
|                                |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  
|Segment operating income (loss) |  | $                    | (606    | ) |            | $ | (3,267  | )      |  | $    | 778    |  | $     | (1,645  | ) |       | $ | (2,403 | ) |  | $ | (7,143    | )
|                                |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  
|Capital expenditures            |  |                      | 3,618   |   |            |   |        |        |  |      |       |  |       | 64      |   |       |   |       |   |  |   | 3,682     |  
|Assets                          |  |                      | 366,940 |   |            |   | 604,934 |        |  |      | 27,651 |  |       | 356,784 |   |       |   | 77,133 |   |  |   | 1,433,442 |  
|                                |  |                      |         |   |            |  
|Property Sales                  |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  
|Sales price                     |  | $                    |        |   |            | $ | 3,650   |        |  | $    |       |  | $     | 10,203  |   |       | $ |       |   |  | $ | 13,853    |  
|Cost of sale                    |  |                      |        |   |            |   | 1,736   |        |  |      |       |  |       | 7,163   |   |       |   |       |   |  |   | 8,899     |  
|Deferred current gain           |  |                      |        |   |            |   |        |        |  |      |       |  |       | 150     |   |       |   |       |   |  |   | 150       |  
|Recognized prior deferred gain  |  |                      |        |   |            |   | 1,850   |        |  |      |       |  |       |        |   |       |   |       |   |  |   | 1,850     |  
|                                |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  
|Gain on sale                    |  | $                    |        |   |            | $ | 3,764   |        |  | $    |       |  | $     | 2,890   |   |       | $ |       |   |  | $ | 6,654     |  
|                                |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  
|                                |  |                      |         |   |            |  
|                                |  | CommercialProperties |         |   | Apartments |   |         | Hotels |  | Land |        |  | Other |         |   | Total |  
|For three months ended 6/30/07  |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  
|Operating revenue               |  | $                    | 17,903  |   |            | $ | 19,726  |        |  | $    | 5,567  |  | $     | 248     |   |       | $ | 2      |   |  | $ | 43,446    |  
|Operating expenses              |  |                      | 10,895  |   |            |   | 10,218  |        |  |      | 4,015  |  |       | 1,362   |   |       |   | 50     |   |  |   | 26,540    |  
|Depreciation and amortization   |  |                      | 3,446   |   |            |   | 2,848   |        |  |      | 228    |  |       | 14      |   |       |   |       |   |  |   | 6,536     |  
|Mortgage and loan interest      |  |                      | 5,375   |   |            |   | 6,107   |        |  |      | 791    |  |       | 6,191   |   |       |   | 3,096  |   |  |   | 21,560    |  
|Interest income                 |  |                      |        |   |            |   |        |        |  |      |       |  |       |        |   |       |   | 1,477  |   |  |   | 1,477     |  
|Gain on land sales              |  |                      |        |   |            |   |        |        |  |      |       |  |       |        |   |       |   |       |   |  |   |          |  
|                                |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  
|Segment operating income (loss) |  | $                    | (1,813  | ) |            | $ | 553     |        |  | $    | 533    |  | $     | (7,319  | ) |       | $ | (1,667 | ) |  | $ | (9,713    | )
|                                |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  
|Capital expenditures            |  |                      | 1,700   |   |            |   | 824     |        |  |      | 312    |  |       | 3,731   |   |       |   |       |   |  |   | 6,567     |  
|Assets                          |  |                      | 326,012 |   |            |   | 598,910 |        |  |      | 27,498 |  |       | 299,540 |   |       |   | 66,285 |   |  |   | 1,318,245 |  
|                                |  |                      |         |   |            |  
|Property Sales                  |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  
|Sales price                     |  | $                    |        |   |            | $ | 21,100  |        |  | $    |       |  | $     | 9,865   |   |       | $ |       |   |  | $ | 30,965    |  
|Cost of sale                    |  |                      |        |   |            |   | 23,492  |        |  |      |       |  |       | 6,174   |   |       |   |       |   |  |   | 29,666    |  
|Deferred current gain           |  |                      |        |   |            |   |        |        |  |      |       |  |       | 3,691   |   |       |   |       |   |  |   | 3,691     |  
|Recognized prior deferred gain  |  |                      |        |   |            |   |        |        |  |      |       |  |       |        |   |       |   |       |   |  |   |          |  
|                                |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  
|Gain on sale                    |  | $                    |        |   |            | $ | (2,392  | )      |  | $    |       |  | $     |        |   |       | $ |       |   |  | $ | (2,392    | )
|                                |  |                      |         |   |            |   |         |        |  |      |        |  |       |         |   |       |   |        |   |  |   |           |  



17



---

##### Table of Contents

The table below reconciles the segment information to the corresponding amounts in the Consolidated
Statements of Operations and Consolidated Balance Sheet:



|                                             |  |           |           |   |           |   |           |  
|-------------------------------------------- |  | --------- | --------- | - | --------- | - | --------- | -
|                                             |  | 6/30/2008 |           |   | 6/30/2007 |  
|For three months ended                       |  |           |           |   |           |   |           |  
|Segment operating income (loss)              |  | $         | (7,143    | ) |           | $ | (9,713    | )
|Other non-segment items of income (expense)  |  |           |           |   |           |   |           |  
|General and administrative                   |  |           | (3,917    | ) |           |   | (4,014    | )
|Advisory fees                                |  |           | (3,920    | ) |           |   | (3,834    | )
|Litigation settlement                        |  |           |          |   |           |   | 24        |  
|Bad debt and allowance                       |  |           |          |   |           |   |          |  
|Net income fee                               |  |           |          |   |           |   |          |  
|Other income (expense)                       |  |           | 2,768     |   |           |   | 1,725     |  
|Equity in earnings of investees              |  |           | (555      | ) |           |   |          |  
|Minority interest                            |  |           | 2,417     |   |           |   | (281      | )
|Deferred tax                                 |  |           | (741      | ) |           |   | (2,222    | )
|                                             |  |           |           |   |           |   |           |  
|Income (loss) from continuing operations     |  | $         | (11,091   | ) |           | $ | (18,315   | )
|                                             |  |           |           |   |           |   |           |  
|                                             |  |          
|SEGMENT ASSET RECONCILIATION TO TOTAL ASSETS |  |           |           |   |           |   |           |  
|                                             |  |          
|                                             |  | 6/30/2008 |           |   | 6/30/2007 |  
|Segment assets                               |  | $         | 1,433,442 |   |           | $ | 1,318,245 |  
|Investments in real estate partnerships      |  |           | 36,417    |   |           |   | 31,260    |  
|Other assets and receivables                 |  |           | 185,174   |   |           |   | 241,223   |  
|Assets held for sale                         |  |           | 94,563    |   |           |   | 107,327   |  
|                                             |  |           |           |   |           |   |           |  
|Total assets                                 |  | $         | 1,749,596 |   |           | $ | 1,698,055 |  
|                                             |  |           |           |   |           |   |           |  



18



---

##### Table of Contents

|                                |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  
|------------------------------- |  | -------------------- | ------- | ---------- | - | ------- | ------ |  | - | ------ | - |  | ----- | ------- | - | ----- | - | ------ | - |  | - | --------- | -
|                                |  | CommercialProperties |         | Apartments |   |         | Hotels |  |   | Land   |   |  | Other |         |   | Total |  
|For six months ended 6/30/08    |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  
|Operating revenue               |  | $                    | 40,958  |            | $ | 35,524  |        |  | $ | 9,810  |   |  | $     | 1,531   |   |       | $ | 186    |   |  | $ | 88,009    |  
|Operating expenses              |  |                      | 22,556  |            |   | 23,163  |        |  |   | 7,096  |   |  |       | 3,677   |   |       |   | 111    |   |  |   | 56,603    |  
|Depreciation and amortization   |  |                      | 6,091   |            |   | 6,596   |        |  |   | 611    |   |  |       | 4       |   |       |   | 2      |   |  |   | 13,304    |  
|Mortgage and loan interest      |  |                      | 10,112  |            |   | 14,794  |        |  |   | 1,539  |   |  |       | 9,379   |   |       |   | 8,169  |   |  |   | 43,993    |  
|Interest income                 |  |                      |        |            |   |        |        |  |   |       |   |  |       |        |   |       |   | 3,719  |   |  |   | 3,719     |  
|Gain on land sales              |  |                      |        |            |   |        |        |  |   |       |   |  |       | 4,165   |   |       |   |       |   |  |   | 4,165     |  
|                                |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  
|Segment operating income (loss) |  | $                    | 2,199   |            | $ | (9,029  | )      |  | $ | 564    |   |  | $     | (7,364  | ) |       | $ | (4,377 | ) |  | $ | (18,007   | )
|                                |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  
|Capital expenditures            |  |                      | 3,618   |            |   |        |        |  |   |       |   |  |       | 64      |   |       |   |       |   |  |   | 3,682     |  
|Assets                          |  |                      | 366,940 |            |   | 604,934 |        |  |   | 27,651 |   |  |       | 356,784 |   |       |   | 77,133 |   |  |   | 1,433,442 |  
|                                |  |                      |         |            |   |        
|Property Sales                  |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  
|Sales price                     |  | $                    | 35,797  |            | $ | 120,687 |        |  | $ | 11,749 |   |  | $     | 13,077  |   |       | $ |       |   |  | $ | 181,310   |  
|Cost of sale                    |  |                      | 16,949  |            |   | 33,977  |        |  |   | 4,023  |   |  |       | 8,762   |   |       |   |       |   |  |   | 63,711    |  
|Deferred current gain           |  |                      |        |            |   |        |        |  |   |       |   |  |       | 150     |   |       |   |       |   |  |   | 150       |  
|Recognized prior deferred gain  |  |                      |        |            |   | 1,850   |        |  |   |       |   |  |       |        |   |       |   |       |   |  |   | 1,850     |  
|                                |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  
|Gain on sale                    |  | $                    | 18,848  |            | $ | 88,560  |        |  | $ | 7,726  |   |  | $     | 4,165   |   |       | $ |       |   |  | $ | 119,299   |  
|                                |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  
|                                |  |                      |         |            |   |        
|                                |  | CommercialProperties |         | Apartments |   |         | Hotels |  |   | Land   |   |  | Other |         |   | Total |  
|For six months ended 6/30/07    |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  
|Operating revenue               |  | $                    | 37,055  |            | $ | 35,540  |        |  | $ | 10,567 |   |  | $     | 391     |   |       | $ | 899    |   |  | $ | 84,452    |  
|Operating expenses              |  |                      | 21,373  |            |   | 18,759  |        |  |   | 7,809  |   |  |       | 2,775   |   |       |   | 1,078  |   |  |   | 51,794    |  
|Depreciation and amortization   |  |                      | 5,638   |            |   | 5,166   |        |  |   | 456    |   |  |       | 20      |   |       |   | 3      |   |  |   | 11,283    |  
|Mortgage and loan interest      |  |                      | 9,629   |            |   | 15,278  |        |  |   | 2,794  |   |  |       | 11,334  |   |       |   | 4,390  |   |  |   | 43,425    |  
|Interest income                 |  |                      |        |            |   |        |        |  |   |       |   |  |       |        |   |       |   | 3,031  |   |  |   | 3,031     |  
|Gain on land sales              |  |                      |        |            |   |        |        |  |   |       |   |  |       | 4,897   |   |       |   |       |   |  |   | 4,897     |  
|                                |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  
|Segment operating income (loss) |  | $                    | 415     |            | $ | (3,663  | )      |  | $ | (492   | ) |  | $     | (8,841  | ) |       | $ | (1,541 | ) |  | $ | (14,122   | )
|                                |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  
|Capital expenditures            |  |                      | 1,700   |            |   | 824     |        |  |   | 312    |   |  |       | 3,731   |   |       |   |       |   |  |   | 6,567     |  
|Assets                          |  |                      | 326,012 |            |   | 598,910 |        |  |   | 27,498 |   |  |       | 299,540 |   |       |   | 66,285 |   |  |   | 1,318,245 |  
|                                |  |                      |         |            |   |        
|Property Sales                  |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  
|Sales price                     |  | $                    |        |            | $ | 28,760  |        |  | $ |       |   |  | $     | 32,602  |   |       | $ |       |   |  | $ | 61,362    |  
|Cost of sale                    |  |                      |        |            |   | 26,769  |        |  |   |       |   |  |       | 24,014  |   |       |   |       |   |  |   | 50,783    |  
|Deferred current gain           |  |                      |        |            |   |        |        |  |   |       |   |  |       | 3,691   |   |       |   |       |   |  |   | 3,691     |  
|Recognized prior deferred gain  |  |                      |        |            |   |        |        |  |   |       |   |  |       |        |   |       |   |       |   |  |   |          |  
|                                |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  
|Gain on sale                    |  | $                    |        |            | $ | 1,991   |        |  | $ |       |   |  | $     | 4,897   |   |       | $ |       |   |  | $ | 6,888     |  
|                                |  |                      |         |            |   |         |        |  |   |        |   |  |       |         |   |       |   |        |   |  |   |           |  



19



---

##### Table of Contents

The table below reconcile the segment information to the corresponding amounts in the Consolidated
Statements of Operations and Consolidated Balance Sheet:



|                                             |  |           |           |   |           |   |           |  
|-------------------------------------------- |  | --------- | --------- | - | --------- | - | --------- | -
|                                             |  | 6/30/2008 |           |   | 6/30/2007 |  
|For six months ended                         |  |           |           |   |           |   |           |  
|Segment operating income (loss)              |  | $         | (18,007   | ) |           | $ | (14,122   | )
|Other non-segment items of income (expense)  |  |           |           |   |           |   |           |  
|General and administrative                   |  |           | (8,247    | ) |           |   | (8,492    | )
|Advisory fees                                |  |           | (7,895    | ) |           |   | (7,133    | )
|Litigation settlement                        |  |           |          |   |           |   | 24        |  
|Bad debt and allowance                       |  |           | (12,000   | ) |           |   |          |  
|Net income fee                               |  |           |          |   |           |   | 705       |  
|Other income (expense)                       |  |           | 4,356     |   |           |   | 4,270     |  
|Equity in earnings of investees              |  |           | 4,396     |   |           |   |          |  
|Minority interest                            |  |           | (9,460    | ) |           |   | (505      | )
|Deferred tax                                 |  |           | 33,186    |   |           |   | (1,976    | )
|                                             |  |           |           |   |           |   |           |  
|Income (loss) from continuing operations     |  | $         | (13,671   | ) |           | $ | (27,229   | )
|                                             |  |           |           |   |           |   |           |  
|                                             |  |          
|SEGMENT ASSET RECONCILIATION TO TOTAL ASSETS |  |           |           |   |           |   |           |  
|                                             |  |          
|                                             |  | 6/30/2008 |           |   | 6/30/2007 |  
|Segment assets                               |  | $         | 1,433,442 |   |           | $ | 1,318,245 |  
|Investments in real estate partnerships      |  |           | 36,417    |   |           |   | 31,260    |  
|Other assets and receivables                 |  |           | 185,174   |   |           |   | 241,223   |  
|Assets held for sale                         |  |           | 94,563    |   |           |   | 107,327   |  
|                                             |  |           |           |   |           |   |           |  
|Total assets                                 |  | $         | 1,749,596 |   |           | $ | 1,698,055 |  
|                                             |  |           |           |   |           |   |           |  

NOTE 10. DISCONTINUED OPERATIONS

The Company applies the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets that are to be disposed of
by sale be measured at the lesser of (1) book value or (2) fair value less cost to sell. In addition, it requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens the presentation of
discontinued operations to include more disposal transactions.

Discontinued operations relates to the sale of 34 apartments of which 17 were sold in 2008,
seven commercial buildings which three were sold in 2008, and five hotels which were all sold in 2008.



20



---

##### Table of Contents

|                                                                          |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ---------------------------------- | ------ | - | -------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                          |  | For the Three Months EndedJune 30, |        |   | For the Six Months EndedJune 30, |  
|                                                                          |  | 2008                               |        |   | 2007                             |   |        | 2008 |  |   | 2007    |  
|Revenue                                                                   |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|Rental                                                                    |  | $                                  | 1,601  |   |                                  | $ | 14,262 |      |  | $ | 6,433   |   |  | $ | 26,084  |  
|Property operations                                                       |  |                                    | 1,462  |   |                                  |   | 12,191 |      |  |   | 4,654   |   |  |   | 20,484  |  
|                                                                          |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|                                                                          |  |                                    | 139    |   |                                  |   | 2,071  |      |  |   | 1,779   |   |  |   | 5,600   |  
|Expenses                                                                  |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|Interest                                                                  |  |                                    | (704   | ) |                                  |   | (4,407 | )    |  |   | (7,031  | ) |  |   | (9,222  | )
|General and administration                                                |  |                                    | (550   | ) |                                  |   | (11    | )    |  |   | (613    | ) |  |   | (206    | )
|Depreciation                                                              |  |                                    | (179   | ) |                                  |   | (1,608 | )    |  |   | (528    | ) |  |   | (3,808  | )
|                                                                          |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|                                                                          |  |                                    | (1,433 | ) |                                  |   | (6,026 | )    |  |   | (8,172  | ) |  |   | (13,236 | )
|                                                                          |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|Net loss from discontinued operations before gains on sale of real estate |  |                                    | (1,294 | ) |                                  |   | (3,955 | )    |  |   | (6,393  | ) |  |   | (7,636  | )
|Gain on sale of discontinued operations                                   |  |                                    | 3,764  |   |                                  |   | (2,392 | )    |  |   | 115,134 |   |  |   | 1,991   |  
|Net income fee to affiliate                                               |  |                                    | (4,586 | ) |                                  |   |       |      |  |   | (4,586  | ) |  |   |        |  
|Net sales fee to affiliate                                                |  |                                    |       |   |                                  |   |       |      |  |   | (9,337  | ) |  |   |        |  
|                                                                          |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) from discontinued operations                                |  |                                    | (2,116 | ) |                                  |   | (6,347 | )    |  |   | 94,818  |   |  |   | (5,645  | )
|Tax benefit                                                               |  |                                    | 741    |   |                                  |   | 2,222  |      |  |   | (33,186 | ) |  |   | 1,976   |  
|                                                                          |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) from discontinued operations                                |  | $                                  | (1,375 | ) |                                  | $ | (4,125 | )    |  | $ | 61,632  |   |  | $ | (3,669  | )
|                                                                          |  |                                    |        |   |                                  |   |        |      |  |   |         |   |  |   |         |  

The Companys application of SFAS No. 144 results in the presentation of the net operating results of
these qualifying properties sold or held for sale during 2008 as income from discontinued operations. The application of SFAS No. 144 does not have an impact on net income available to common shareholders. SFAS No. 144 only impacts the
presentation of these properties within the Consolidated Statements of Operations.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Partnership Obligations. ARI is the limited partner in several partnerships that are currently constructing residential properties. As permitted in the respective
partnership agreements, ARI presently intends to purchase the interests of the general and any other limited partners in these partnerships subsequent to the final completion of these construction projects. The amounts paid to buyout the
non-affiliated partners are limited to development fees earned by the non-affiliated partners, and are set forth in the respective partnership agreements.

Liquidity.ARIs principal liquidity needs are funding normal recurring expenses, meeting debt service requirements, funding capital expenditures, funding development costs not otherwise covered by construction loans and
funding new property acquisitions not otherwise covered by acquisition financing. In 2008, ARI will rely on aggressive land sales, selected income producing property sales and, to the extent necessary, additional borrowings to meet its cash
requirement.

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

NOTE 12. SUBSEQUENT EVENTS

On July 23, 2008 we purchased 24.1 acres of land known as Las Colinas land in Irving, Texas for $6.7 million. We financed the transaction with
$2.2 million in cash and a $4.5 million mortgage.

On July 23, 2008, we purchased 246.0 acres of land known as Windmill Farms Harlan land located in
Kaufman County, Texas for $6.8 million. We financed the transaction with $1.3 million cash and seller financing of $5.5 million.



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

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

This Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the captions
Business, Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations. We caution investors that any forward-looking statements in this report, or which management
may make orally or in writing from time to time, are based on managements beliefs and on assumptions made by, and information currently available to, management. When used, the words anticipate, believe,
expect, intend,



21



---

##### Table of Contents

may, might, plan, estimate, project, should, will, result and
similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may
be affected by known and unknown risks, trends, uncertainties, and factors, that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, or projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when
they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on
past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

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



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



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



| |  |  | demand for apartments and commercial properties in the Companys markets and the effect on occupancy and rental rates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | the Companys ability to obtain financing, enter into joint venture arrangements in relation to or self-fund the development or acquisition of properties;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | risks associated with the timing and amount of property sales and the resulting gains/losses associated with such sales;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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

The risks included here are not exhaustive. Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from
those expressed or implied by forward-looking statements, include among others, the factors listed and described at Item 1A Risk Factors in the Companys Annual Report on Form 10-K, which investors should review. There have
been no changes from the risk factors previously described in the Companys Form 10-K for the fiscal year ended December 31, 2007 (the Form 10-K).

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

Overview

ARI is an externally advised and managed real estate investment company that owns a diverse portfolio of
income-producing properties and land held for development. The Companys portfolio of income-producing properties includes residential apartment communities, office buildings, hotels, and other commercial properties. ARIs investment
strategy includes



22



---

##### Table of Contents

acquiring existing income-producing properties as well as developing new properties on land already owned or acquired for a specific development project. ARI
acquires land primarily in urban in-fill locations or high-growth suburban markets. ARI is an active buyer and seller and during 2008, and acquired over $78.4 million and sold over $169 million of land and income-producing properties.

As of June 30, 2008, the Company owned 10,044 units in 53 residential apartment communities, 36 commercial properties comprising almost 6.3 million rentable
square feet and five hotels containing a total of 812 rooms. In addition, at June 30, 2008, ARI owned 11,251 acres of land held for development and had 13 apartment projects under construction.

ARI finances its acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the
form of property-specific first-lien mortgage loans from commercial banks and institutional lenders. ARI finances its development projects principally with short-term, variable interest rate construction loans that are converted to long-term, fixed
rate amortizing mortgages when the development project is completed and occupancy has been stabilized. The Company will, from time to time, also enter into partnerships with various investors to acquire income-producing properties or land and to
sell interests in certain of its wholly-owned properties. When the Company sells assets, it may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable. The Company generates
operating revenues primarily by leasing apartment units to residents; leasing office, retail and industrial space to commercial tenants; and renting hotel rooms to guests. ARI is advised by Prime under a contractual arrangement that is reviewed
annually by ARIs Board of Directors. ARIs commercial properties are managed by Regis Commercial while the Companys hotels are managed by Regis Hotel. ARI currently contracts with five third-party companies to manage the
Companys apartment communities. Approximately 64.3 % of ARIs common stock is owned by BCM; an additional 13.8% is owned by Prime and TCI owns approximately 7% of the outstanding common shares of ARI. Other affiliated companies own
approximately 2.2% of ARIs outstanding common shares. ARI is a C Corporation for U.S. federal income tax purposes and files an annual consolidated income tax return with TCI. ARI does not qualify as a Real Estate Investment Trust
(REIT) for federal income tax purposes primarily due to ARIs majority ownership of the Company.

At June 30, 2008, ARI subsidiaries
owned 83.2 % of the outstanding shares of common stock of Transcontinental Realty Investors, Inc., a Nevada corporation (TCI), which has its common stock listed and traded on the New York Stock Exchange, Inc. (NYSE). The
ownership of the TCI shares was achieved through a series of transactions, including a cash tender offer completed March 19, 2003, an exchange by certain ARI subsidiaries of securities with Basic Capital Management, Inc. (BCM) and a
sale of a participating interest in a line of credit receivable from One Realco Corporation (One Realco) to BCM, as well as certain open market purchases of TCI shares in December 2003. ARI has consolidated TCIs accounts and
operations since March 31, 2003. At June 30, 2008, TCI owned approximately 24.9% of the outstanding common stock of Income Opportunity Realty Investors, Inc., (IORI), a public company whose shares are listed and traded on the
American Stock Exchange.

Critical Accounting Policies

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

Real Estate

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



23



---

##### Table of Contents

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

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

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

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

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

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

Impairment

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



24



---

##### Table of Contents

Investment in Unconsolidated Real Estate Ventures

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

Recognition of Rental Income

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

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

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

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

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

Revenue Recognition on the Sale of Real Estate

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

Non-performing Notes Receivable

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

Interest Recognition on Notes Receivable

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



25



---

##### Table of Contents

Related Party Transactions

The Company has historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving related parties cannot be
presumed to be carried out on an arms length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our
business and may include terms, conditions and agreements that are not necessarily beneficial to or in the best interest of our company.

Allowance for
Estimated Losses

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

Fair Value of Financial Instruments

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

Results of Operations

The following discussion is based on our
Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007 as included in Part 1, Item 1 Financial Statements of this report. We had or owned interests in a total property portfolio of 97
and 110 properties as of June 30, 2008 and 2007, respectively.

Comparison of the three months ended June 30, 2008 as compared to the same
period ended June 30, 2007

For the three months ended June 30, 2008 the Company reported a net loss applicable to common shares of
$(13.1) million or $(1.25) per diluted earnings per share, as compared to a net loss applicable to common shares of $(23.1) million or $(2.28) per diluted earnings per share.

Revenues

Rental and other property revenues increased by $1.3 million for the three month period ended
June 30, 2008 as compared to the same period ended 2007. This was due to the revenues within the apartment portfolio which increased by $1.2 million. The majority of the increase was attributable the larger number of apartments in the lease up
phase. Our commercial, hotel and land portfolios attributed to the remaining $100,000 increase.

Expenses

Operating expenses increased by $1.5 million for the three months ended June, 30 2008, as compared to the same period ended 2007. The majority of the increase of $2.9
million was attributable to the larger number of apartments in the lease up phase. This was offset by a $700,000 decrease in the hotel portfolio. The remaining decrease was from our commercial, land and other portfolios.

Depreciation and amortization were relatively consistent for the three months ended June 30, 2008 as compared to the same period ended 2007.

General and administrative expenses were relatively consistent for the three months ended June 30, 2008 as compared to the same period ended 2007.

Advisory fee expenses were relatively consistent for the three months ended June 30, 2008 as compared to the same period ended 2007.



26



---

##### Table of Contents

Other income/expense

Interest income was relatively consistent for the three months ended June 30, 2008 as compared to the same period ended 2007.

Other income increased by $1.0 million for the three months ended June 30, 2008, as compared to the same period ended 2007. The income is due to receiving litigation settlement proceeds related to the Tanglewood apartments.

Mortgage and loan interest expense was $21.8 million for the three months ended June 30, 2008 as compared to $21.6 million for the same period ended 2007. Our
interest expense is a function of our debt balance and the terms on the debt. Although we have acquired several properties via debt financing, we have also sold properties, paying off existing balances. In addition, we have effectively refinanced
some of our existing debt at terms that are more beneficial to us, thus effectively keeping our interest expense consistent and comparable to the prior period.

Gain on land sales was $2.9 million for the three months ended June 30, 2008. We sold 67.9 acres of land for an average gain of $43,000 per acre.

Minority interest relates primarily to our 83.2% owned subsidiary, Transcontinental Realty Investors, Inc. Approximately 17% of this subsidiary is held by third parties which represents our non-controlling interest. The $2.4 million
represents a recapture of the first quarter minority (non-controlling) interest expense due to the overall loss incurred by the subsidiary in the second quarter ended June 30, 2008.

Net loss from discontinued operations was $(1.4) million for the three months ended June 30, 2008 as compared to a net loss from discontinued operations of $(4.1) million for the same period ended 2007.
Discontinued operations consists of 34 apartments of which 17 were sold in 2008, seven commercial buildings of which three were sold in 2008, and five hotels of which three were sold in 2008.



|                                                                          |  |                                    |        |   |      |   |        |  
|------------------------------------------------------------------------- |  | ---------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                          |  | For the Three Months EndedJune 30, |       
|                                                                          |  | 2008                               |        |   | 2007 |  
|Revenue                                                                   |  |                                    |        |   |      |   |        |  
|Rental                                                                    |  | $                                  | 1,601  |   |      | $ | 14,262 |  
|Property operations                                                       |  |                                    | 1,462  |   |      |   | 12,191 |  
|                                                                          |  |                                    |        |   |      |   |        |  
|                                                                          |  |                                    | 139    |   |      |   | 2,071  |  
|Expenses                                                                  |  |                                    |        |   |      |   |        |  
|Interest                                                                  |  |                                    | (704   | ) |      |   | (4,407 | )
|General and administrative                                                |  |                                    | (550   | ) |      |   | (11    | )
|Depreciation                                                              |  |                                    | (179   | ) |      |   | (1,608 | )
|                                                                          |  |                                    |        |   |      |   |        |  
|                                                                          |  |                                    | (1,433 | ) |      |   | (6,026 | )
|                                                                          |  |                                    |        |   |      |   |        |  
|Net loss from discontinued operations before gains on sale of real estate |  |                                    | (1,294 | ) |      |   | (3,955 | )
|Gain on sale of discontinued operations                                   |  |                                    | 3,764  |   |      |   | (2,392 | )
|Net income fee to affiliate                                               |  |                                    | (4,586 | ) |      |   |       |  
|                                                                          |  |                                    |        |   |      |   |        |  
|Income (loss) from discontinued operations                                |  |                                    | (2,116 | ) |      |   | (6,347 | )
|Tax benefit                                                               |  |                                    | 741    |   |      |   | 2,222  |  
|                                                                          |  |                                    |        |   |      |   |        |  
|Income (loss) from discontinued operations                                |  | $                                  | (1,375 | ) |      | $ | (4,125 | )
|                                                                          |  |                                    |        |   |      |   |        |  

Comparison of the six months ended June 30, 2008 as compared to the same period ended June 30,
2007

For the six months ended June 30, 2008, the Company reported a net income applicable to common share of $46.7 million or $4.46 per
diluted earnings per share, as compared to a net loss applicable to common share of $(32.1) million or $(3.17) per diluted earnings per share.



27



---

##### Table of Contents

Revenues

Rental and other property revenue increased by $3.6 million for the six months ended June 30, 2008 as compared to the same period ended 2007. The increase was due to an increase in our commercial portfolio of $3.9 million and an
increase in our land portfolio of $1.1 million. This was offset by a decrease in our hotel portfolio of $800,000 and decreases in our other portfolio of $600,000.

Expenses

Operating expenses increased by $4.8 million for the six months ended June 30, 2008 as compared to the same
period ended 2007. Our commercial portfolio increased by $1.2 million. Our apartment portfolio increased by $4.4 million. In addition, we had an increase in land holding costs of $900,000. This was offset by a $1.7 million decrease in our hotel and
other portfolios.

Depreciation and amortization increased by $2.0 million for the six months ended June 30, 2008 as compared to the same period ended
2007. Our new apartments in the lease up phase increased depreciation by $1.0 million. The remainder of the increase is distributed evenly among our apartment, hotel and commercial portfolio. We continue to refurbish, remodel and upgrade all our
existing properties.

General and administrative expenses were relatively consistent for the six months ended June 30, 2008 as compared to the same
period ended 2007.

Advisory fees to affiliate increased by $800,000 as compared to the same period ended 2007. These fees are based in part on our total
assets which have increased from prior period.

Other income expense

Interest income increased by $700,000 for the six months ended June 30, 2008 as compared to the same period ended 2007. The increase is primarily due to receiving interest income on the Unified Housing Foundation
excess cash flow notes. These notes were acquired on June 30, 2007.

Other income was relatively consistent for the six months ended June 30, 2008 as
compared to the same period ended 2007.

Mortgage and loan interest expense was $44.0 million for the six months ended June 30, 2008 as compared to
$43.4 million for the same period ended 2007. Our interest expense is a function of our debt balance and the terms on the debt. Although we have acquired several properties via debt financing, we have also sold properties, paying off existing
balances. In addition, we have effectively refinanced some of our existing debt at terms that are more beneficial to us, thus effectively keeping our interest expense consistent and comparable to the prior period.

Bad debt allowance for the six months ended June 30, 2008 was $12.0 million. We recorded a $5.0 million allowance for doubtful receivables and a $7.0 million
allowance for the doubtful collectability of certain investments within our portfolio.

Minority interest relates primarily to our 83.2% owned subsidiary,
Transcontinental Realty Investors, Inc. Approximately 17% of this subsidiary is held by third parties which represents the non-controlling interest. The $9.5 million represents the subsidiaries portion of income that is applicable to the
minority (non-controlling) interest for the six month period ended June 30, 2008.

Equity in income of investees was $4.4 million for the six months
ended 2008. This represents our portion of the income associated with these investments in which we own 20% or more that are not consolidated within our financial statements. The income from these entities has increased for the six months ended
June 30, 2008.

Net income from discontinued operations was $61.6 million for the six months ended June 30, 2008 as compared to a net loss from
discontinued operations of $(3.7) million for the same period ended 2007. Discontinued operations consists of 34 apartments of which 17 were sold in 2008, seven commercial buildings of which three were sold in 2008, and five hotels of which three
were sold in 2008.



|                                                                          |  |                                  |         |   |      |   |         |  
|------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                          |  | For the Six Months EndedJune
30, |        
|                                                                          |  | 2008                             |         |   | 2007 |  
|Revenue                                                                   |  |                                  |         |   |      |   |         |  
|Rental                                                                    |  | $                                | 6,433   |   |      | $ | 26,084  |  
|Property operations                                                       |  |                                  | 4,654   |   |      |   | 20,484  |  
|                                                                          |  |                                  |         |   |      |   |         |  
|                                                                          |  |                                  | 1,779   |   |      |   | 5,600   |  
|                                                                          |  |                                 
|Expenses                                                                  |  |                                  |         |   |      |   |         |  
|Interest                                                                  |  |                                  | (7,031  | ) |      |   | (9,222  | )
|General and administrative                                                |  |                                  | (613    | ) |      |   | (206    | )
|Depreciation                                                              |  |                                  | (528    | ) |      |   | (3,808  | )
|                                                                          |  |                                  |         |   |      |   |         |  
|                                                                          |  |                                  | (8,172  | ) |      |   | (13,236 | )
|                                                                          |  |                                  |         |   |      |   |         |  
|Net loss from discontinued operations before gains on sale of real estate |  |                                  | (6,393  | ) |      |   | (7,636  | )
|Gain on sale of discontinued operations                                   |  |                                  | 115,134 |   |      |   | 1,991   |  
|Net income fee to affiliate                                               |  |                                  | (4,586  | ) |      |   |        |  
|Net sales fee to affiliate                                                |  |                                  | (9,337  | ) |      |   |        |  
|                                                                          |  |                                  |         |   |      |   |         |  
|Income (loss) from discontinued operations                                |  |                                  | 94,818  |   |      |   | (5,645  | )
|Tax (expense) benefit                                                     |  |                                  | (33,186 | ) |      |   | 1,976   |  
|                                                                          |  |                                  |         |   |      |   |         |  
|Income (loss) from discontinued operations                                |  | $                                | 61,632  |   |      | $ | (3,669  | )
|                                                                          |  |                                  |         |   |      |   |         |  



28



---

##### Table of Contents

Liquidity and Capital Resources

Our principal sources of cash have historically been and will continue to be:



| |  |  | property operations;
| | - |  | --------------------



| |  |  | proceeds from land and income-producing property sales;
| | - |  | -------------------------------------------------------



| |  |  | the collection of mortgage notes receivable;
| | - |  | --------------------------------------------



| |  |  | the collection of receivables from affiliated companies;
| | - |  | --------------------------------------------------------



| |  |  | refinancing of existing mortgage notes payable; and
| | - |  | ---------------------------------------------------



| |  |  | additional borrowing, including mortgage notes payable and lines of credit.
| | - |  | ---------------------------------------------------------------------------

Our principal liquidity needs over the next twelve months include:



| |  |  | funding of normal recurring expenses and obligations;
| | - |  | -----------------------------------------------------



| |  |  | funding current development costs not covered by construction loans;
| | - |  | --------------------------------------------------------------------



| |  |  | meeting debt service requirements including loan maturities;
| | - |  | ------------------------------------------------------------



| |  |  | funding capital expenditures; and
| | - |  | ---------------------------------



| |  |  | funding acquisition costs for land and income-producing properties not covered by acquisition financing.
| | - |  | --------------------------------------------------------------------------------------------------------

We draw on multiple financing sources to fund our long-term capital needs. We generally fund our development projects with construction loans.

Management anticipates that our available cash from property operations may not be sufficient to meet all of our cash requirements. Management intends to selectively
sell land and income producing assets, refinance or extend real estate debt and seek additional borrowing secured by real estate to meet its liquidity requirements. Historically, management has been successful at extending a portion of the
Companys current maturity obligations. Management also anticipates funding ongoing real estate development projects and the acquisition of new real estate from cash generated by sales of land and income-producing properties, debt refinancings
or extensions and additional borrowings.

Cash flow summary

The following summary discussion of our cash flows is based on the statements of cash flows as presented in Item 1 and is not meant to be an all inclusive discussion of the changes in our cash flow.

Cash and Cash equivalents were $47,000 and $5.5 million for the six month period ended June 30, 2008 and 2007, respectively. For the six month period ended
June 30, 2008, cash used in operating activities was $(28.9) million, cash provided by investing activities was $27.0 million, cash used in financing activities was $(9.6) million.

Cash used in operating activities was $(29.0) million. Our primary source of cash from operating activities is rental income on properties. Our primary use of cash for operations is daily operating costs, general and
administrative, interest expense, and land holding cost. In addition to these costs, we paid $(13.9) million fees to our advisor. As our cash from operations was not sufficient to meet our operating needs, we used the excess cash from the sales of
our income producing properties and land to cover the shortfalls.

Cash provided by investing activities was $27.0 million. The majority was from proceeds
for the sale of income producing properties of $156.5 million. We sold 24 properties in nine separate transactions. The most significant being the sale of 15 apartments; The 4400, Arbor Pointe, Ashton Way, Autumn Chase, Courtyard, Coventry Pointe,
Fairway, Fountains at Waterford, Hunters Glen, Southgate, Sunchase, Sunset, Thornwood, Westwood, and Woodview located in Midland and Odessa, Texas in a single transaction. This was followed by the sale of three hotels in a single transaction; City
Suites, Majestic, and the Willows, located in Chicago, Illinois and six other transactions consisting of the Lexington commercial building in Colorado Springs, Colorado, the Fairway View apartments in El Paso, Texas, the Executive court in Memphis,
Tennessee, the Hotel Akademia in Worclaw, Poland, the Willow Creek apartments in El Paso, Texas, and Governors Square, a commercial building, in Tallahassee, Florida. The sale of land provided $12.2 million. We sold 81.6 acres of undeveloped land in
Texas. We received $11.8 million from our investments in marketable equity securities. This was offset by $(66.9) million used in the construction and development of 13 apartment projects. We used $(63.2) million to purchase new properties. We
acquired six properties consisting of two apartment complexes, Bridgewood Ranch in Kaufman, Texas, and Quail Hollow in Holland, Ohio, and four commercial buildings; Alpenloan building in Dallas, Texas, Teleport Boulevard building in Irving, Texas,
Thermalloy building in Farmers Branch, Texas, and Stanford Centre in Dallas, Texas. We purchased 81.6 acres of land in Texas for $(15.2) million.



29



---

##### Table of Contents

Cash used in financing activities was $(9.6) million. We paid off the existing mortgages on properties sold consisting of
24 properties and 81.6 acres of land using $(154.2) million. We paid down $(11.1) million in recurring debt obligations. This was offset from proceeds received on notes of $157.2 million.

Environmental Matters

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

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

Inflation

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

Tax Matters

Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes receivable and payable and the difference in the allowance for estimated losses. ARI had a loss, after the use of net operating loss carryforwards for federal income tax
purposes in the first six months of 2008 and a loss in the first six months of 2007; therefore, it recorded no provision for income taxes.

At
June 30, 2008, ARI had a net deferred tax asset of $91.9 million due to tax deductions available to it in future years. However, as the Company cannot determine that it is more likely than not that ARI will realize the benefit of the deferred
tax assets, a 100% valuation allowance has been established.



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

At
June 30, 2008, ARIs exposure to a change in interest rates on its debt is as follows (dollars in thousands except per share):



|                                          |  |         |         |                              |      |   |                                   |   |      
|----------------------------------------- |  | ------- | ------- | ---------------------------- | ---- | - | --------------------------------- | - | -----
|                                          |  | Balance |         | WeightedAverageInterest Rate |      |   | Effect of 1%Increase InBase Rates
|Notes payable:                            |  |         |         |                              |      |   |                                   |   |      
|Variable rate                             |  | $       | 337,139 |                              | 6.08 | % |                                   | $ | 3,371
|                                          |  |         |         |                              |      |   |                                   |   |      
|Total decrease in ARIs annual net income |  |         |         |                              |      |   |                                   |   | 3,371
|                                          |  |         |         |                              |      |   |                                   |   |      
|Per share                                 |  |         |         |                              |      |   |                                   | $ | 0.32 
|                                          |  |         |         |                              |      |   |                                   |   |      



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



|(a) | As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Companys management,
including the Companys Principal Executive Officer and Chief Financial Officer per the Companys disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Companys Principal
Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries)
required to be included in the Companys periodic SEC filings.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



---

##### Table of Contents

|(b) | There have been no changes in the Companys internal controls over financial reporting during the quarter ended June 30, 2008, which have materially affected or are
reasonably likely to materially affect the Companys internal controls over financial reporting.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



31



---

##### Table of Contents

PART II. OTHER INFORMATION



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

During the period of time covered by this report, American Realty Investors, Inc. repurchased 8,400 shares its equity securities. The following table sets forth a summary by month for the quarter for repurchases made, and the specified
number of shares that may yet be repurchased under the program as specified below:



|                             |  |                                 |  |                             |       |                                                                     |         |                                                                      |       
|---------------------------- |  | ------------------------------- |  | --------------------------- | ----- | ------------------------------------------------------------------- | ------- | -------------------------------------------------------------------- | ------
|Period                       |  | Total Number ofShares Purchased |  | Average PricePaid per Share |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Program |         | Maximum Number ofShares that MayYet be PurchasedUnder the Program(a)
|Balance as of March 31, 2008 |  |                                 |  |                             |       |                                                                     | 908,165 |                                                                      | 91,835
|April 30, 2008               |  | 3,600                           |  | $                           | 31.00 |                                                                     | 911,765 |                                                                      | 88,235
|May 31, 2008                 |  | 1,500                           |  | $                           | 47.35 |                                                                     | 913,265 |                                                                      | 86,735
|June 30, 2008                |  | 3,300                           |  | $                           | 39.73 |                                                                     | 916,565 |                                                                      | 83,435
|                             |  |                                 |  |                             |       |                                                                     |         |                                                                      |       
|Total                        |  | 8,400                           |  |                             |       |                                                                     |         |                                                                      |       
|                             |  |                                 |  |                             |       |                                                                     |         |                                                                      |       



|(a) | In September 2000, the ARI Board of Directors approved a share repurchase program for up to 1,000,000 shares of our common stock. This repurchase program has no termination date.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32



---

##### Table of Contents

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

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



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                         
|3.0           |  | Certificate of Restatement of Articles of Incorporation of American Realty Investors, Inc. dated August 3, 2000 (incorporated by reference to Exhibit 3.0 to the Registrants Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000).                                                                                                                                         
|              | 
|3.1           |  | Certificate of Correction of Restated Articles of Incorporation of American Realty Investors, Inc. dated August 29, 2000 (incorporated by reference to Exhibit 3.1 to Registrants Quarterly
Report on Form 10-Q dated September 30, 2000).                                                                                                                                                    
|              | 
|3.2           |  | Articles of Amendment to the Restated Articles of Incorporation of American Realty Investors, Inc. decreasing the number of authorized shares of and eliminating Series B Cumulative Convertible
Preferred Stock dated August 23, 2003 (incorporated by reference to Exhibit 3.3 to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).                      
|              | 
|3.3           |  | Articles of Amendment to the Restated Articles of Incorporation of American Realty Investors, Inc., decreasing the number of authorized shares of and eliminating Series I Cumulative Preferred
Stock dated October 1, 2003 (incorporated by reference to Exhibit 3.4 to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).                                 
|              | 
|3.4           |  | Bylaws of American Realty Investors, Inc. (incorporated by reference to Exhibit 3.2 to Registrants Registration Statement on Form S-4 filed December 30, 1999).                                                                                                                                                                                                                               
|              | 
|4.1           |  | Certificate of Designations, Preferences and Relative Participating or Optional or Other Special Rights, and Qualifications, Limitations or Restrictions Thereof of Series F Redeemable Preferred
Stock of American Realty Investors, Inc., dated June 11, 2001 (incorporated by reference to Exhibit 4.1 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2001).
|              | 
|4.2           |  | Certificate of Withdrawal of Preferred Stock, Decreasing the Number of Authorized Shares of and Eliminating Series F Redeemable Preferred Stock, dated June 18, 2002 (incorporated by reference to
Exhibit 3.0 to the Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).                                                                                         
|              | 
|4.3           |  | Certificate of Designation, Preferences and Rights of the Series I Cumulative Preferred Stock of American Realty Investors, Inc., dated February 3, 2003 (incorporated by reference to Exhibit 4.3
to the Registrants Annual Report on Form 10-K for the year ended December 31, 2002).                                                                                                       
|              | 
|4.4           |  | Certificate of Designation for Nevada Profit Corporations designating the Series J 8% Cumulative Convertible Preferred Stock as filed with the Secretary of State of Nevada on March 16, 2006
(incorporated by reference to Registrant current report on Form 8-K for event of March 16, 2006).                                                                                                
|              | 
|10.1          |  | Advisory Agreement between American Realty Investors, Inc. and Prime Income Asset Management, LLC, dated October 1, 2003 (incorporated by reference to Exhibit 10.0 to the Registrants
Current Report on Form 8-K, dated October 1, 2003).                                                                                                                                                    
|              | 
|10.2          |  | Second Amendment to Modification of Stipulation of Settlement dated October 17, 2001 (incorporated by reference to Exhibit 10.1 to the Registrants Registration Statement on Form S-4, dated
February 24, 2002).                                                                                                                                                                              
|              | 
|31.1*         |  | Certification by the President and Chief Operating Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                           
|              | 
|31.2*         |  | Certification by the Chief Financial Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                         
|              | 
|31.3*         |  | Certification by the Chief Accounting Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                        
|              | 
|32.1*         |  | Certification pursuant to 18 U.S.C. 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                 



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



33



---

##### Table of Contents

SIGNATURES

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



|                      |  |  |  |                                 |  |                       |  |                                                      
|--------------------- |  |  |  | ------------------------------- |  | --------------------- |  | -----------------------------------------------------
|                      |  |  |  | AMERICAN REALTY INVESTORS, INC.
|                      |  |  | 
|Date: August 14, 2008 |  |  |  | By:                             |  | /s/ Daniel J. Moos   
|                      |  |  |  |                                 |  |                       |  | Daniel J. Moos                                       
|                      |  |  |  |                                 |  |                       |  | President and Chief Operating Officer                
|                      |  |  |  |                                 |  |                       |  | (Principal Executive Officer)                        
|                      |  |  | 
|Date: August 14, 2008 |  |  |  | By:                             |  | /s/ David R. Fletcher
|                      |  |  |  |                                 |  |                       |  | David R. Fletcher                                    
|                      |  |  |  |                                 |  |                       |  | Executive Vice President and Chief Financial Officer 
|                      |  |  | 
|Date: August 14, 2008 |  |  |  | By:                             |  | /s/ Gene S. Bertcher 
|                      |  |  |  |                                 |  |                       |  | Gene S. Bertcher                                     
|                      |  |  |  |                                 |  |                       |  | Executive Vice President and Chief Accounting Officer



34



---

##### Table of Contents

AMERICAN REALTY INVESTORS, INC.

EXHIBITS TO

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2008



|               |  |                                                                                                                                                     
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                                                             
|31.1*          |  | Certification by the President and Chief Operating Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.
|               | 
|31.2*          |  | Certification by the Chief Financial Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.              
|               | 
|31.3*          |  | Certification by the Chief Accounting Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.             
|               | 
|32.1*          |  | Certification pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                      



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